Mining and Power Harworth Estates UK COAL PLC Annual Report And

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CONTENTS

Highlights 1 Chairman’s Statement 2 Operating and Financial Review (OFR) — Business overview 6 — Strategy 6 UK COAL PLC — Objectives 7 Annual Report and Accounts 2007 — Mining and Power 9 — Market overview 10 — Deep mines 13 KCA L nulRpr n cons2007 Accounts and Report Annual PLC COAL UK — Surface mines 17 — Power 20 — Harworth Estates 21 — Financial review 32 Mining and Power Harworth Estates — Key risks and uncertainties 36 — Corporate Social Responsibility 38 Board of Directors 42 Directors’ report 44 Corporate governance 48 Directors’ remuneration report 54 Independent auditors’ report 61 Consolidated income statement 63 Consolidated statement of recognised income and expense 64 Balance sheets 65 Cash flow statements 66 Notes to the financial statements 67

UK COAL PLC Harworth Park Blyth Road Harworth Doncaster South Yorkshire DN11 8DB

t: +44 (0)1302 751751 f: +44 (0)1302 752420 [email protected]

www.ukcoal.com

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CONTENTS

UK COAL PLC Harworth Park Blyth Road Harworth Doncaster South Yorkshire DN11 8DB

t: +44 (0)1302 751751 f: +44 (0)1302 752420 [email protected]

www.ukcoal.com

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PRODUCTION FROM SURFACE MINE SITES MORE THAN DOUBLED IN 2007 TO 1.5 MILLION TONNES.

OUR LOCATIONS BRITAIN’S BIGGEST PRODUCER OF COAL, UK COAL SUPPLIES AROUND 5% OF THE COUNTRY’S ENERGY NEEDS FOR ELECTRICITY GENERATION AND EMPLOYS 3,100 PEOPLE WITHIN THE GROUP.

ONE OF BRITAIN’S LARGEST BROWNFIELD SITE PROPERTY DEVELOPERS, Deep Mines UK COAL OWNS A SUBSTANTIAL LAND PORTFOLIO, WHICH IT IS IN THE Operating Surface Mines PROCESS OF DEVELOPING. Principal Development Sites

MININGANDPOWER

DEEP MINING The Group operates 4 deep mines, located in Central and Northern England. The Group has reserves and resources of over 100 million tonnes at these mines.

SURFACE MINING At the end of 2007, the Group had 6 active surface mines and planning consent to mine a further site. The Group has applied for planning consents for a further 4 mines and expects to make applications for a further 6 sites during 2008. Total surface mining reserves available for planning are estimated at approximately 97 million tonnes.

POWER GENERATION UK COAL has 29 MW of electrical power generation capacity, utilising waste gas from mines. It is actively pursuing the development of alternative power generation opportunities, including wind farms and has recently acquired planning consent for its first 9 MW wind farm.

HARWORTH ESTATES

UK COAL owns some 46,500 acres (18,818 hectares) of predominantly agricultural land. Within this, some 3,696 net acres have been identified as offering prime prospects for development into a mix of residential, business park, distribution and community developments over the medium to longer term.

At 31 December 2007, the Group’s property interests, excluding the deep mine sites, had a current open market value of £411 million. We estimate, however, that, with the benefit of currently envisaged planning consents, at 2007 prices, our land portfolio would have a worth of some £935 million by 2012, and in excess of £1 billion by 2013, in each case with the potential for further development phase value uplift.

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PRODUCTION FROM SURFACE MINE SITES MORE THAN DOUBLED IN 2007 TO 1.5 MILLION TONNES.

OUR LOCATIONS BRITAIN’S BIGGEST PRODUCER OF COAL, UK COAL SUPPLIES AROUND 5% OF THE COUNTRY’S ENERGY NEEDS FOR ELECTRICITY GENERATION AND EMPLOYS 3,100 PEOPLE WITHIN THE GROUP.

MININGANDPOWER

DEEP MINING The Group operates 4 deep mines, located in Central and Northern England. The Group has reserves and resources of over 100 million tonnes at these mines.

HARWORTH ESTATES

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HIGHLIGHTS

2007 2006 INCOME STATEMENT Average sales price per Gigajoule (£/GJ) 1.62 1.41

Operating profit (£m) 82.7 27.6 Profit before tax (£m) 69.0 17.6 Earnings per share (pence) 59.9 11.7 Earnings per share excluding tax (pence) 44.0 11.7

BALANCE SHEET Net assets (£m) 358.2 244.1 Net assets per share (£) 2.28 1.56 Year end gearing (%) 23 28

OPERATING PROFIT UP BY 200%

2007 £82.7m 2006 £27.6m

EARNINGS PER SHARE UP BY 412%

2007 59.9 pence 2006 11.7 pence

NET ASSETS UP BY 47% 2007 £358.2m 2006 £244.1m

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CHAIRMAN’S STATEMENT

IN 2007, WE CREATED SUBSTANTIAL VALUE FOR ALL OUR STAKEHOLDERS, AND I THANK OUR EXECUTIVE TEAM FOR THEIR STRONG LEADERSHIP AND ALL OUR EMPLOYEES FOR THEIR UNFLAGGING EFFORTS AND THEIR CONTRIBUTIONS. I AM CONFIDENT THAT WE WILL BUILD FURTHER ON OUR GROWTH PLATFORM IN 2008.

OVERVIEW AND OUTLOOK I said last year that UK COAL had put in place a far stronger platform for future value creation and that 2007 would see the execution of our strategy go a great deal further.

I am delighted to report this has indeed been the case. We have delivered another year of substantial progress in our businesses. Pre-tax profits grew almost four-fold to £69.0 million, earnings per share increased 412% to 59.9 pence, and net assets per share increased 46% to 228.0 pence. We have shown that we have a strong growth platform, that we are effectively executing our strategy, and that we have the potential to continue delivering further substantial value this year and beyond.

Regrettably I have to report on the loss of the lives of two colleagues at two separate mines during the year. Nothing can ever be said to reduce the impact of a fatality on the family, friends, colleagues and on the rescuers directly involved. My condolences, and those of each individual Board member, go out to all of those affected, and our thanks are similarly extended for the brave efforts of those involved in rescue. We are dedicated to enhancing controls and to making changes to improve safety at all of our operations. To reinforce this objective, the Board has established a Health and Safety Committee to have oversight of these matters.

In mining, we have been successful in our continued negotiations with customers to move our overall sales prices closer to the world market price for coal and are progressively moving the Group’s contracts position towards a balance of contracts at floating, capped and collared, and fixed (or RPI linked) prices. This is altering the underlying economics of our mining operations and enabling us to invest in accessing more reserves in both our deep and surface mining operations.

We announced that there would be a period of non-production during the early part of 2007 at Daw Mill, our largest mine, and this had a substantial impact on the first half production and profitability of our deep mining business. In the second half of the year, however, our deep mines operated profitably, despite managing face changes and, for 2008, they have the prospect of increased production at an increased overall selling price. Meanwhile, our surface mine production sharply increased last year and is scheduled to increase again this year. I will always make the point that we face challenges and that, particularly in deep mining, there remains an element of unpredictability. These factors should not be underestimated. That said, however, the demand and price environment for coal has improved notably and has created a more positive backcloth than at any time in UK COAL’s corporate life.

In Harworth Estates, we have also delivered further good progress in evolving our development plans, gaining further planning permissions and growing the value of our portfolio.

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There has been much publicity about downward pressure on UK commercial property values during the second half of last year. Notwithstanding this, the value of our land and property, excluding the deep mine sites, increased to £411 million, a like-for-like increase of 21%.

Our estimate for “Project Worth”, the worth of the portfolio in 2012, with the benefit of the planning permissions we are seeking, grew from £800 million at December 2006 to £935 million by December 2007. Taking a view to 2013, our estimate of this worth increases to in excess of £1 billion. These estimates are expressed in 2007 money terms. It is not that we are immune from the realities of the property market, more so it is that the longer term outlook for property in the UK, with its structural shortage of land for development, remains positive and very little of our land is as yet developed. The construction phase for our planned developments starts to become significant from 2009 onwards, and none of our estimates of future worth include any potential for development phase profits.

As expected, mines output in the first quarter of the new financial year was restrained by face changes at each of Kellingley, Thoresby and Welbeck, the latter starting later than planned following the fatality at the end of 2007. Overall first quarter production was 1.7 million tonnes (2006: ongoing operations 1.7 million tonnes) reflecting these face changes and the slow ramp up of the new face at Daw Mill, but in line with achievement of our overall results expectations for 2008.

With a positive outlook for all our businesses, we face the current financial year with considerable confidence.

MINING AND POWER Our strategy for mining is framed by the selling prices which we can achieve, the production economics of our collieries and the geological and other factors characterising each colliery. We are focused on accessing and mining reserves only where there is a clear prospect of creating substantial value over time.

The principal change in the market environment is the sharp increase in the internationally traded price of coal. Driven by global energy demand, this price rose last year by circa 90% and over the last two years it has grown by approximately 140%.

Alongside this, there is an increased recognition of the value of security of coal supply, both within the Government’s thinking on energy policy and within the UK electricity generators’ strategy. All this reinforces the role of indigenous coal as a long term fuel resource.

Against this backcloth, we have been successful in our continued negotiations with customers to reduce the proportion of our deep mine production committed in past years at historically low selling prices. This, and the increasing volume of our surface mine production, enabled us to increase our average sales price last year by around 15% to £1.62 per Gigajoule (GJ).

We have estimated a further increase in our sales price to between £1.75 and £1.80 per GJ for 2008, based upon the forward price for 2008 Rotterdam delivery of $118 per tonne as at December 2007 and dependent upon expected tonnages.

This progress has enabled us to commit to around £55 million of new investment over the next 3 years in our Thoresby colliery and a similar amount over 3 years in our Kellingley colliery. This investment will extend the lives of the mines by some 10 years beyond their previously anticipated closure dates and add over 3 million tonnes a year to our planned deep mine production from 2009 to around 2018. At the same time, we continue actively seeking permissions for additional surface mining sites.

As I reported in last year’s Statement, we completed the sale of our Maltby colliery in February 2007 for a cash consideration of £21.5 million, thereby improving the operating profile of our deep mining business. This resulted in a profit on disposal of £8.5 million, lower than originally reported as the improvement in the pension fund deficit over the year reduced the anticipated benefit arising from the transfer of pension liabilities.

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Our power generation operation, Harworth Power, generated 181,835 MWh (2006: 119,717 MWh) of electricity from methane pumped from our deep mines and successfully completed a new generating station at Stillingfleet. We also continued with the lengthy process of seeking planning permissions for wind farms to be built on some of our sites, successfully receiving planning consent for our first, 9 MW, wind farm site in February 2008 at Lynemouth, Northumberland.

Overall our Mining and Power businesses produced an operating loss before non-trading exceptional items of £1.8 million (2006: £26.8 million), with a loss in the deep mines business of £14.6 million (2006: £30.4 million) being offset by profits in the surface mines and power businesses of £8.5 million and £4.3 million respectively (2006: £0.5 million and £3.1 million respectively).

HARWORTH ESTATES Our land and property portfolio is of very considerable value and we have clearly mapped out our strategy for realising this value.

The changes we have seen in UK commercial property valuations and home price trends have had a very limited effect on us for the reasons I have already set out. Our work last year, therefore, has increased the RICS valuation of our property portfolio to £411 million up 21% on a like-for-like basis. Our estimate of the worth of our property portfolio in 2012, has increased as a result from £800 million to £935 million and, taking a view for a further year out, to over £1 billion in 2013.

During 2007, we secured a number of key planning consents and we further expanded our property development plans — increasing the number of projects in our “Project Worth” development programme from 60 to 76 and increasing the net developable acreage from 2,650 to 3,696 acres. During the middle of the year, we also saw a significant change in Government policy towards promoting new housing. This has increased the likelihood of our gaining residential consent on a larger proportion of our acreage.

Among the key achievements last year were the establishment of a joint venture with Helical Governetz to promote our Waverley/Orgreave site, near Rotherham, for a 645,000 sq ft Government office relocation campus, and the submission and short listing of our Eco Town bid for a major housing scheme at Rossington, near Doncaster.

In early January 2008, a planning application for 250 homes and 150,000 sq ft of industrial space was approved at Edlington, Doncaster. Negotiations continue positively on our major scheme at Prince of Wales, Pontefract, where, once highway design matters have been fully resolved, the Council is expected to grant planning approval shortly.

I am confident that we will continue to make significant further progress during the current year and, step-by-step, enhance and crystallise the value of our portfolio.

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We further strengthened the Executive team in Harworth Estates by the appointment in the final quarter of Mike Jones, a highly experienced Construction Director who joins us with 20 years experience in the construction industry, most recently with the highly successful Castlemore Securities Group Limited of Birmingham.

Overall Harworth Estates produced a profit of £73.2 million (2006: £73.3 million), including gains on Investment Properties of £70.5 million (2006: £70.0 million), of which £66.8 million was unrealised (2006: £68.6 million). A further revaluation gain of £6.7 million was taken directly to reserves, being the increase in value from historic cost to market value in respect of former Operating Properties transferred to Investment Property status (and thus being revalued) on their ceasing to be operational sites.

DIVIDEND Over the coming years, the Group will be making significant investments in our mining and property businesses, in both of which we see significant opportunity to drive superior shareholder value. For this reason and to preserve financial flexibility, the Board has decided not to recommend a dividend. We will keep this under review but future dividends will be dependent both on our future performance and on our view of how best to drive total shareholder value.

BOARD During the year, we made a number of Board changes. At the end of May, we announced that Gerry Spindler was to leave the Group in order to return with his family to the USA. We were delighted to announce Jon Lloyd as Gerry’s successor. Jon has exceeded the Board’s expectations in the way he is leading the Group and developing our strategy and its execution. In September, Chris Mawe left the Group in order to pursue other interests, and we welcomed David Brocksom, his successor as Finance Director.

We further strengthened our non-executive Director team during the year. Last June, Kevin Whiteman, who is Chief Executive of Kelda Group and has extensive coal mining experience from his time with British Coal, joined our Board and, in October 2007, we welcomed Owen Michaelson, who has substantial brownfield land and property development experience and who is a Director of Peel Holdings, our largest shareholder.

DAVID JONES, CHAIRMAN 17 APRIL 2008

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OPERATING AND FINANCIAL REVIEW (OFR)

BUSINESS OVERVIEW UK COAL remains the largest producer of coal in the UK, and a significant supplier of energy to the UK’s electricity industry. In the last year we mined 8.1 million tonnes of coal, which represented approximately 15% of the total amount of coal burned in the UK. Predominantly our customers are in the electricity supply industry (“ESI”) and our production therefore represented 5% of total UK electricity supply.

At the 2007 year end, the Group had 4 deep mines and 6 surface mines and had 29 MW of power generation capacity from mines methane.

As a result of our heritage, we have a very large estate of 46,500 acres of land. This estate includes agricultural land which was originally acquired for its underlying coal reserves, and the sites of former mine and associated workings. The estate is largely focused on the UK coal fields along the A1/M1 corridor through Nottinghamshire and Yorkshire, and in Northumberland, although it also includes some very significant sites elsewhere.

Given their location and former use, these sites are often very well connected to road, rail and electricity networks, and represent an excellent opportunity for development of both residential and employment buildings, helping to meet the long term needs of the UK.

As a result of our business and strategy, we make a significant contribution to the UK’s energy needs, to the local communities where our operations are based and to social and economic regeneration programmes.

STRATEGY The Group’s purpose is to create shareholder value by accessing and mining reserves of coal where there is a clear prospect of creating substantial value over time and by realising the considerable value of our land portfolio through identifying optimum development opportunities, securing planning permissions, developing the sites and actively managing our estate.

JON LLOYD, CHIEF EXECUTIVE

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OBJECTIVES The Group’s principal objectives are:

MINING AND POWER Deep Mining ■ To improve continually safety in our operations ■ To reduce risk and variability in operational performance ■ To reduce operating costs ■ To achieve progressively an optimum balance of long-term sales contracts and access market prices for our coal

LONGWALL COAL PRODUCTION AT WELBECK COLLIERY IN NORTH NOTTINGHAMSHIRE HAS BEEN EXTENDED FOR 2 YEARS BY A FURTHER 4 PANELS NOW VIABLE AS A RESULT OF INCREASES IN SALE PRICES.

NEW COPY TO COME. NEW COPY TO COME. NEW COPY TO COME.

Surface Mining ■ To improve continually safety in our operations ■ To increase surface mine production and to maintain a sustainable level of production over the longer term through planning applications and consents ■ To maximise productivity and operating performance on our sites ■ To maintain the high environmental standards of our mining schemes and maintain close working relationships with local communities

EARLY PRODUCTION DAYS AT THE NEW 150 ACRE LONG MOOR SURFACE MINE SITE IN LEICESTERSHIRE, WHERE THE EXTRACTION OF AROUND 750,000 TONNES OF POWER STATION COAL WILL TAKE 36 MONTHS TO COMPLETE.

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Power ■ To improve the profitability of our methane-based power generation operations ■ To develop a profitable alternative renewable energy business predominantly based on wind power

COMMISSIONED IN 2007, THIS NEW GENERATING STATION BURNING METHANE GAS AT THE STILLINGFLEET MINE SITE IN NORTH YORKSHIRE HELPED INCREASE UK COAL’S HARWORTH POWER OUTPUT LAST YEAR BY 52% TO 181,835 MWh OF ELECTRICITY.

HARWORTH ESTATES ■ To identify a long-term supply of development sites and to promote these sites through the planning process ■ To participate in the development of these sites where this will optimise shareholder returns ■ To manage actively and to develop rental Investment Properties and maximise returns from these through asset enhancement, rental growth and/or disposal

PROPOSALS TO DEVELOP A NEW COMMUNITY OF 3,800 HOMES WITH ASSOCIATED LEISURE, RETAIL, SOCIAL, HEALTH, EDUCATION AND COUNTRY PARK ELEMENTS ON THIS UK COAL SITE AT WAVERLEY, NEAR ROTHERHAM, HAVE RECEIVED THE PUBLIC BACKING OF THE LOCAL AUTHORITY AND OTHER KEY STAKEHOLDERS.

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MINING AND POWER

LOCATED JUST A FEW MILES FROM THE BIGGEST COAL- FIRED POWER STATION IN BRITAIN, UK COAL’S KELLINGLEY COLLIERY IN WEST YORKSHIRE IS DRIVING ACCESS ROADWAYS INTO NEW BEESTON SEAM RESERVES CONTAINING AROUND 10 MILLION TONNES OF COAL.

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REVIEW OF OPERATIONS MINING AND POWER

Overall, our Mining and Power operations improved their financial performance from an operating loss before non-trading exceptional items of £26.8 million in 2006 to £1.8 million in 2007.

This overview reflects a strongly improved underlying performance from deep mining and strongly improved results from both surface mining and power business.

The period of non production during the early part of last year at Daw Mill represented a loss of some £20 million of profits against expectations. In addition, Daw Mill managed a face change in the second half and, as previously announced, production at Kellingley will remain lower whilst it negotiates adverse geological conditions. In the light of this, deep mining performed well to produce a full year loss before non-trading exceptional items of £14.6 million (2006: £30.4 million), and operated profitably in the second half of the year.

Operating profits before non-trading exceptional items from our surface mines increased from £0.5 million in 2006 to £8.5 million and similarly profits from our power business increased from £3.1 million to £4.3 million.

Key Performance Indicators (“KPIs”) 2007 2006 Sales price per Gigajoule (£/GJ) 1.62 1.41 Tonnage sold (million tonnes) 8.0 9.7 Tonnage produced (million tonnes) 8.1 9.5

MARKET OVERVIEW

The UK burned an estimated total of 55 million tonnes of coal last year, the vast majority of this being used to generate electricity.

Our own production, last year some 8.1 million tonnes, can only meet a portion of this demand, making the UK a substantial importer of coal. Whilst we intend to increase our production of both deep and surface mined coal, demand will continue substantially to exceed our supply capacity.

The mining business operates in a commodity market where the basic cost of production in a crowded and economically prosperous country and the cost of transporting a bulk product limits its economic market. Balancing this, we believe that the benefits to our customers of having a local supply helps them to mitigate the risks inherent from importing all their requirements from thousands of miles away, from areas of potential political change, in a global climate where demand for fuels and the availability and security of energy supply will become ever more important.

AROUND 5 MILLION TONNES OF COAL PRODUCED AT UK COAL’S DAW MILL COLLIERY AND SURFACE MINE SITES IN LEICESTERSHIRE AND DERBYSHIRE, WILL BE SUPPLIED TO E.ON’S RATCLIFFE POWER STATION NEAR NOTTINGHAM UNDER A NEW 5 YEAR DEAL.

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Given the nature of the UK electricity supply industry, our predominant market, we have a very limited number of significant customers, although the retro-fitting of flue gas desulphurisation equipment onto more power stations will expand the number of sites able to burn coal mined in the UK, where coal seams typically have a higher sulphur content than coalfields generally around the world.

Also affecting the demand for, and economics of, coal burn for electricity is the increasing focus on reducing the output of greenhouse gases. The UK Government is encouraging the development of carbon capture technology to achieve this aim. The cost of carbon on marginal power station burn will offer a financial incentive to develop and install this technology, under the umbrella of the EU Emissions Trading Scheme which is currently being reviewed, although this will inevitably increase the cost of energy to the country. Given both the availability of other sources of energy and power station capacity and the lead times involved in developing such new capacity and sources, we believe that UK coal burn is unlikely to reduce significantly in the mid term, but the risk of market change remains.

In the UK, 2007 saw the coal burn at power stations fall back to 2005 levels from the peak in 2006. This normalisation was due to an increased availability of gas from Russia, coupled with the construction in the UK of Liquefied Natural Gas facilities creating an economical method of transporting gas to the UK.

World demand for coal continued to increase through 2007, with the bulk of the increased demand coming from China and India together with other developing countries such as Brazil. There was no noticeable increase in the world bulk carrier shipping fleet, which sent freight rates to all-time highs in the year.

NW Europe Steam Coal Price Reflecting the increased global demand for coal and increased freight costs, both international and NW European coal prices rose steadily throughout the year, from their initial start point of $68 per tonne in January to finish the year around the $128 per tonne, an increase of almost 90%. The forward curve for 2008 and 2009 show prices remaining well above $100 per tonne for coal delivered into Europe (equivalent to approximately £2/GJ at $2:£1, before UK delivery costs). Actual steam coal prices together with the January 2008 forward market prices for Amsterdam/Rotterdam/Antwerp (“ARA”) landed coal are shown below.

140

Jan 2008 Forward 120 Jan 2007 Forward Actual to Dec 2007 100

80 $/TONNE

20 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: McCloskey Group/TFS Brokers Basis: <1%S, CIF NW Europe, 6000 Kcal / Kg NAR (25.121 GJ/Tonne)

UK Steam Coal Market Coal delivered into the UK is priced off the ARA price shown above, converted into sterling, with the additional cost of delivery into the UK coal market added on. The average forward price for 2008 on the ARA market at 31 December 2007 was $118 per tonne. Converted into sterling at $2:£1 and into its calorific value by dividing the tonnes by 25.121, this equates to a forward price of £2.35/GJ. The additional cost of delivery to the UK brings this to a UK delivered price of around £2.60/GJ.

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The table below shows the UK steam coal market together with UK COAL’s share. The table also highlights the increase in Russian imports into the UK over recent years.

UK Electricity Supply Industry (“ESI”)

70.0 Import – Others

Import – South Africa 4.5 60.0 Import – Colombia 3.6 12.6 4.2 4.4 13.0 11.7 6.3 Import – Russia 50.0 4.9 7.6 10.0 9.6 Other Indigenous 3.8 3.2 3.7 40.0 3.3 22.0 UK Coal 3.5 4.9 3.6 16.7 19.5 3.6 13.5 8.9 30.0 11.5 MILLIONS OF TONNES OF MILLIONS 11.0

20.0 18.9 18.9 8.6 7.8 11.8 14.2 10.0 9.7 10.0 8.0

0.0 2002 2003 2004 2005 2006 2007 Source: Department of Business Enterprise and Regulatory Reform (“DBERR”) Energy Trends/UK Coal/HM Revenue & Customs (2007 based on provisional numbers).

As the table below shows, the coal used in electricity generating has fallen back from the unusually high 2006 levels, and usage is now broadly in line with gas in the overall UK fuel mix. 2007 2006 2005 % %% Coal 36 41 34 Gas 38 30 38 Nuclear 18 20 19 Oil, hydro & renewables 8 99 Total 100 100 100

Source: DBERR Energy Trends (2007 based on provisional numbers).

Coal Contracts Contractual supply obligations to all customers increased to 24.0 million tonnes at 31 December 2007 (2006: 17.9 million tonnes). Of the contracted tonnage, approximately 13 million tonnes is considered to have been contracted at historic lower fixed prices of circa £1.55/GJ. The balance is at higher and/or more variable prices having been contracted more recently. Overall, assuming a £2.60/GJ UK delivered price for 2008, and dependent upon expected tonnages, we have estimated a 2008 realised sale price of £1.75–£1.80/GJ.

In 2007, UK COAL secured new contracts with E.ON and EDF Energy. These new contracts will allow UK COAL to recover the investment needed to mine the coal and develop further coal reserves. The Group has adopted the strategy of moving towards a more diverse mix of long term contracts with customers, with shorter term contracts or spot sales to balance security of supply contracts, with the ability to take advantage of current coal prices. Our contracts position now includes an element of sales negotiated at market rates, along with contracts priced at capped and collared or fixed prices, which may also be subject to inflation adjustments.

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FACEWORKERS NEIL GREWCOCK, MARTIN PENNYCOOK, STEVE GUILD, CHARGEMAN GARRY JONES AND SHEARER DRIVER RICHARD GLADDERS AT DAW MILL COLLIERY IN THE WEST MIDLANDS, PICTURE REQUIRED WITH ONE OF THE FIRST LUMPS OF COAL TO BE PICTURE REQUIRED CUT FROM A NEW PANEL CONTAINING OVER 5 MILLION TONNES OF PROVEN RESERVES.

Customers Details of coal sold by UK COAL by customer type are summarised below. This profile is unlikely to change in the foreseeable future. 2007 2006 Tonnes (m) % Tonnes (m) % Electricity Supply Industry 7.4 92.5 8.8 90.7 Industrial 0.3 3.8 0.3 3.1 Domestic 0.2 2.5 0.3 3.1 Other 0.1 1.2 0.3 3.1 Total 8.0 100.0 9.7 100.0

The fall in the level of sales to the ESI and others in 2007 was primarily as a consequence of the sale of Maltby colliery to Hargreaves Services PLC in February 2007 and reduced production at Daw Mill.

Coal sales to the domestic market are carried out through sales to the Group’s joint venture with Hargreaves Services PLC, Coal4Energy Limited.

DEEP MINES Our deep mines business consists of Daw Mill (Warwickshire), Kellingley (Yorkshire) and Thoresby and Welbeck (Nottinghamshire). The key performance indicators for this business are:

Key Performance Indicators (“KPIs”) 2007 2006 Coal mined (million tonnes) 6.6 8.9 Revenue (£m) 265.8 310.9 Operating cost (£m) 246.2 301.7 (excluding non-trading exceptional items and depreciation costs) Loss before non-trading exceptional items (£m) 14.6 30.4 Face gap times (weeks) 34.0 26.0 Development drivage metres 15,484 24,432 Reserves and resources (ongoing mines — million tonnes) 105 110

Deep mining has largely a fixed cost base, and therefore the KPIs for the business focus on the output tonnage achieved from this cost base, together with other indicators which highlight the risk of future production being achieved. In this latter regard, the development metreage achieved, being the investment in future coal panels, and the total length of time of face gaps, when production is shifted onto new coal panels is monitored. As in other businesses, the realised sales price and the costs of operating the business, are also monitored as KPIs.

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Colliery Performance Summary Production Operating cost* (million tonnes) (£m) 2007 2006 2007 2006 Ongoing mines Daw Mill 2.2 2.7 70.9 68.2 Kellingley 1.8 2.1 67.8 69.2 Thoresby 1.4 1.5 50.7 53.4 Welbeck 1.0 1.2 49.4 44.9 Ongoing deep mines 6.4 7.5 238.8 235.7 Closed/sold deep mines 0.2 1.4 7.4 66.0 Total deep mines 6.6 8.9 246.2 301.7

* Operating cost before non-trading exceptional items and depreciation costs, with central costs absorbed.

Daw Mill As previously announced, following the fatality at Daw Mill in January 2007 the mine ceased production for a month. Production remained very low for 2 further months whilst additional safety work was carried out. The costs incurred in this period can be measured at approximately £11.5 million, including the additional costs of £3.5 million reinforcing the entries to the coal face, to take into account the knowledge learnt following the fatality. In addition to these costs was the significant value of lost output, bringing the total impact to the income statement of an estimated £20 million against original expectations. In the second half of 2007, as planned, Daw Mill had to manage a face change and encountered delays and difficulties in ramping up production, further reducing output against original expectations for the year.

However, Daw Mill is now working well on this new panel, which given the thickness of its large seams, consists of over 5 million tonnes of coal. With the new face now in full production and no further face changes until late in 2009, the outlook for Daw Mill is robust.

Kellingley As expected, Kellingley output fell, as a result of encountering adverse geological conditions on both its coal faces. The colliery continues to be strongly productive in an area of difficult geological conditions, although production will remain lower than its previous performance until the move is made to a new area of reserves in the Beeston seam, with coal production due to start in mid 2009.

The Beeston seam and related areas being accessed at a cost of circa £55 million consist of estimated reserves and resources of around 18 million tonnes and extend the life of the mine to at least 2017.

Thoresby Thoresby’s output for the year was slightly better than envisaged at the start of the year as a result of the planned face change at the colliery being achieved 2 weeks earlier than scheduled. Production in the existing Parkgate seam will continue until late 2009, during which time the geology will be difficult and production restrained. As a result of new customer contracts, we have been able to commit to a major investment of circa £55 million and therefore, in late 2009, production will transfer to the Deep Soft seam with its estimated reserves and resources of circa 12 million tonnes.

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Welbeck Welbeck was originally due to close during 2007, but the identification of 4 further coal panels together with the improvement in coal prices have extended the life of the mine until at least 2009. Operations were affected by a fatality caused by a fall of rock on a coal face being salvaged in November. This greatly slowed down a face transfer and has delayed the start date of the new coal face in 2008.

Closed mines Production ceased at Rossington Colliery in April 2006 and, following a period of equipment salvage, the mine closed and the shafts were filled. At Harworth Colliery, during the year, we also moved the mine from its previous mothballed status to a closure.

We have investigated the requirements for investment to access new coal at Welbeck Colliery. Unfortunately the level of investment required, coupled especially with the coal potential, the timescales involved and the level of assurance needed in terms of contracted customer demand, all militate against the investment. Welbeck Colliery may, therefore, have to close when the current workable reserves are exhausted in 2009. Costs relating to this closure would be incurred as exceptional items in 2008 and 2009.

Improved coal prices do encourage a further review of the potential of the Group’s assets however. To this end we are considering again the opportunity to reopen Harworth Colliery, in conjunction with a mixed use development of the site, although any decision in this regard is not likely in the immediate future.

Productivity and Face Gaps There were 5 face changes in the year, incurring face gaps of 34 weeks (2006: 26 weeks). Face gaps comprise 21 weeks lost in the Welbeck face changes, 4 weeks at Daw Mill, and 9 weeks at Thoresby.

Centechnology Also included in our deep mines business is our Centechnology labour contracting business. Historically focused on supplying labour into the mining business, it is now also performing both mining and other non-mining work for a number of third parties.

NORTH NOTTINGHAMSHIRE’S WELBECK COLLIERY WHERE THE LIFE OF THE MINE HAS BEEN EXTENDED UNTIL AT LEAST 2009.

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Reserves and Resources The reserves and resources available in the deep mine operations are critical to the long term prospects of the Group.

We estimate that we have approximately 105 million tonnes of reserves and resources at our ongoing mines of which 45 million tonnes of coal are accessible under existing 5 year mining and investment plans. The additional resources will become accessible with future investment required as current mining plans approach completion.

UK COAL continues to utilise the latest technology in seismic exploration, including 3-D representations of seams, to provide better definition of the reserves at the remaining mines. These techniques have been used successfully at Daw Mill, Kellingley and Thoresby to assess the reserves more effectively.

Our estimates as at 31 December 2007 of our deep mine coal reserves are set out in the following table, in million tonnes:

Total Ongoing reserves and Mineral colliery Reserves Resources resources potential Total Daw Mill 22 — 22 41 63 Kellingley 10 45 55 5 60 Thoresby 11 12 23 2 25 Welbeck 23516 21

Total 45 60 105 64 169

2006 40 70 110 63 173

Reserve Reserves which are accessible using the broad infrastructure in place at the current time and which are in the current 5 year mining plan. Resource Reserves which may require substantial development and other costs to allow accessibility and are not currently in the 5 year mining plan. Mineral Coal that has been assessed (although possibly not to the same extent as Reserve and Resource coal) Potential but UK COAL does not have any licences or planning permission to extract the deposits.

These figures must be treated with caution, being based on the Group’s best estimates at the current time. A number of factors may cause the actual production 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 panel is subject to unforeseen geological problems that make production difficult ■ 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

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SURFACE MINES

Our surface mining business had a very successful year, despite poor weather in the summer with the resultant flooding problems affecting parts of the business. Significantly we more than doubled production from 0.6 million tonnes in 2006 to 1.5 million tonnes last year. Principally, this reflected the opening of 3 new sites during the year. Surface mining profits increased over 15 times to £8.5 million, reflecting the increased production volumes and the higher market price of coal.

SHALLOW-LAYING COAL SEAMS BEING RECOVERED ON THE SHARLSTON SITE IN WEST YORKSHIRE WHERE RESTORATION PLANS INCLUDE RESIDENTIAL DEVELOPMENT, WOODLAND, HEATHLAND, MEADOWS AND WATER FEATURES, WITH INCREASED PUBLIC ACCESS.

Key Performance Indicators (“KPIs”) 2007 2006 Coal mined (million tonnes) 1.5 0.6 Revenue (£m) 52.9 21.7 Operating cost (£m) 41.2 17.3 (excluding non-trading exceptional items and depreciation costs) Operating profit before non-trading exceptional items (£m) 8.5 0.5 Sites with consent (number) 7 5 Reserves on sites with planning consent (million tonnes) 4.3 4.1 Operating cost per Gigajoule (£/GJ) 1.11 1.23 (excluding non-trading exceptional items and depreciation costs)

Surface mines have a more variable cost base than deep mines. The site by site cost per GJ will vary according to the nature of each site. The costs of planning gains and the coal yield at each site, along with variations associated to operating cost, efficiencies and weather, make year to year direct comparisons difficult. Surface mine operating costs stated above are after charging amortisation of mine development and restoration assets.

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PLANNING AND RESERVES In total, we estimate that we have a potential 97 million tonnes of surface mine coal, the majority of which is under our land or our control and which at current prices should be capable of profitable extraction. Accessing these reserves requires planning consents and we therefore remain cautious in estimating the likely proportion of this total that will ultimately be extracted.

We are now seeing a marked change in the success rate for surface mining consents with the various Local Authorities. Recognition is being given not only to the need for an indigenous supply of coal for both national and local requirements but also to the fact that the schemes are meeting high environmental standards both in design and operation.

We currently have planning consents in place for 7 sites equivalent to 4.3 million tonnes, and applications already submitted for a further 4 sites equivalent to 4.7 million tonnes. We expect during 2008 to submit planning applications for a further 6 sites equivalent to 5.1 million tonnes.

A summary of estimated remaining reserves through the various stages of planning is set out in the table below, in thousand tonnes:

Applications Applications submitted to be for submitted Sites with planning, in the planning decision following consent awaited 12 months Maidens Hall Extension 90 —— Cutacre 765 —— North Stobswood 395 —— Steadsburn 1,088 —— Long Moor 686 —— Sharlston 307 —— Lodge House 1,000 ——

Potland Burn — 2,000 — Park Wall North — 1,275 — Bradley — 550 — Huntington Lane — 900 —

Blair House ——700 Butterwell ——1,000 Minorca ——1,250 Chesterfield Canal ——530 Stockley Hill ——1,000 Field House ——600 Total reserves in process 2007 4,331 4,725 5,080

Total reserves in process 2006 4,103 5,350 4,600

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EARLY PRODUCTION DAYS ON THE NEW SHARLSTON SURFACE MINE SITE IN WEST YORKSHIRE, WHERE COAL, FIRECLAY AND RED SHALE WILL BE RECOVERED IN A RECLAMATION AND RE-DEVELOPMENT SCHEME.

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POWER

Key Performance Indicators (“KPIs”) 2007 2006 Operating profit before non-trading exceptional items (£m) 4.3 3.1 MWh generated 181,835 119,717 Net income/MWh (excluding Emissions Trading credit) (£/MWh) 23.1 10.9

In 2007, we generated 181,835 MWh of electricity (up 52%) from 29 MW of installed capacity from methane extracted at both operating mines and former mine workings and expanded its profitability by 39% to £4.3 million. This was principally the result of a successful completion of a new generating station at Stillingfleet in North Yorkshire and the installation of new engines at Harworth.

From a safety standpoint we need to extract methane from operating mines. Its use as a fuel source both contributes to our operations providing an economic fuel source and reduces the impact on the environment of

venting methane, a greenhouse gas with approximately 21 times the environmental impact of CO2.

We have also continued to progress a series of planning applications to install wind turbines on Group property sites where this is economic and represents the best use for the properties concerned, or can be combined with a sustainable property development. The planning process for wind farms remains challenging, balancing local consideration against national needs.

During 2007, a planning application for a wind farm consisting of 5 turbines at Stonish Hill, Nottinghamshire which was previously turned down, was resubmitted and refused against officers’ recommendations. This decision will be appealed. A new planning application was submitted in 2007 for a 3 turbine wind project at Bleak House in Staffordshire with the determination expected in the second half of 2008. In February 2008, UK COAL received planning consent to build three wind turbines on land at the former Lynemouth coal handling site near Ellington, Northumberland. The turbines are expected to have a generating capacity of 9 MW, providing an annual electricity output of around 23,000 MWh and generating sufficient renewable electricity to meet the needs of over 5,500 households.

6 further projects are at varying stages of development for submission, with the potential for further applications subject to removal of key constraints on development.

THIS NEW GENERATING STATION BURNING METHANE GAS AT THE STILLINGFLEET MINE SITE IN NORTH YORKSHIRE AND COMMISSIONED IN 2007, HELPED UK COAL’S HARWORTH POWER TO PRODUCE 181,835 MWh OF ELECTRICITY, AN INCREASE OF 52% ON THE PREVIOUS YEAR.

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HARWORTH ESTATES

MAN-MADE LAKES WILL BE A HAVEN FOR WILDLIFE AND A FOCAL POINT OF UK COAL’S WAVERLEY DEVELOPMENT ON THE SITE OF A RESTORED SURFACE MINE WHERE 3,800 HOMES AND ASSOCIATED RETAIL, LEISURE, SOCIAL AND HEALTH FACILITIES COULD BE DEVELOPED WITH EASY ACCESS TO THE M1 BETWEEN ROTHERHAM AND SHEFFIELD.

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REVIEW OF OPERATIONS HARWORTH ESTATES

Harworth Estates produced a profit of £73.2 million (2006: £73.3 million), including gains on Investment Properties of £70.5 million (2006: £70.0 million), of which £66.8 million was unrealised (2006: £68.6 million). A further revaluation gain of £6.7 million was taken directly to reserves, being the gains recognised on former Operating Properties transferred to Investment Property status on their ceasing to be operational sites.

Key Performance Indicators (“KPIs”) 2007 2006 RICS valuation of the property portfolio (£m) 410.7 343.9 Number of sites in Project Worth 76 60 2012 estimate of Project Worth (£m) 935 800 2013 estimate of Project Worth (£m) 1,000 N/A

The principal objective of Harworth Estates is to maximise the value of the Group’s property portfolio over the long term. To this end, the changes in values of the estate, as planning consents are obtained or become more likely, are measured as KPIs.

Harworth Estates controls and manages approximately 46,500 acres of freehold land, which is predominantly in England, on behalf of the Group. We announced, in 2006, our intention to enhance the value of this land bank, and, in particular, a portfolio of largely Brownfield sites, with the target of attaining a gross worth by 2012 of £800 million.

During the course of 2007, our estimate of worth, and the number of sites, have both been raised, such that it is our objective to deliver to shareholders £935 million of gross worth by 2012, through the gaining of planning consents on 76 sites, representing 13,800 gross acres of this land of which a net acreage of 3,696 will be developed.

There will remain, beyond this initial 5 year horizon, further significant value to be obtained from our land bank. We have therefore announced an estimate for 2013 of circa £1 billion of gross worth on these same 76 sites.

Much of this enhancement of value will come through ONE OF 5 FURTHER BUILDINGS the obtaining of planning consents for development, CONSTRUCTED BY OCCUPIERS ON UK and the subsequent, or conditional, sale of parts of sites COAL’S ADVANCED MANUFACTURING PARK for development. We would intend that, in the case of ON THE WAVERLEY/ORGREAVE SITE NEAR residential land, we will strive to obtain planning ROTHERHAM. consent, and would then invest in the major infrastructure, e.g. roads, utilities and section 106 (planning gain), then sell off smaller economically viable plots to house builders for development. In the case of commercial land, a more varied set of models would be employed, often involving the use of co-operation agreements or joint ventures with third parties where these parties bring particular expertise to the development of individual sites.

PROPERTY VALUATIONS A full independent valuation of all our properties has been undertaken as at the 31 December 2007 in accordance with the RICS appraisal and valuation standards published by the Royal Institution of Chartered Surveyors (“RICS”).

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The valuation of non-agricultural properties was undertaken by Atisreal, acting in the capacity of external valuers. The majority of the agricultural portfolio was valued by Smiths Gore with some additional land in the North of England and Scotland valued by Bell Ingram. Agricultural valuations are at market value subject to existing tenancies and existing use.

The Harworth Estates portfolio RICS valuation at the year end is summarised in the table below: Like-for-like Dec 07 Dec 06 percentage £m £m change* Business Parks 54.0 48.3 9.4% Commercials with planning 37.5 41.4 4.1% Other commercial and residential 212.0 152.7 34.9% Agricultural 107.2 101.5 12.4% Total 410.7 343.9 21.0%

* The like-for-like percentage change takes account of properties reclassified from Agricultural to Other commercial and residential together with an adjustment for asset sales and development expenditure.

Surface mine sites currently being mined are included in the value above based on their restored land value of £26.4 million (2006: £32.2 million). While sites, otherwise being held for their long term investment potential, are being used by the Group for its mining and other activities, changes in valuations are not reflected in the balance sheet. As at 31 December 2007 a total of £11.1 million (2006: £17.6 million) has not been included in the balance sheet as a result. Operating deep mine sites are not included in the above valuation.

The basis of valuations is described in note 13 to the Financial Statements.

PRINCIPAL DEVELOPMENT ACTIVITIES DURING 2007 Waverley/Orgreave, Rotherham The Advance Manufacturing Park (“AMP”) continues to develop at pace with 5 further buildings constructed by occupiers and the commencement on site of a 100,000 sq ft part pre-let, part speculative development of hybrid industrial units in a joint venture with Strategic Sites Limited.

In the final quarter of the year we announced that the Highfield Commercial Business Park, which gained outline planning consent in 2006 for 650,000 sq ft of mixed commercial space, would change its focus and that we would promote it as a 645,000 sq ft Government relocation office campus. We will develop this through a joint venture with development and relocation investment specialist, Helical Governetz Limited. This announcement has been well received nationally and locally. Marketing to potential Government department occupiers and to organisations in their supply chain has started and major infrastructure works will commence later in 2008.

Harworth Estates also continues to pursue planning for the new community of 3,800 homes with associated leisure, retail, social, health, education and country park elements on the Waverley site. The project has received the public backing of the Local Authority and other key stakeholders, although the delay in the implementation of the Local Authorities Local Development Framework (“LDF”) has meant that, by agreement with the Local Authority, the Group will now be submitting a planning application for the entire site masterplan during the middle of the year, whilst still pursuing designation through the LDF in parallel.

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ARTIST’S IMPRESSION OF 18,900 SQ FT BUILDING CURRENTLY BEING CONSTRUCTED ON A PRE-LET BASIS FOR DORMER TOOLS ON OUR WAVERLEY AMP DEVELOPMENT WITH OUR JV PARTNER STRATEGIC SITES LIMITED.

Prince of Wales, Pontefract Having had a frustrating year in 2007, progress on the planning application for the first 913 homes and 250,000 sq ft of employment space continues and should shortly be successfully completed. The delay has principally centred on resolving highway access issues both within the congested local network and on the adjoining M62 motorway junction, issues which, we believe, have now been addressed. As a technical departure from an old adopted plan showing the site as an operating colliery (and part greenbelt) the application will, when approved by the Council, be referred to the Government for confirmation that the Local Authority may proceed with the granting of the consent. That approval is expected as the scheme wholly accords with Government policy.

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THE SHAPE OF DEVELOPMENTS TO COME . . . ARTISTS’ IMPRESSION OF HOW MAJOR HOUSING SCHEMES AT THE FORMER PRINCE OF WALES COLLIERY SITE, PONTEFRACT, THE WAVERLEY NEW COMMUNITY PROJECT NEAR THE M1 BETWEEN ROTHERHAM AND SHEFFIELD, AND THE FORMER ROSSINGTON COLLIERY SITE NEAR DONCASTER, COULD LOOK ONCE PLANNING CONSENTS HAVE BEEN GRANTED.

G Park Distribution Development, Lounge, Ashby-de-la-Zouch In August 2007, we submitted a planning application for the first phase development of a 850,000 sq ft distribution hub, which we will develop as a joint venture with Gazeley PLC. Negotiations continue with the Local Authority and other stakeholders, and we become progressively more confident of approval as the negotiations continue. We are targeting a fully implementable planning consent being obtained by the joint venture by the end of the year.

South Leicester Industrial Development, Ellis Town In July 2007, we submitted, in joint venture with Graftongate Developments and Legal & General, a 2 phase planning application with a 300,000 sq ft distribution unit and 250,000 sq ft of small and medium sized industrial units on this former coal preparation and disposal site. We expect a determination on this site in the first half of 2008 and work is targeted to commence on the site by the year end.

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The Former Yorkshire Main Colliery, Edlington, Doncaster Following an unexpected planning refusal in August 2007, we progressed an appeal to the Secretary of State and in parallel resubmitted the planning application to the Local Authority. In January 2008 the consent for 250 residential units and 150,000 sq ft of industrial development was granted. Marketing of the residential element and construction of the industrial element is to commence by the year end.

Gascoigne Wood Following a Call In by the Secretary of State, as a result of a single objection from a local major landowner, in August 2007, we received planning consent for the reuse of the buildings and sidings. The third party then sought High Court review of the Secretary of State’s decision. In the meantime, we have entered into a lease with rail operator EWS to service a major gypsum contract between our customer at Drax and British Gypsum. We intend to proceed with lettings on the site and are confident that the High Court challenge will ultimately be dismissed.

Business Parks Our first generation Business Parks are generally reused former mine buildings with some new build infill. They continue to be well tenanted and attract strong demand when units become available. During the year, we obtained planning consent for a further Business Park at Riccall in the Selby area and we are pursuing planning approval on 3 similar additional sites in Yorkshire. The Riccall site is already 47% let with good enquiries for the balance of the space.

MASTERPLAN OF YORKSHIRE MAIN SHOWING OUR MIXED RESIDENTIAL AND EMPLOYMENT SCHEME AT EDLINGTON NEAR DONCASTER.

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Property Disposals During the year we disposed of 1,106 acres of surplus agricultural land which had no further development opportunities. In addition, we completed sales of 2 sites at Tetron and Denby where we determined that the maximum value and minimum risk generated optimum returns by sale rather than development. In June, we sold the final development plot at Denby to DEB Limited for them to construct a purpose-built world HQ and manufacturing unit, and in November we sold the final 10 acres of the current development phase at Tetron to LSP Limited to construct a distribution warehouse for medical supplies.

Development and Market Conditions While we have some Greenfield sites, the majority of our development land is classified as Brownfield or Previously Developed Land.

The latter part of 2007 saw significant softening of yields and reductions in value especially in the commercial property sectors. However, the valuation of our own portfolio increased, reflecting the increase in the number of development projects, the progress with the planning consent process and the fact that little of our estate is built out. Looking ahead, we believe the longer term outlook for property in the UK, with its structural shortage of land for development, continues to be positive.

Rental income from our existing Business Parks and agricultural estate increased last year and is expected to continue to grow. Our primary opportunity to create value, however, remains the securing of planning consents for our progressively evolving development programme and the subsequent participation in development phase profits. Both of these will impact the RICS valuation of our portfolio, with changes in portfolio valuations being predominantly recognised in the Group’s income statement.

It is clear, from both Government publications and from meetings with Ministers and Senior Civil Servants, that the Government recognises our portfolio has the potential to contribute very substantially to its achieving challenging housing and regeneration targets.

PROJECT WORTH Through the development programme, “Project Worth”, the Group is currently managing 76 projects covering approximately 3,696 net developable acres. We expect that approximately one third of these acres will ultimately become residential land supporting approximately 25,000 plots, with the balance of the land supporting circa 35 million sq ft of commercial employment space. We continue to seek additional opportunities, though progressively these will come from the non-Brownfield estate and will be delivered in the long term, beyond 2013.

The macro-economics of the UK, particularly around the need for additional housing units over the next 10–20 years, means that the prospects for reclassifying potentially significant additional areas of land into the development programme remain good.

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CURRENT VALUATIONS A summary of our major properties is set out on the following pages by location, development status and current market valuation band.

BUSINESS PARKS

Type and Location Description of Property Valuation Band Asfordby, Melton Mowbray, 69 acre rail connected mixed use Business Park with £10m–£20m Leicestershire 225,000 sq ft of commercial space. Masterplan in place for further 400,000 sq ft. Constructing new 24,000 sq ft office and distribution building on a pre- let basis. Current rent roll £1.0 million per annum plus service charge, 97% let. Gascoigne Wood, Sherburn 165 acre regionally significant strategic rail £7.5m–£10m in Elmet, Selby, connected former deep mine. Planning consent for North Yorkshire rail related distribution covering 225,000 sq ft out of total site with potential for approximately 1,000,000 sq ft. First lease granted. Rental income expected of £0.2 million per annum in 2008. Bilsthorpe, 71 acre rail connected former colliery with outline £5m–£7.5m North Nottinghamshire planning consent for B2 and B8. First phase buildings, 44,000 sq ft, 47% let, generating approximately £0.1 million per annum plus service charge. Site benefited from East Midland Development Agency funding to remediate and provide infrastructure. Negotiations ongoing to let majority of remaining units, plus additional ground leases. Whitemoor, Barlby, Selby, 50 acre former satellite mine, of which 22 acres has £2m–£5m North Yorkshire been converted to mixed use Business Park with in excess of 70,000 sq ft. Annual income circa £0.3 million per annum plus service charge. 95% let. Riccall, Selby, North Yorkshire 67 acre former satellite mine. Planning permission £2m–£5m gained in 2007 for a mixed use Business Park with in excess of 80,000 sq ft. 47% let with further negotiations ongoing. Rental income of £0.1 million per annum plus service charge.

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COMMERCIAL DEVELOPMENT PROPERTIES WITH PLANNING CONSENT

Type and Location Description of Property Valuation Band Highfield Commercial, Consent secured for a 55 acre mixed use B1, B2 and £10m–£20m Waverley, Rotherham, B8, hotel and ancillary retail scheme. Reapplying to South Yorkshire change planning consent to accommodate Helical Governetz Limited’s Government relocation campus proposal which if successful, would result in 645,000 sq ft of B1 offices, hotel and ancillary retail being developed on the site. New application to be submitted by June 2008. Mid Cannock, Staffordshire 22 acre rail connected site, fully let on 50 year lease £7.5m–£10m from April 2005. Waverley Advanced Second phase of successful Business Park extending £7.5m–£10m Manufacturing Park (AMP) to around 66 acres capable of accommodating up to (off the Sheffield Parkway, 795,000 sq ft. This phase will be offered as pre-let or Junction 33 M1), Rotherham, design and build opportunities through our joint South Yorkshire venture with Strategic Sites Limited. Tetron Point, Swadlincote, 245 acre fully restored surface mine site. Substantially £2m–£5m South Derbyshire developed out through plot sales to third parties. Final 10 acres of developed land sold in 2007, small 29 acre rail head parcel of development land still held with remaining land approved for leisure development. Further appraisals being undertaken to incorporate additional mixed uses.

UK COAL’S ADVANCED MANUFACTURING PARK ON THE WAVERLEY/ORGREAVE SITE NEAR ROTHERHAM, WHERE A 645,000 SQ FT GOVERNMENT RELOCATION OFFICE CAMPUS IS NOW PLANNED AND WHERE WORK HAS STARTED ON A DEVELOPMENT OF HYBRID INDUSTRIAL UNITS IN A JOINT VENTURE WITH STRATEGIC SITES LIMITED.

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OTHER PROJECTS IN THE PLANNING PIPELINE Type and Location Description of Property Valuation Band Waverley/Orgreave (off the Former surface mine, remediated and fully £50m–£60m Sheffield Parkway, Junction compacted which will provide a New Community 33, M1), Rotherham, Residential site of around 170 acres plus a further South Yorkshire 296 acres of open space and 60 acres of attenuation reservoirs. A Masterplan and Outline Planning Application will be submitted to Rotherham Metropolitan Borough Council by the middle of 2008. Total scheme will be up to 3,800 homes together with retail, leisure and community buildings. Prince of Wales, off Junction 297 acre former colliery and spoil heap site. Forming £20m–£50m 32, M62, Pontefract, part of major regeneration strategy in the area. West Yorkshire Subject to 2 Planning Applications, the first covering the former Pit Yard site which is seeking consent for 913 residential units, employment development (B1 235,231 sq ft) 10 live work units (A1, A3 and A4 26,630 sq ft), a medical centre, a community centre and a children’s day nursery. The second application relates to the former Pit Spoil Heap site for which we are seeking consent to extract 1 million m3 of coal slurry whilst remodelling the landform into a new Country Park and providing a further development platform of approximately 32 acres which will be promoted through the LDF as a Phase 2 housing site. If successful, this could accommodate a further 400 new homes. Planning decision anticipated on both current Planning Applications in mid-2008. Cutacre, off Junction 4, M61, 42 acres currently allocated for industrial £10m–£20m Bolton, Greater Manchester development following completion of our major surface mine activities by 2012. Promoting through the LDF process an additional 216 acres which is supported by Bolton council and satisfies their need to identify a new strategic and employment site to maintain continued economic prosperity for the area. Rossington Colliery, 359 acre former deep mine with spoil heap and £10m–£20m Rossington, South Yorkshire adjacent agricultural land. Potential for 125 acre employment site capable of accommodating around 2,020,000 sq ft of distribution units, subject to construction of new FARRRS road link to Junction 3 of M18. Programme entry for the road is expected to be secured by the end of 2008. This site together with additional land holdings controlled by Helios and Persimmon has been shortlisted as a potential Eco Town, which if successful would secure a large allocation of housing land within UK COAL’s ownership.

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OTHER PROJECTS IN THE PLANNING PIPELINE continued Type and Location Description of Property Valuation Band Harworth Colliery, Harworth, Former deep mine having anticipated net £10m–£20m South Yorkshire developable area of 163 acres. Centrally located adjacent to Harworth and Bircotes town centres offering potential for a major mixed use redevelopment. The opportunity is being discussed with Bassetlaw District Council. A Masterplanner has been appointed to prepare proposals to promote the scheme through the planning process. A Planning Application could be submitted after agreement on Development Framework in 2009. North Gawber, The site is a 39 acre former colliery split into two £10m–£20m Barnsley, South Yorkshire areas, the northern site (15 acres) and southern site (24 acres). The northern site is allocated in the Emerging Local Development Framework to accommodate 250 homes. The southern site is being promoted for further residential development. Lounge, A42, Ashby-de- 104 acre former coal disposal point with substantial £7.5m–£10m la-Zouche, Leicestershire rail infrastructure. Development agreement signed with Gazeley PLC to promote as a major B8 distribution hub. Planning Application was submitted in 2007.

Bennerley, Broxtowe, Rail connected former disposal point, substantially £5m–£7.5m Nottinghamshire restored. Potential for 85 acre mixed use regenerative development scheme, with good access to J26 M1. Ellington/Lynemouth, Potential 27 acre residential led regenerative £5m–£7.5m Northumberland development. Planning Application to be submitted at the end of 2008. Chatterley Valley, 25 acre former operational site. Current development £2m–£5m Stoke-on-Trent, agreement signed with Prologis to promote Staffordshire substantial distribution development in association with adjoining land. An application to intensify existing consent was submitted in 2007. Approval is anticipated in mid 2008. South Leicester Disposal Point, Former 73 acre operational site. Planning Application £2m–£5m Ellistown, Leicestershire submitted for a total of 570,000 sq ft of B1, B2 and B8 accommodation. Approval expected mid 2008. Yorkshire Main, Edlington, 47 acre restored tip washing facility with 25 acres £2m–£5m Doncaster, South Yorkshire allocated for mixed uses. Consent granted, subject to section 106 agreement, for mixed residential and commercial development use and up to 250 homes and 160,000 sq ft for employment use. Additional Sites 56 additional properties are in the early stages of the planning process, each with current year-end values of not more than £2 million.

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FINANCIAL REVIEW

Overall, Group profit before tax increased almost four-fold to £69.0 million, from £17.6 million in 2006. Excluding non-trading exceptional items, operating profit totalled £72.1 million (2006: £46.3 million).

Non-trading exceptional items totalled a net credit of £10.5 million in the period (2006: charges of £18.6 million). This included an £8.5 million profit on the sale of Maltby colliery in February 2007. This was lower than originally anticipated, with the reduction in the pensions deficit in the year being reflected in a reduced surplus on disposal on the transfer of pension entitlements at Maltby. Also included in non-trading exceptional items was £2.0 million credit of rationalisation, closure and other costs (2006: charges of £18.6 million). These benefited from the net release of £8.8 million of provisions following agreement with HM Revenue & Customs (“HMRC”) on the treatment of tax deductions arising on redundancies.

Earnings per share increased by 412% to 59.9 pence (2006: 11.7 pence). This includes the effect of a £25.0 million deferred tax credit, after recognising the deferred tax asset relating to the Group’s accumulated trading losses. Adjusted earnings per share, excluding this tax credit, were 44.0 pence (2006: 11.7 pence).

Financing costs and funding Net finance costs have increased by 41% to £14.2 million (2006: £10.1 million). This includes the cost of the mark-to-market adjustment on interest rate swaps of £1.9 million (2006: gain of £0.6 million). We have applied hedge accounting from 1 January 2008 and this will minimise the volatility of the swaps on our income statement going forward.

Excluding the change in fair value of interest rate swaps, net finance costs have increased by 15% to £12.3 million reflecting the higher level of drawn debt (2006: £10.7 million). On average, interest rates on our current facilities are approximately 98% fixed at approximately 7% interest per annum. Also included in Group financing costs is a charge for the unwinding of discounts in relation to the provisions in the balance sheet of £3.9 million (2006: £4.6 million).

The Group currently has £194.3 million of borrowing facilities and a further £13.9 million outstanding on finance leases. The borrowing facilities comprise a revolving credit facility of £52.0 million secured on property and working capital, £136.4 million secured on property and £5.9 million on surface mining plant. The average maturity of the facilities was 2.9 years (2006: 2.2 years).

The Group has cash deposits which are held by our captive insurance company against insurance claims and similarly ring-fenced funds held on behalf of the Coal Authority predominantly securing surface damage claims resulting from mining. These totalled £25.7 million and £23.4 million respectively at 31 December 2007 (2006: £19.6 and £22.7 million). These deposits together with property assets with a value of £9.9 million (2006: £13.9 million) were secured against liabilities of £18.9 million and £16.4 million respectively.

Gearing at the year end has been reduced as a result of the increase in our property asset values recognised on the balance sheet. The gross debt less unrestricted cash to equity ratio improved to 23% (2006: 28%).

Tax The Group paid no corporation tax in 2007 (2006: £nil).

At 31 December 2007, the Group had trading losses of £264.0 million with a tax value of £74.0 million (2006: £41.5 million) available to offset against future profits in the mining business and gross timing differences with a tax value of £6.9 million (2006: £33.1 million). The net deficit on the balance sheet in respect of retirement provisions also represents a tax timing difference of £20.5 million (2006: £35.8 million).

The Group has recognised, at 31 December 2007, a deferred tax asset of £36.0 million (2006: £35.7 million). The Group continues to take a prudent view of deferred tax asset, given the nature of the business and its historic

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performance. A deferred tax credit of £25.0 million has been recognised in the income statement, however, offsetting a corresponding charge to reserves, reflecting the ascription of the asset at the year end in part to trading losses and other timing differences and in part to pension liabilities.

The Group has in excess of £380 million of capital losses which can be offset against profits arising on disposals of properties currently held by the Group. These capital losses are sufficient to offset the vast majority of the deferred tax liability which would otherwise be required in respect of the Investment Properties leaving a small deferred tax liability which has been recognised in the financial statements of £0.8 million (2006: £1.2 million).

Group cash flows 2007 2006 £m £m Cash generated from/(used in) operations 6.1 (21.0) Interest and financing cost (13.2) (8.0) Cash used in operating activities (7.1) (29.0) Purchase of property, plant and equipment (23.0) (26.6) Pre-coaling expenditure for surface mines (4.7) (5.1) Development costs of Investment Properties (7.5) (3.3) Proceeds on disposal of operating property, plant and equipment 0.8 5.6 Profit on disposal of Investment Properties 13.3 18.6 Proceeds on disposal of business 21.5 — Net (payment to)/receipt from restricted funds (6.8) 9.9 Other movements 3.4 2.2 Cash used in operating and investing activities (10.1) (27.7) Net drawdown on bank loans 27.2 8.8 Net proceeds/(repayments) of obligations under hire-purchase and finance leases 0.2 (7.6) Proceeds from issue of ordinary shares — 29.1 Increase in cash 17.3 2.6

There was a net cash outflow from operating activities of £7.1 million. This is mainly due to interest and financing costs of £13.2 million.

The cash outflow from investing activities was £3.1 million. This is mainly attributable to purchase of operating property, plant and equipment of £23.0 million offset by the proceeds on disposal of Maltby of £21.5 million.

Balance Sheet The net assets of the Group increased by £114.1 million to £358.2 million. The increase in net assets is mainly due to the increase in our investment portfolio valuation and a reduction in retirement benefit obligations. Significant movements in the balance sheet relate mainly to Investment Properties, provisions and retirement benefit obligations. The increase in Investment Property has been discussed within the Harworth Estates section.

Provisions The provisions outstanding at 31 December were as follows: 2007 2006 £m £m (i) Employer and public liabilities 18.9 19.9 Surface damage 16.4 19.8 (ii) Claims — 1.5 (iii) Restoration and closure costs of surface mines 54.6 51.8 (iv) Restoration and closure costs of deep mines: — shaft treatment and pit top 12.2 17.6 — spoil heaps 3.2 4.2 — pumping costs 6.3 6.6 Ground/groundwater contamination 6.5 9.8 (v) Redundancy 4.1 16.0 122.2 147.2

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(i) Employer and public liabilities and surface damage provisions Provisions are made for current and estimated obligations in respect of claims made by employees and contractors relating to accident or disease as a result of the business activities of the Group. This is managed by our captive insurance Company, Harworth Insurance Company Limited, a UK-based FSA registered Company. As at 31 December 2007, it held £25.7 million of cash deposits and £3.3 million of property assets to meet £18.9 million of liabilities.

Surface damage provision relates to the Group’s liability to compensate for subsidence damage arising essentially from past deep mining operations. Claims can be lodged by the public up to 6 years after the date of the relevant damage. The estimate is based on historical claims experience, following a detailed assessment of the nature of damage foreseen. The reduction in surface damage provisions is in line with the reduction in number of operating mines within the Group. As at 31 December 2007, the Group had £23.4 million of ring-fenced deposits and £6.6 million of property secured to meet these liabilities.

(ii) Claims Outstanding claims associated with surface mine sites contracted out to third parties have largely been settled during the year.

(iii) Surface mines Restoration and rehabilitation provisions represent the expected cost of the reinstatement of the site including overburden and soil, discounted for the time value of money.

This provision is created, and an equal and opposite non-current asset is created, when coaling commences. Along with other pre-coaling expenses, this asset is written off in proportion to the expected recoverable reserves of the mine.

Expenditures for restoration and rehabilitation are offset against the provisions as incurred. The unwinding of the discount for the time value of money is included within the finance cost.

As at 31 December 2007, the Group had a non-current asset of £20.1 million (2006: £9.7 million), relating to both expenditure on pre-coaling and similar expenses and the recognition of the provision for restoration and rehabilitation liabilities on sites that had started coaling. At the same date, provisions for restoration and rehabilitation totalled £54.6 million (2006: £51.8 million).

In future the average working surface mine site is likely to be smaller than those worked in the past, reflecting both the available sites and planning issues. There will be a significant unwinding of the balance sheet provisions in respect of the last remaining large sites — Maidens Hall and Stobswood. Mining on these sites has lasted over 11 and 17 years respectively, and there remains a cost of £37.6 million to restore these sites, of which £26.5 million will be carried out over the next 2 years with the balance being utilised over the next 5 years.

(iv) Deep mines We maintain provisions in respect of the costs of restoring our deep mines to the required standard and planning conditions. The amount provided represents the discounted net present value of the expected costs. Costs are charged to the provision as incurred and the unwinding of the discount is included within the finance costs for the year. The provision can be broken down into ongoing and closed mines. £m Ongoing mines 19.7 Closed mines 8.5 28.2

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70 per cent of deep mines provision relates to our 4 ongoing mines which will be utilised after the point of closure. Of the closed mines provision, we expect to utilise £1.8 million in 2008 and £1.9 million in 2009, predominantly the costs in respect of Harworth and Rossington collieries. The remaining balance of £4.8 million will be utilised from 2010.

(v) Redundancy Provisions Redundancy provisions are created when the decision to make the redundancies has been made and communicated, usually through the representatives of the workforce. We expect to utilise all the redundancy provisions in 2008.

Retirement Benefit Obligations The defined benefit pension and retirement schemes comprise 2 funded Industry Wide Schemes and an unfunded concessionary fuel scheme.

The Group has a deficit of £73.2 million (2006: £120.5 million) on these schemes which are closed to new entrants but are required to be open for future service. All new employees who joined after the privatisation in 1994 are eligible to join defined contribution schemes. This includes an unfunded concessionary fuel scheme with a liability of £23.4 million (2006: £24.7 million). All of these schemes are valued annually by our independent actuaries, the Government Actuary’s Department.

The schemes have been valued under International Accounting Standard 19 (“IAS 19”), using the projected unit method and discounting future scheme liabilities on the basis of AA-rated corporate bond yields of over 15 years. The discount rate used, net of inflation, was 2.5% (2006: 2.0%). Contributions are determined by a qualified actuary on the basis of triennial valuations, using the projected unit method. The most recent valuations for this purpose were at 31 December 2003 and we are currently in the process of finalising the 2006 triennial valuations.

Movements in the schemes in 2007 are set out below:

Concessionary Pension* Fuel Total £m £m £m 1 January 2007 (95.8) (24.7) (120.5) Expected return on assets 22.9 — 22.9 Interest on deficit (22.0) (1.2) (23.2) Net actuarial gains 36.2 1.3 37.5 Effect of curtailment or settlement 2.4 0.9 3.3 Contributions paid less current service cost 6.5 0.3 6.8 31 December 2007 (49.8) (23.4) (73.2)

* Including Blenkinsopp pension scheme.

The deficit reduction of £47.3 million comprises:

■ Net actuarial gains of £37.5 million (2006: £11.6 million) arising mainly from estimated higher than previously expected asset returns. The gains are treated as reserve movements and reported in the statement of recognised income and expense (“SORIE”). ■ Additional payments to the pension scheme of £6.8 million (2006: £6.4 million) representing the net difference between employer contributions payments made of £20.0 million (2006: £21.0 million) and the actuary’s calculation of the costs of benefits accrued in the year. ■ Gains from curtailments and settlements of £3.3 million (2006: £4.3 million) due to redundancies, the sale of Maltby colliery, and other scheme leavers. These are reported in the income statement as non-trading exceptional items.

Details relating to the pension scheme, as presented in the 2007 annual report and the most recent actuarial valuation, are shown in note 23 to the financial DAVID BROCKSOM, statements. FINANCE DIRECTOR

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KEY RISKS AND UNCERTAINTIES

We operate in an industry which carries inherent risk, and is subject to market and other external risks which cannot be fully controlled, mitigated or insured against. Set out below are some of the principal risks and uncertainties identified by the Directors which exist within the Group that could materially affect our financial condition, performance, strategies and prospects. The following risk information is not intended to be a comprehensive overview of risks inherent within the business.

MINING RISK Health, safety and environment All of our mining operations are subject to potential health and safety risks, and the possibility of pollution of water, air or soil.

A number of actions have been taken during the year to reduce the number of health and safety incidents occurring and to advance further the standards of environmental safety and protection. A Health and Safety Committee of the Board has been established during the year to oversee and promote the importance of health and safety to the business. Health and safety training is provided to employees on an ongoing basis to ensure an awareness of safety issues across the Group. This is to reinforce management’s policies of safety issues and create as safe a working environment as possible. We are determined that by working together with all our workforce, we will improve on all our health and safety performance.

The potential for other hazards underground is continually monitored, in particular the risks from methane gas and from fire, enabling immediate action to be taken in the event of any abnormal reading. There is only very limited or uneconomic insurance available in the market against these risks which might normally be insurable in other industries.

Major unforeseeable production shortfalls or geological constraints The operating costs of our deep mines are largely fixed and cannot readily be reduced in changed circumstances. Output is therefore key to our financial performance and to the viability of the mines and the business.

In an operation as complex as a deep mine there are inevitably risks to production from the failure of equipment. We therefore seek to maintain adequate supplies of equipment spares to ensure that any downtime is limited and we are operating at high levels of machine availability.

Our mining plans and development programmes are designed to minimise face gaps, the time between one face finishing and a new face starting and production ramping to a normalised level. During this time coal production may be limited and the economic impact is closely monitored.

Inherent to the nature of our business is the geology of the ground in which we are mining. Whilst boreholes are drilled and modern surface and other surveys including 3-D seismic surveys offer better information, we often face unexpected geological conditions. These may be revealed in part when the roadway access gates are initially driven or by knowledge from previous workings in the same area (for example in seams above or below those being mined) but frequently the extent of geological faulting or other conditions in the coal seam that have to be safely traversed is not totally predictable.

We manage these mining risks by having a well structured risk management policy and experienced personnel to ensure any operational difficulties are mitigated where possible to ensure a continuous production process throughout the year.

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Fluctuations in coal prices We are exposed to the risks of fluctuations in coal prices as our revenue and earnings are directly related to the prevailing prices for the coal produced.

We have mitigated this in the past by the use of longer term customer contracts, both to ensure more certainty of demand and of price. These contracts have, with the subsequent sustained increase in the world price of coal, worked to our disadvantage. Our strategy is now to move towards a balanced mix of longer term contracts on fixed, capped, collared and floating prices, and to maintain an element of shorter term contracts and spot sales.

We also aim to reduce costs on a continuous basis and to maintain an efficient production process to maximise our returns.

PROPERTY RISK Property market downturn or volatility Harworth Estates is exposed to changes in the property market and the valuation of its estate will fluctuate in part with the general market. The UK market is currently undergoing a period of disruption, and this is particularly apparent in respect of the small part of our estates that is built out, where property yields have increased, with a commensurate fall in values. Conversely, our Agricultural land has seen an increase in value per acre, without any change in planning, reflecting the continuing increase in values for this type of land. Overall, whilst short term fluctuations will always occur in the property market, the underlying macro-economic position and long term demand for property in the UK will, we believe, underpin the market and the value and future worth of our property portfolio.

Planning Approvals The planning regime affects Harworth Estates, and our Mining and Power businesses, and any major changes could affect the business, either positively or negatively. During the course of 2007, we have seen improvements in the planning environments, in particular following the publication by the Government of its various Regional Spatial Strategies (Regional Development Plans), and in the planning regime surrounding the surface mine business, where greater recognition is being given both for the need for coal and the high environmental standards of the design and operation of the schemes. Of immediate impact, the resources available to planning authorities to process planning applications in a reasonable timescale continues to be a restraining factor on the Group, and in the development of activities contributing to overall Government targets and the Group’s aspirations.

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CORPORATE SOCIAL RESPONSIBILITY

We take our Corporate Social Responsibility (“CSR”) seriously and are committed to implementing appropriate policies and systems across the Group. These include concern for employees and their health and safety, care for the environment and community involvement.

The Board has responsibility for CSR and is committed to developing and implementing appropriate policies to create and maintain long term value for all stakeholders. This is important for the Group as it helps to minimise risk, ensure legal compliance, and further develop the Group’s reputation. We have commenced a review of our CSR policies in the light of the changing profile of the Group’s business to ensure that all stakeholders are properly represented and that each of our businesses acts appropriately with regard to its type of operations.

Health and Safety The Board believes that the health and safety of our employees, and persons affected by our operations, is of paramount importance and is committed to ensuring that we do much more than merely comply with all of our obligations and promote an active safety culture. In recognition of this, the Board has established a Health and Safety Committee to have oversight of health and safety management of the business.

All Directors are fully aware of the Group’s and their own responsibilities towards health and safety and fully support and provide resource for systems and initiatives that promote health and safety.

Following his recent appointment, the Chief Executive issued a personal health and safety commitment to all employees. He has followed this up with programmes of face-to-face meetings with a large number of employees, particularly those working in higher risk areas of the business.

The Directors deeply regret the fatal accidents involving a contractor at Daw Mill colliery in January 2007 and an employee at Welbeck colliery in November 2007, both of whom were highly valued and experienced mine workers. The Directors extend their most sincere sympathy for the loss of these men to their families and friends.

The management is dedicated to maintain and enhance controls and to make improvements throughout the Group’s operational structure and activities recognising that it operates in an industry that has to control significant major hazards.

Health and safety is an integral part of the management accountability process with clear reporting lines up to Board level. Health and safety training, risk assessment with appropriate Group and site control measures, health screening and the personalisation, through safe work instructions, of individuals’ roles are the key measures used to ensure health and safety compliance. Internal audits are carried out at sites. We have a programme of audits of the key major hazard control measures which is carried out centrally.

The Group is represented on a number of Industry/Health and Safety Executive (HSE) consultation and working parties which it fully supports. Recent work has involved publishing industry guidance on ‘Guidance and Information on the role and Design of Safe Havens in Arrangements for Escape from Mines’ and ‘Guidance on Brake Testing for Rubber-Tyred vehicles in Quarries, Open-Cast Coal Sites and Mines’, all of which are published on the HSE website.

We have a Health and Safety Manager, supported by competent health and safety professionals, with a direct reporting line to the Board which receives regular updates on our safety performance and health and safety strategy. Extensive Group-wide and local policies and procedures are in place and all employees are subject to ongoing health surveillance. Safety inductions are a requirement for all staff and contractors working on sites and risk assessments are carried out for all new works to be undertaken. Regular safety audits are conducted and the results of these are reviewed and signed-off by site managers. These are supplemented by regular visits from officers of the appropriate regulatory authorities.

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We promote a healthy environment and a high standard of safety for all our employees and others who may be affected by our activities. Underlying health and safety statistics continue to demonstrate year on year improvements in accident and ill health incidents which are reinforced by improving trends in disease-related claims and an underlying accident claims handling trend.

In 2007, there were 21 major injury accidents reported to the HSE compared to 30 in 2006 but unfortunately including 2 fatalities in 2 separate mines. The overall reportable injury rate improved to 23.9 accidents per 100,000 manshifts (2006: 27.8 accidents per 100,000 manshifts). This is an improvement on rates of 14% but the Company considers this insufficient improvement and will continue through the direction of management and the involvement and commitment of our employees to target further significant improvements in 2008.

All sites have appropriate emergency arrangements. The deep mines are members of the Approved National Mine Rescue Scheme.

We have occupational health providers who carry out extensive health surveillance in order to enhance our development of risk control strategies, as the health of our employees, within an ageing workforce, is key to the success of the business. Health surveillance includes a formal drugs and alcohol policy.

Health and safety training is, in the main, a standards-based process and the programmes ensure all persons are updated with current best practice. Training is primarily contracted-out to professional providers. A full review of the Group’s health and safety training needs is being undertaken to ensure that the behavioural needs of our workforce are supported alongside our core training programmes.

Employees It is essential that we have a skilled and motivated workforce to ensure the long term success of the business. We aim to attract, retain and motivate the highest calibre of employees within a structure that encourages their development and personal initiative.

We employ 3,100 people (December 2006: 3,700), with the reduction primarily as a result of the sale of Maltby colliery. We maintained our policy of maximising the redeployment of skilled and experienced mineworkers where possible.

The continuing review of working practices to meet the ever changing needs of the business resulted in operational and functional changes at most units, backed by training and refresher courses to develop further employee skills and safe working practices.

Regular dialogue is also maintained with the mining trade unions, particularly at operational level where the specific requirements of each individual unit are addressed. As part of our communications strategy, we have continued to produce our NewScene newspaper on a regular basis, distributed free to employees to achieve a common awareness of the financial, economic and operational factors affecting business unit and Group performance.

We remain committed to all aspects of equal opportunities, recognising the value of a positive approach to diversity. To this end, we are committed to providing equal opportunity in recruitment, promotion, career development, training and reward to all employees without discrimination and continue to be supportive of the employment of disabled persons in accordance with their abilities and aptitudes, provided that they can be employed in a safe working environment.

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Environment The Environmental Policy commitments of the Group are to:

■ Minimise pollution and comply with environmental legislation, and any agreements with external organisations in order to comply with ISO 14001 ■ Maintain certification of environmental management systems to international standards at all mines ■ Set and regularly review objectives and targets to achieve continuous improvement in environmental performance ■ Use the principles of sustainable development to design new mines and restore completed mines to include long term environmental or community benefits ■ Encourage the efficient use of coal with minimum emissions ■ Maximise the use of other natural resources recovered with the coal ■ Provide access to contact us about environmental issues and give a prompt response ■ Ensure this policy is communicated to all employees, contractors and suppliers

The first three year period of certification to ISO 14001 for all surface and deep mined sites was reached at the end of 2007. A programme for expanding the ongoing continuous certification has been set up and will include the Mining Services department early in 2008. Harworth Estates is currently progressing with its implementation of the system. Increasing the coverage of our certified system will improve both the day-to-day operational procedures and longer term environmental risk management over all our activities. Our Environmental Policy is reviewed by the Board, and both in-house and external audits ensure continued compliance. Monitoring and analysis of emissions to air, water and land, as well as the use of natural resources, are carried out and, where appropriate, programmes to reduce emissions, or to reduce the use of natural resources are designed and implemented. As new legislative regulations on waste and resources are introduced, our programmes to encourage reduction, reuse and recycling continue to show positive benefits to the environment and to improve the Group’s profitability.

The Group’s commitment to minimising greenhouse gas emissions continues, and is improved through projects such as the use of methane gas from deep mines to generate electricity, and where this is not feasible, flaring the methane. This assists in the UK meeting its responsibilities to reduce greenhouse gas emissions under the Kyoto agreement, as well as reducing power costs on the Group’s sites.

The Environment Department liaises with our suppliers through the purchasing function to look at ways of encouraging environmentally sustainable practices throughout the supply chain, in particular around waste packaging. The Environment Manager is an active participant in the CBI East Midlands Environment Committee, which meets regularly with like-minded companies to share good environmental practice.

The success of our policies is judged internally by the use of internal performance indicators based on established criteria provided by DEFRA. These have been introduced throughout the ongoing mining sites where appropriate reduction programmes and data collection will help us achieve our objectives. Specific environmental successes at ongoing mines in 2007 included an 8% reduction in waste sent to landfill sites and an increase in recycled wastes of 12%. There was also a reduction in towns’ water use of 23% when compared to 2006.

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Social and Community Issues We have maintained our philosophy of supporting suitable community projects focused on the surface and deep mines and also on major property developments operating at the heart of the communities in which they are based.

In Derbyshire, as a community project, we are now completing the stabilisation of a medieval stronghold, the Codnor Castle and Monument which dates back to shortly after the Norman Conquest. By the time the work is completed this summer, around £1.5 million will have been spent on stabilising the castle and the nearby Jessop Monument Tower and Hall.

In addition, we typically plant up to 500,000 young trees a year on our restored surface mine sites and other land. In the last decade, we planted around 4 million trees — 1 million in the North East, 1 million in Yorkshire, 1.6 million in the Midlands and around 0.4 million in Scotland and the North West.

In 2007 we agreed to match awards made by the Miners Welfare National Educational Fund pound-for-pound to the family members of former and current employees studying full-time at a university or college or on a designated course of higher education. Each year, the fund provides grants of around £50,000 in total. UK COAL’s financial commitment to these schemes cannot be fully quantified at this time as the scheme for the current educational year is open to applicants until 31 March 2008. We, however, estimate approximately £20,000 per annum will be distributed to qualifying applicants. This initiative has been warmly welcomed by the communities in which we work and by the individuals who have received the support.

In addition to the Community Fund commitments providing support for projects to those living close to surface mine sites, charitable donations in the year totalled £4,200 (2006: £5,300).

Contributions were also made to a wide range of individual and team activities, individual and Group events and sporting and academic aspirations benefiting all age groups. It is anticipated that a similar level of donations will be sustained in 2008.

UK COAL PROJECT MANAGER BARRY KEATES PRESENTS A CHEQUE FOR £500 TO MEMBERS OF THE CODNOR CASTLE PRESERVATION SOCIETY TO HELP PROMOTE THEIR COMMUNITY WORK. THE CASTLE IS SET TO BECOME PART OF THE REGION’S HERITAGE AND TOURIST MAP NOW A £1.5 MILLION UK COAL FUNDED PROJECT TO STABILISE THE MEDIEVAL REMAINS IS NEARING COMPLETION.

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BOARD OF DIRECTORS

DAVID JONES JON LLOYD DAVID BROCKSOM PETER HAZELL Aged 65, was appointed to Aged 51, was appointed Aged 47, was appointed Aged 59, Chairman of the the Board as a non-executive as Chief Executive on Finance Director with effect property developers, Argent Director in January 2003 and 1 September 2007, having from 18 September 2007 and Group PLC, joined the Board in became Chairman in April joined the Board as Property has additional responsibility for September 2003 as a non- 2003. He has extensive Director in July 2006. He is a sales and marketing and executive Director. He is also a experience in the electricity Chartered Surveyor and was Harworth Power. He qualified non-executive Director of Brit supply industry and was Chief Head of Property at HBOS PLC. as a Chartered Accountant Insurance Holdings PLC and Executive at The National Grid He was formerly Regional with Price Waterhouse and Smith & Williamson Limited Company PLC until March Managing Director for the was previously Finance and a member of the 2001. He is currently Chairman North Region at DTZ Director of Pace Micro Competition Commission. of Teesside Power Limited and Debenham Thorpe, and held Technology PLC and Avesco Previously he was UK a non-executive Director of senior roles at Yorkshire Water PLC. Managing Partner of United Utilities PLC. PLC, where he was Managing PricewaterhouseCoopers and Director of Yorkshire Water spent his early career at Estates Limited and Rosehaugh Coopers & Lybrand and Heritage PLC. Deloitte Haskins & Sells. He is Chairman of the Audit Committee and the Senior Independent Director.

CHAIRMAN NON-EXECUTIVE COMPANY REGISTERED NO. FINANCIAL ADVISERS DIRECTORS David Jones†* 2649340 Gleacher Shacklock LLP Peter Hazell‡†* Cleveland House Mike Toms‡†*# 33 King Street Kevin Whiteman‡†*# AUDITORS London CHIEF EXECUTIVE Owen Michaelson SW1Y 6RJ PricewaterhouseCoopers LLP Jon Lloyd†# Donington Court Pegasus Business Park SECRETARY AND STOCKBROKER Castle Donington REGISTERED OFFICE FINANCE DIRECTOR East Midlands Landsbanki Securities (UK) Limited Richard Cole DE74 2UZ Beaufort House David Brocksom Harworth Park 15 St Botolph Street Blyth Road London Harworth EC3A 7QR Doncaster South Yorkshire DN11 8DB

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MIKE TOMS KEVIN WHITEMAN OWEN MICHAELSON Aged 54, joined the Board as a Aged 51, is Chief Executive of Aged 41, was appointed to non-executive Director and Kelda Group PLC and joined the Board as a non-executive Chairman of the Remuneration the Board of UK COAL as a Director with effect from Committee with effect from 3 non-executive Director on 2 October 2007. He is a May 2006. He is a Chartered 1 June 2007. He secured a Chartered Surveyor and is Surveyor, Town Planner and degree in mining engineering Corporate Development Economist by background and at University College, Cardiff Director of Peel Holdings. was formerly Group Director, and started his career at British He has specialised in the Planning and Regulatory Affairs Coal. He joined the National remediation and development and Board member at BAA PLC. Rivers Authority in 1993, of brownfield and He is Chairman of Northern becoming Chief Executive in contaminated land, waste Ireland Electricity PLC, a non- 1995, before spending a year management operations and executive Director of Oxera as Regional Director of the power generation. He is a Consulting Limited, and non- Environment Agency. In 1997, member of the DBERR Coal executive Director of Birmingham he joined Yorkshire Water and Forum and a former Chair of Airport Holdings Limited. was appointed Chief Executive the RICS Waste Policy Panel. of Kelda Group PLC in 2002. He is Chairman of the Health and Safety Committee.

SOLICITORS BANKERS ‡ Audit Committee Freshfields Bruckhaus Deringer Barclays Bank PLC † Nomination Committee 65 Fleet Street 6 East Parade * Remuneration Committee London Leeds # Health and Safety EC4Y 1HS LS1 2UX Committee

Lloyds TSB PLC 6–7 Park Row REGISTRARS Leeds Equiniti LS1 1NX Aspect House Spencer Road Bank of Scotland Lancing New Uberior House West Sussex 11 Earl Grey Street BN99 6DA Edinburgh EH3 9BN

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DIRECTORS’ REPORT

The Directors present their report and the audited financial statements for the year ended 31 December 2007. These will be laid before the Annual General Meeting to be held on 20 May 2008. Details of all resolutions to be proposed at the 2008 Annual General Meeting are set out in the notice calling the meeting, which is enclosed with this report.

PRINCIPAL ACTIVITIES, BUSINESS REVIEW AND FUTURE DEVELOPMENTS The principal activities of the Group comprise surface and underground coal mining, property regeneration and management and power generation. The consolidated income statement for the year is set out on page 63.

The Chairman’s Statement and the Operating and Financial Review on pages 2 to 41 provide a review of the Group’s business which includes the:

■ Development and performance of the Group in the year and its position at the year end ■ Principal risks and uncertainties faced by the Group (pages 36 to 37) ■ Key Performance Indicators used to measure the Group’s performance ■ Environmental and employee priorities facing the Group ■ Group’s future development and outlook for 2008

DIVIDENDS PER ORDINARY SHARE There was no dividend paid during the year (2006: £nil). The Directors are not recommending the payment of a final dividend (2006: £nil).

LAND AND PROPERTY The Group’s investment property was revalued at the year end, full details of which are set out in the Operating and Financial Review.

DEVELOPMENT The Group actively develops its mining and property portfolios, full details of which are found in the Operating and Financial Review and in the notes to the Accounts.

DIRECTORS The Directors who served during the year were: David Brocksom, Peter Hazell, David Jones, Jon Lloyd, Christopher Mawe, Owen Michaelson, Garold Spindler, Michael Toms and Kevin Whiteman. Messrs Whiteman, Brocksom and Michaelson were appointed with effect from 1 June 2007, 18 September 2007 and 2 October 2007 respectively and will offer themselves for re-election at the Annual General Meeting. All three are recommended by the Board for re-election. Garold Spindler resigned on 1 September 2007 and Christopher Mawe resigned from the Board on 17 September 2007.

All continuing Directors are subject to re-election every three years. David Jones will retire by rotation in accordance with the Articles of Association and will offer himself (and is recommended by the Board) for re-election at the Annual General Meeting. It is planned that Mr Jones will serve for a further term as Chairman after his current term expires on 31 December 2008.

All executive Directors have service contracts, which may be terminated by the Company on not more than twelve months’ notice, for all non-executive Directors the notice period is three months. There are no Directors on fixed term contracts. There are no contractual clauses that give any of the Directors an entitlement to compensation exceeding his due payment in lieu of notice.

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The interests of the Directors in the shares of the Company are shown in the report on Directors’ remuneration. The biographical details of the current Directors are shown on pages 42 to 43.

CHARITABLE DONATIONS The contributions made by the Group during the year for charitable purposes were £4,200 (2006: £5,300). No political donations were made in 2007 (2006: £nil). Charitable donations made were predominantly to associations and charities involved with the coal industry and local communities.

EMPLOYEES The Group’s policy is to consult and discuss with employees on matters likely to affect their interests. A newspaper is produced and distributed free to all employees regularly. Information on matters of concern to employees is given periodically to achieve a common awareness on the part of all employees of the financial and economic factors affecting the Group’s performance.

DISABLED PERSONS It is the Group’s policy to give full consideration to suitable applications for employment by disabled persons. Opportunities also exist for employees of the Group who become disabled, to continue in their employment or to be trained for other positions within the Group.

HEALTH AND SAFETY UK COAL is committed to maintaining high standards of health and safety in every area of the business. It is the aim of the Group to exceed the requirements of the Health and Safety at Work Act 1974 and all other relevant health and safety legislation and has established a committee of the Board to oversee Health and Safety. Details of the Group’s commitment to health and safety are found on pages 38 to 39 of the Operating and Financial Review.

TREASURY POLICY AND LIQUIDITY The Group maintains borrowing lines estimated to be sufficient to cover forecast cash requirements. In this assessment, the Group only takes into account existing or renewing facilities and new facilities where these have received credit approval or equivalent.

The Group enters into hedging transactions required to cover the operations of the business. The principal function of the financial instruments held by the Group is to provide security, raise funds and mitigate some interest rate risks.

Details of financial risks in respects of market risk, credit risk and liquidity risk are set out in note 22 to the financial statements.

SUPPLIER PAYMENT POLICY The Company and the Group does not follow any specific external code or standard on payment practice. Its policy is normally to pay suppliers according to terms of business agreed with them on entering into binding contracts and to keep to the payment terms providing the relevant goods or services have been supplied in accordance with the contracts.

The Group had 68 days’ purchases outstanding at 31 December 2007 (2006: 67 days) based on the average daily amount invoiced by suppliers during the year.

ETHICAL POLICY UK COAL is committed to working with our employees, customers, suppliers and contractors to promote responsible working and trading practices. It also provides assistance to the wider community by way of financial support for charitable and other local causes.

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DIRECTORS’ REPORT CONTINUED

QUALITY AND INTEGRITY OF PERSONNEL It is the Group’s policy to employ the highest calibre of management and staff and encourage the highest standards of personal integrity. Recruitment procedures are designed to identify and reward high calibre individuals.

SUBSTANTIAL SHAREHOLDINGS IN THE COMPANY The Directors have been notified of the following substantial shareholdings as at 9 April 2008:

% of Date of No. of issued share Company Notification shares capital Peel Land & Property Investments 20.03.07 38,357,633 24.41 Artemis Investment Management Ltd 29.11.07 8,568,386 5.45 Ameriprise Financial Inc 19.03.08 7,687,541 4.89 Deutsche Bank AG 27.03.08 6,431,874 4.09 Legal & General Assurance (Pension Management) Ltd 20.11.07 6,396,997 4.07 Credit Suisse Securities (Europe) Ltd 27.06.07 6,351,812 4.04 Allianz SE 13.07.07 6,305,737 4.01 Audley European Opportunities Master Fund Ltd 05.06.07 5,299,897 3.37

SHARE CAPITAL Details of the structure of the Company’s share capital and changes in the share capital during the year are disclosed in note 24 to the consolidated financial statements. The Company has one class of ordinary shares which carry equal voting rights and no contractual right to receive payment.

PURCHASE OF OWN SHARES The Directors are authorised to make market purchases of the Company’s own shares under an authority granted at the Annual General Meeting held on 23 April 2007. No such purchases were made during the year. The Directors will seek renewal of this authority at the Annual General Meeting to be held on 20 May 2008.

INCREASE IN THE MAXIMUM AMOUNT WHICH CAN BE PAID TO THE DIRECTORS Under the Articles of Association (Article 88) there is currently a £300,000 limit to the aggregate fees that may be paid to Directors for their services as Directors. The Directors will seek authority from shareholders at the Annual General Meeting on 20 May 2008 to increase this aggregate limit to £500,000.

AMENDMENT TO THE COMPANY’S ARTICLES OF ASSOCIATION Many English companies are amending their Articles of Association this year to take account of changes in English Company law brought about by the phased implementation of the Companies Act 2006. Certain key sections of the Companies Act 2006 coming into force on 1 October 2008 (relating to conflicts of interest) will expose the Directors to potential liability under the Act. The Directors will seek authority from shareholders at the Annual General Meeting on 20 May 2008 to amend the Articles of Association to enable the Directors to protect themselves against such liability.

SIGNIFICANT AGREEMENTS The Companies Act 2006 requires us to disclose the following significant agreements that take effect, alter or terminate on a change of control of the Company:

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The facility agreement dated 25 July 2007 for the committed term and revolving credit facilities provided to Harworth Estates (Waverley Prince) Limited by Bank of Scotland PLC (among others) relating to the redevelopment of the Prince of Wales and Waverley/Orgreave, Rotherham sites contains mandatory prepayment provisions on a change of control of the Company.

The terms of the agreements dated 13 September 2007 for the committed revolving debt, property and stock facilities provided to UK Coal Mining Limited by Lloyds TSB Commercial Finance Limited (among others) include a termination event entitling the lenders to terminate the facilities on a change of control of the Company.

DIRECTORS’ RESPONSIBILITIES The Directors are responsible for preparing the annual report, the Directors’ remuneration report and the financial statements in accordance with applicable law and regulation. Under that law the Directors have prepared the Group and Parent Company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union.

The Directors consider that in preparing the financial statements on pages 63 to 110 the Company and the Group have used appropriate accounting policies, consistently applied and supported by reasonable and prudent judgements and estimates and comply with IFRSs as adopted by the European Union.

The Directors have responsibility for ensuring that the Company and Group keep accounting records, which disclose with reasonable accuracy at any time the financial position of the Company and Group and which enable them to ensure that the financial statements comply with the Companies Act 1985 and, as regards, the Group financial statements, Article 4 of the IAS Regulations. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Board is ultimately responsible for the Group’s system of internal control and for reviewing its effectiveness. However, such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives, and can provide only reasonable and not absolute assurance against material misstatement or loss. The Directors are responsible for the maintenance and integrity of the website.

It is accepted that legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

GOING CONCERN In forming its opinion as to going concern, the Board prepares a working capital forecast based upon its assumptions as to trading as well as taking into account the available borrowing facilities in line with the Treasury Policy above. The Board also prepares a number of alternative scenarios modelling the business variables and key risks and uncertainties, both as summarised in the Operating and Financial Review.

Based upon these, the Board has concluded that the Group has adequate working capital and therefore confirm their belief that, it is appropriate to use the going concern basis of preparation for the financial statements of the Company and the Group.

AUDITORS AND DISCLOSURE OF INFORMATION TO AUDITORS Each of the Directors at the date of approval of this report confirms that, so far as the Director is aware, there is no relevant audit information (being information needed by the Company’s auditor in connection with preparing its report) of which the Company’s auditors are unaware. In addition, each Director confirms that he has taken all the steps that he ought to have taken as a Director in order to make himself aware of any relevant audit information and to establish that the Company’s auditor is aware of that information.

A resolution to reappoint PricewaterhouseCoopers LLP as auditors to the Company will be proposed at the Annual General Meeting.

By order of the Board RICHARD COLE, COMPANY SECRETARY,17 APRIL 2008

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CORPORATE GOVERNANCE

The Company recognises the importance of, and is committed to, high standards of Corporate Governance. The following sections explain how the Company has applied the main and supporting principles set out in the Combined Code (2006) on Corporate Governance, issued by the UK Listing Authority. The Board confirms that the Company has complied with the provisions set out in the Combined Code throughout the year ended 31 December 2007, save for the period between 1 January 2007 and Kevin Whiteman’s appointment as an independent non- executive on 1 June 2007, when less than half the Board, excluding the Chairman, comprised independent non- executive Directors and both the Audit and Remuneration Committees comprised only two independent non-executive Directors.

THE BOARD OF DIRECTORS The Company is headed by a Board of Directors, comprising the Chairman, two executive Directors and four non- executive Directors, three of whom are determined by the Board to be independent. The Board recognises that Owen Michaelson, who is a Director of Peel Holdings which is a major shareholder in the Group, is not independent. The offices of Chairman and Chief Executive are held separately, and both officers have clearly defined roles and responsibilities.

The Chairman is responsible for the running of the Board including, but not limited to, ensuring that a fixed schedule of matters is exclusively retained for the Board’s review and approval, and that a framework exists to allow the clear and timely dissemination of relevant information to all Directors for such review to occur. The Chief Executive is responsible for running the Group’s business and for implementing the Board strategies and policies. The Senior Independent Director is Peter Hazell.

The Board of the Company is responsible for setting the Group’s objectives and policies and for the stewardship of the Group’s resources. The Board is responsible to the shareholders for the overall management of the Group.

The Board considers its independent non-executive Directors bring strong judgement and considerable knowledge and experience to the Board’s deliberations. It is further considered that Owen Michaelson’s skills and experience are extremely relevant to the business and he contributes to the realisation of the Group’s strategy. The non- executive Directors have no financial or contractual interests in the Company, other than interests in ordinary shares as disclosed in the Directors’ Remuneration Report. Non-executive Directors are offered the opportunity to attend meetings with major shareholders and would attend them if requested by major shareholders.

All Directors have access to the advice and services of the company secretary, who is responsible to the Board for ensuring that Board procedures are complied with. The appointment and removal of the company secretary are matters for the Board as a whole. The Board has established a procedure under which any Director, wishing to do so in furtherance of his duties, may take independent advice at the Company’s expense.

The Company maintains an appropriate level of Directors’ and officers’ insurance in respect of legal action against the Directors. During the year the Group entered into an indemnity with all Directors and members of the Executive Management Committee in respect of costs and expenses suffered from an investigation by a regulatory body which are not covered by insurance.

The interests of the Directors in the shares of the Company are shown in the Directors’ Remuneration Report. The biographical details of the current Directors are shown on pages 42 to 43.

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ATTENDANCE AT BOARD MEETINGS Attendance by individual Directors at meetings of the Board and its Committees during the year ended 31 December 2007 is shown in the table below:

Board* Audit Remuneration* Nomination* Possible Actual Possible Actual Possible Actual Possible Actual D H Jones 11 11 —— 10 10 55 J S Lloyd 11 11 —— —— 2 2 D G Brocksom 3 3 —— —— —— P F Hazell 11 10 44 10 955 M R Toms 11 11 44 10 10 55 K I Whiteman 66 32 43 22 O Michaelson 3 3 —— —— —— G R Spindler 77 —— —— 33 C Mawe 8 8 —— —— ——

* The number of meetings includes those held by telephone.

COMMITTEES The Group’s governance structure ensures that all decisions are made by the most appropriate people, in such a way that the decision making process itself does not unnecessarily delay progress. The Board has delegated specific responsibilities to the Nomination, Remuneration, Audit and Health and Safety Committees, as described below. Each committee has terms of reference that the whole Board has approved, which can be found on the Company’s website. Board and committee papers are circulated in advance of each meeting so that all Directors are fully briefed. Papers are supplemented by reports and presentations to ensure that Board members are supplied in a timely manner with the information they need.

NOMINATION COMMITTEE The Nomination Committee leads the process for Board appointments by making recommendations to the Board about filling Board vacancies and appointing additional persons to the Board. The Committee also considers and makes recommendations to the Board on its composition, balance and membership and on the re-appointment by shareholders of any Director under the retirement by rotation provisions in the Company’s Articles of Association.

The Committee’s members are the independent non-executive Directors and the Chairman, together with the Chief Executive. Although the Chairman is also Chairman of the Committee, he will not chair the Committee when it deals with the appointment of a successor to the chairmanship. The Nomination Committee evaluates the balance of skills, knowledge and experience on the Board and, in the light of this evaluation, prepares a description of the roles and capabilities required for a particular appointment.

During the year the Committee engaged the services of external search consultants to assist with the recruitment of David Brocksom and Kevin Whiteman. Whilst no consultants were engaged to assist with the recruitment of Owen Michaelson, the Chairman led a full consultation with major institutional shareholders to seek views and comments prior to his appointment.

The Board initially appoints all new Directors, having first considered recommendations made to it by the Nomination Committee. Following such appointment, the Director is required to retire and seek re-appointment at the next Annual General Meeting. There is a process of rotation, which ensures that approximately one third of all Directors are required to retire and seek re-appointment at each Annual General Meeting and that all Directors are required to be re-appointed no less than every three years.

The Nomination Committee considers succession planning for appointments to the Board and to senior management positions so as to maintain an appropriate balance of skills and experience both on the Board and in the Company.

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CORPORATE GOVERNANCE CONTINUED

REMUNERATION COMMITTEE The composition and work of the Remuneration Committee are described in the Directors’ Remuneration Report.

AUDIT COMMITTEE AND AUDITORS The Audit Committee comprises Peter Hazell (Chairman), Mike Toms and Kevin Whiteman. The Board is satisfied that Peter Hazell has recent and relevant financial experience and that all members of the Committee are independent non-executive Directors. The Chairman, the Chief Executive, the Finance Director, the Group Internal Audit Manager and the external auditors are invited to attend meetings. The minutes of meetings of the Committee are circulated to all Directors. The Committee meets at least four times a year to review the Company’s accounting and financial reporting practices, the work of the internal and external auditor and compliance with policies, procedures and applicable legislation. The Audit Committee also reviews the half year and annual financial statements before submission to the Board and periodically reviews the scope, remit and effectiveness of the internal audit function and the effectiveness of the Group’s internal control systems. It also reviews “whistle-blowing” arrangements by which employees of the Group may, in confidence, raise concerns about possible financial or other improprieties. The terms of reference of the Audit Committee are available to shareholders on request and are also available on the Company’s website. The Group Internal Audit Manager has a direct reporting line to the Committee.

The auditors throughout 2007 have been PricewaterhouseCoopers LLP.

Fees to PricewaterhouseCoopers LLP 2007 2006 £000 £000 Audit fees 348 375 Other audit-related fees 165 33 Tax compliance and advice services 212 173 725 581

The Board recognises the importance of safeguarding auditor objectivity and has taken the following steps to ensure that auditor independence is not compromised:

■ The Audit Committee reviews the audit appointment periodically. ■ It is Group policy that the external auditors will not, as a general rule, provide consulting services. The external auditors provide audit-related services such as regulatory and statutory reporting as well as formalities relating to shareholder and other circulars. ■ The external auditors may undertake due diligence reviews and provide assistance on tax and pension matters given its knowledge of the Group’s businesses. Such provision will, however, be assessed on a case by case basis so that the best placed adviser is retained. The Audit Committee monitors the application of the policy in this regard and keeps the policy under review. ■ The Audit Committee reviews on a regular basis all fees paid for audit, and all consultancy fees, with a view to assessing reasonableness of fees, value of delivery, and any independence issues that may have arisen or may potentially arise in the future. ■ The auditors report to the Directors and the Audit Committee confirming their independence in accordance with Auditing Standards.

HEALTH AND SAFETY COMMITTEE The Board has established a Health and Safety Committee to assist it in ensuring that the Company complies with its health and safety obligations and to review and recommend to the Board strategic options that may enhance the policies, standards and processes that operate within the Group. The Committee comprises Kevin Whiteman (Chairman), Mike Toms and Jon Lloyd and meetings are attended by all relevant senior managers.

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OTHER MEETINGS In accordance with best practice, the Chairman has regular meetings with the non-executive Directors without the executive Directors being present.

A meeting of the non-executive Directors, chaired by the Senior Independent Director (without the Chairman), takes place at least annually to appraise the Chairman’s performance.

DIRECTORS’ DEVELOPMENT All Directors receive formal induction training on joining the Company and access to further training is made available. The Company provides the necessary internal and external resources to enable Directors to develop and update their knowledge and capabilities.

PERFORMANCE EVALUATION The Board has conducted a self-evaluation of its performance and effectiveness and has both identified and addressed matters requiring attention. It has also reviewed the results of an assessment by members of management and staff of how the business views the Board. It has been agreed that the Chairman has responsibility for the appraisal of the performance of the non-executive Directors and the Chief Executive. The Chief Executive has responsibility to conduct a performance evaluation of executive Directors.

EXECUTIVE MANAGEMENT COMMITTEE The Executive Management Committee was established to manage and co-ordinate all strategic and key operational issues. Its membership is as follows:

Chief Executive Jon Lloyd Finance Director David Brocksom Production Director Bill Tinsley Human Resources and Communications Director Norman Haslam Commercial Contracts Director Philip Garner Company Secretary Richard Cole

RELATIONS WITH SHAREHOLDERS The Company maintains ongoing dialogue with major shareholders through regular presentations and meetings to outline the Group’s trading environment and objectives and also offers them the opportunity to meet non- executive Directors. The Senior Independent Director is available to all shareholders. Private investors are encouraged to attend the Annual General Meeting where they have the opportunity to question the Board.

INTERNAL CONTROL RISK ASSESSMENT There is an ongoing process for identifying, evaluating and managing the significant risks of the Group, and this process has been in place throughout the year under review. Following a review by the Board, on 27 February 2008, of an updated strategic risk assessment and the effectiveness of the Group’s system of internal controls, it concluded that there were no significant risks that had not been considered, nor any significant weaknesses in internal controls that had not been recognised.

The updated assessment supplements ongoing dialogue between the Board and the Directors and managers responsible for monitoring risks at an operational level. The Board receives regular reports from the Internal Audit and Health & Safety Management departments. These reports identify areas of risk exposure, recommendations made and actions implemented. They also highlight new areas of legislation that will impact on the risk profile of the Group, and provide positive assurance that procedures are working and assisting in the attainment of business objectives. Operational and financial risk management is delegated to Directors and managers who are responsible for the day-to-day management of the business. The following controls are embedded in the procedures of the relevant business units:

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CORPORATE GOVERNANCE CONTINUED

Operational — detailed mining production and development plans are agreed on an annual basis and updated each month. Quarterly Operational Review meetings are held with senior management to discuss performance against plan and to decide and implement any actions required. There are Group-wide and local procedures to which compliance is monitored.

Health and Safety — full details of the health and safety policies and practices of the Group are set out in the Operating and Financial Review.

Environmental Management — full details of the environmental policies and practices of the Group are set out in the Operating and Financial Review.

Financial — these controls are considered under the following headings:

■ Cost Budgeting — The annual budget setting process includes a detailed review of each business unit and final budgets are approved by the Board. Costs and performance are monitored on a monthly basis against budgets. Monthly Operational Review meetings are held with senior management to discuss financial issues.

■ Treasury — The terms of reference for the Treasury department are approved and kept under review by the Board. The Treasury department is responsible for placing deposits, for arranging borrowings and for making payments. These transactions are subject to Director or senior management authorisation. The Finance Director is responsible for determining Treasury policies which are reviewed by the Board, Internal Audit undertakes periodic reviews of the Treasury function and Group’s financing agreements.

■ Insurance Risk — The Company holds insurance cover for all employer liability and public liability claims, which is issued by its captive insurance company, and which limits the Group’s exposure to the first £100,000 per claimant from 2008. All claims are subject to expert assessment and challenge and, where appropriate, independent medical and legal opinion.

■ Capital Expenditure — Board approval of all major capital projects is required. Smaller capital projects are approved by the Investment Committee, which is chaired by the Finance Director and comprises the executive Directors. Senior executives are invited where appropriate. The Investment Committee reviews projects with a cost in excess of £100,000.

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ASSURANCE PROCEDURES Assurance is provided by the in-house team of Internal Auditors, Health and Safety Auditors and Environmental Auditors. This resource is supplemented by the HM Inspectorate of Mines (Health and Safety) and other Health and Safety Commission personnel, legal advisers and professional claims handlers (Insurance and Claims Management) and external environmental consultants (Environmental Management).

Reports are prepared and summarised at management level for reporting to the Board as either standing or intermittent agenda items.

The Audit Committee reviews internal audit reports and corporate governance matters. The internal audit plan is based on the annual assessment of risks as reviewed by the Board and is not limited to financial systems. Reports give an opinion of the risk and control profile of each audited system.

ANNUAL GENERAL MEETING The Board encourages shareholders to exercise their right to vote at the Annual General Meeting. The notice calling the meeting and related papers are sent to shareholders at least 20 working days before the meeting and separate resolutions are proposed on each substantially separate issue.

Shareholders are encouraged to participate through a question and answer session and individual Directors or, where appropriate, the Chairman of the relevant committee, respond to those questions directly. Shareholders have the opportunity to talk informally to the Directors before and after the formal proceedings.

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DIRECTORS’ REMUNERATION REPORT

INTRODUCTION This report is made by the Board on the recommendation of the Remuneration Committee. The first part of the report provides details of UK COAL’s Remuneration Policy. The second part provides details of the remuneration, service contracts and share interests of all the Directors for the year ended 31 December 2007. The Remuneration Report is unaudited except for those parts marked with an asterix. The Directors confirm that this report has been drawn up in accordance with the Directors’ Remuneration Report Regulations 2002 and the Combined Code (2006) on Corporate Governance (“Combined Code”).

THE REMUNERATION COMMITTEE Responsibility for reviewing Group remuneration strategy and policy, recommending any changes and approving individual remuneration packages for the Chairman, executive Directors and members of the Executive Committee rests with the Remuneration Committee (the “Committee”). The Committee consists exclusively of non-executive Directors and meets on at least two occasions each year. The members in 2007 were: Mike Toms (Committee Chairman), Peter Hazell, David Jones and Kevin Whiteman (member from 1 June 2007). The Committee may seek any information it requires from any employee or Director, and all employees and Directors are required to co- operate with any request made by the Committee. Richard Cole (Company Secretary) and Norman Haslam (Human Resources and Communications Director) provided information to the Committee during the year.

The Remuneration Committee also meets without management and receives information and independent executive remuneration advice from remuneration consultants, New Bridge Street Consultants LLP (“NBSC”). NBSC does not provide any other services to the Group. Neither the Chairman nor the executive Directors participate in discussions relating to their own remuneration.

The Remuneration Committee has terms of reference, approved by the Board, which are available from the Company Secretary and via the Company’s website.

DIRECTORS’ REMUNERATION POLICY The policy of the Committee recognises that the Company requires high quality and committed executive Directors and other senior executives in order to deliver appropriate levels of performance. The Committee therefore conducts its work to determine the appropriate remuneration levels and structure consistent with the need to attract, motivate and retain executive Directors of the high quality required to further the Company’s interests. The executive Directors’ remuneration comprises a base salary, an annual performance bonus, participation in a Long Term Incentive Plan (“LTIP”), a car or car allowance, pension contributions to a defined contribution pension scheme or pension allowance and health insurance. Base salary is the only element of remuneration which is pensionable.

The Company is required to seek shareholder approval for this report, and to put forward any new incentive schemes for shareholder approval at the Annual General Meeting. There are no changes proposed to the remuneration policy for 2008.

In order to allow the Company to pay the Chairman and non-executive Directors competitive fee levels with respect to FTSE 250 non-executives, and to provide sufficient headroom to review these fees annually, a resolution is being proposed to shareholders at the Annual General Meeting to increase the aggregate limit of fees that may be paid in accordance with the Articles of Association from £300,000 to £500,000.

The following paragraphs explain the operation of the main constituents of the remuneration policy.

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CHAIRMAN The Chairman receives fees commensurate with his duties, which include: managing the business of the Board and its Committees, maximising long-term shareholder value by reviewing short-term performance, risk management and long-term development of the Group, ensuring that corporate governance is in line with best practice, ensuring a management succession process is in place and working, making recommendations on the remuneration of all other non-executive Directors and agreeing with the Chief Executive the most appropriate role of the Chairman vis-à-vis stakeholders including Government, shareholders, the financial community, customers, competitors, potential and actual partners, trade unions, employees, the media and the wider community. Following a review of the time commitment, duties associated with this role and current market fee levels, the Chairman’s fee has been reviewed by the Committee and, subject to approval of the resolution to increase the aggregate level of Directors’ fees, will increase to £150,000 per annum after the 2008 Annual General Meeting.

EXECUTIVE DIRECTORS Base Salaries Executive Directors’ salaries are reviewed by the Remuneration Committee on an annual basis. In determining salary levels for executives, due regard is given to external market data in similarly sized companies across a range of sectors, personal and Group performance and pay and employment conditions within the Group. Following a review of executive Directors’ salary levels, Messrs Lloyd’s and Brocksom’s base salaries have been increased from £330,000 to £375,000 and from £225,000 to £234,675 respectively, with effect from 1 January 2008.

Annual Bonus The annual bonus provides an incentive opportunity in the range of 0% to 80% (Chief Executive) and 0% to 75% (for other executive Directors) of base salary. At the start of the incentive year (1 January), the Remuneration Committee sets both the performance measures and targets based on the Group’s business priorities. These targets ensure that incentives at the higher end of the range are payable only for demonstrably superior Group and individual performance.

In respect of 2007, Jon Lloyd received a bonus of £168,327, David Brocksom received a bonus of £33,936, Garold Spindler received a bonus of £133,315 and Christopher Mawe received a bonus of £127,875. The bonus for the period represented 63% of basic pay for Jon Lloyd, 52% of basic pay for David Brocksom, 43% of basic pay for Garold Spindler, and 52% of basic pay for Christopher Mawe.

The targets for 2007 were cash flow, profit, growth in property net asset value and personal performance.

In 2008 the following measures will be applied for each Director in the proportions shown:

Growth in Property Net Asset Cash Flow Profit Value Safety Personal (%) (%) (%) (%) (%) Jon Lloyd 20 20 20 20 20 David Brocksom 25 25 10 20 20

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DIRECTORS’ REMUNERATION REPORT CONTINUED

Long Term Incentive Plan Under the terms of the current LTIP, an award of shares up to a maximum value of 100% of base salary is conditionally allocated to each executive Director.

These shares are released to the executive three years from the date of grant of award, contingent upon continued service (subject to exceptions as set out in the plan) and the Group achieving predetermined levels of performance, with performance being measured as the percentage growth in the Company’sTotal Shareholder Return (“TSR”) over a three year period.

For all awards granted in 2005 and 2006, in order for any part of an award to vest, the Group must have achieved earnings per share growth at least equal to the increase in the RPI plus 3% per annum. If this test is not met then the award will lapse. If the test is met then the proportion of the award vesting will be determined in accordance with the Company’s TSR performance over the period, as set out below.

Growth in TSR % of Award vesting Below 75% Nil 75% or above 30 100% or above 50 150% or above 100

For TSR increases within these bands, shares are allocated on a straight-line basis.

The performance condition attached to awards granted in 2007 requires absolute TSR growth of between 25% and 75% for between 30% and 100% of an award to vest, with straight-line vesting in between. The Committee will review this performance condition on a regular basis to ensure that it is sufficiently demanding.

The earnings per share growth underpin, where the Company must achieve earnings per share growth of at least equal to the increase in RPI plus 3% per annum in order for any part of an award to vest, continues to operate for awards granted in 2007.

In the event of a change of control, vesting of shares under the LTIP is not automatic and would depend upon the extent to which the performance conditions had been satisfied within the period six months prior to that date.

Performance Graph Total Shareholder Return

1200 UK COAL

1000 FTSE 250 (excluding investment trusts)

800

Value (£) 600

400

200 Source: Thomson Financial

0 31 Dec 02 31 Dec 03 31 Dec 04 31 Dec 05 31 Dec 06 31 Dec 07

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The above graph displays the value, by the end of 2007, of £100 invested in the Company on 31 December 2002 compared with the value of £100 invested in the FTSE 250 Index (excluding investment trusts). The other points are the values at intervening financial year ends.

UK COAL is a member of the FTSE 250 Index, which has been selected as the most appropriate index against which to compare UK COAL’s return to shareholders in the absence of a more specific sector index.

Other Terms and Conditions of Service The executive Directors’ service contracts, including arrangements for early termination, are carefully considered by the Remuneration Committee and are designed to recruit, retain and motivate Directors of the quality required to manage the Group. The Remuneration Committee considers that a notice period of no more than one year is appropriate. It is the Company’s policy not to enter into service contracts that provide written notice of more than one year.

In respect of Jon Lloyd, employment will continue until terminated by the Company giving the executive not less than twelve months’ written notice, or by the executive giving the Company not less than six months’ written notice. David Brocksom’s contract shall continue until either party terminates it by not less than twelve months’ notice in writing.

Executive Directors’ service contracts do not contain provisions for compensation in the event of early termination. When calculating termination payments, the Remuneration Committee takes into account a variety of factors including individual and Group performance, the obligation of the Director to mitigate his own loss (for example by gaining new employment), his length of service and the best interests of the Group. Although there is no specific provision for liquidated damages should the Company terminate the contract of a Director, compensation for loss of office is limited to the amounts payable under these notice periods. There are no special provisions for payments to Directors on a change of control.

Any payments made pursuant to these provisions will be made less any deductions the employer is required to make and shall be in full and final settlement of any claims the executive Director may have against the employer or any associated company arising out of the termination of employment except for any personal injury claim, any claim in respect of accrued pension rights or statutory employment protection claims.

NON-EXECUTIVE DIRECTORS The Board aims to recruit non-executive Directors of a high calibre with broad commercial and other relevant experience. Non-executive Directors are appointed for an initial three-year period. The terms of their engagement are set out in a letter of appointment. The initial appointment and any subsequent re-appointment is subject to election or re-election by shareholders at the Annual General Meeting. The letters of appointment contain three- month notice periods.

Compensation for loss of office is limited to the amounts payable under these notice periods. The Board considers these notice periods appropriate given the skills and expertise of the Directors.

Non-executive Directors are paid a basic fee. Additional fees are payable for chairing a committee. Following a review of time commitments, responsibility levels and current market fee levels it is proposed that subject to approval of the resolution to increase the aggregate level of Directors’ fees, the base fee for non-executive Directors will increase from £34,000 to £40,000 per annum after the 2008 Annual General meeting. The additional fee for chairing a committee will also increase from £5,000 to £6,000 per annum.

Non-executive Directors are not eligible to participate in any of the Company’s share schemes, incentive schemes or pension schemes.

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DIRECTORS’ REMUNERATION REPORT CONTINUED

DIRECTORS’ SERVICE CONTRACTS Contract Unexpired term Notice date (as at 31/12/07) period David Jones 13.12.05 1 year 3 months Jon Lloyd 01.07.06 Rolling 1 year 1 year David Brocksom 04.09.07 Rolling 1 year 1 year Peter Hazell 31.08.06 1 year 9 months 3 months Owen Michaelson 01.10.07 2 years 10 months 3 months Mike Toms 13.04.06 1 year 4 months 3 months Kevin Whiteman 29.05.07 2 years 5 months 3 months

There are no liabilities in respect of Directors’ service contracts that require disclosure. Copies of Directors’ service contracts and agreements are available to shareholders for inspection at the Company’s registered office by application to the Company Secretary.

DIRECTORS’ EMOLUMENTS FOR THE YEAR ENDED 31 DECEMBER 2007* Compen- sation for Salary/ Allow- Annual Benefits loss of Total Total fees ances bonus in kind service 2007 2006 £000 £000 £000 £000 £000 £000 £000 David Jones 140 ————140 120 Jon Lloyd(i) 269 14 168 47 — 498 165 David Brocksom(ii) (appointed 18.09.07) 66 23 34 1—124 — Peter Hazell 39 ————39 35 Mike Toms 39 ————39 23 Kevin Whiteman (appointed 01.06.07) 20 ————20 — Owen Michaelson (appointed 02.10.07) 8———— 8 — Garold Spindler(iii) (resigned 01.09.07) 238 85 133 ——456 507 Christopher Mawe(iv) (resigned 17.09.07) 175 43 128 5 249 600 294 Total 994 165 463 53 249 1,924 1,144

(i) Jon Lloyd received relocation expenses of £43,675 and this is included in benefits in kind above. (ii) David Brocksom received £19,687 in lieu of a pension contribution and £2,916 as a car allowance both included in allowances above. (iii) Garold Spindler’s salary, benefits and allowances noted above are for the period he acted as a Director of the Company — included in the figure for allowances above are £13,333 in lieu of a car (2006: £20,000) and £71,507 in lieu of a pension contribution (2006: £103,000). Following his resignation as an executive Director, his salary and allowances for the remainder of 2007 amounted to £96,959. He left the Company’s employment on 31 December 2007 with there being no severance payment made. (iv) Christopher Mawe’s salary, benefits and allowances above are for the period he acted as a Director of the Company — during this period he elected to use a car valued at less than his entitlement and the balance of £2,833 (2006: £4,000), together with a payment of £11,333 in lieu of part of his pension contribution, is included in allowances. Following his resignation as an executive Director, his salary, benefits and allowances for the remainder of 2007 amounted to £96,868 and he remained in employment until 31 December 2007. A severance payment of £248,978 representing the balance of his contractual entitlement was made in January 2008. (v) Other than disclosed in point (i) above, benefits in kind comprise car benefits and health insurance.

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PENSION CONTRIBUTIONS* Executive Directors are entitled to receive a pension contribution, or allowance, at the rate of 30% of base salary. During the year, Jon Lloyd and Christopher Mawe were members of the UK COAL money purchase pension scheme. The money purchase scheme does not provide additional post-retirement benefits (including contingent death benefits).

Pension contributions on behalf of executive Directors were as follows: Pensions Pensions contributions contributions 2007 2006 £000 £000 Jon Lloyd 78 27 Christopher Mawe 41 68 119 95

LONG TERM INCENTIVE PLAN* Interest Interest Interest awarded lapsed matured End of Interest at during during during Interest perform- 1 Jan the the the at 31 Dec Vesting ance 2007 year(i) year year 2007 date period Jon Lloyd Executive LTIP 2006 65,060 ———65,060 03.07.09 31.12.08 Executive LTIP 2007 Nil 27,789 ——27,789 02.03.10 31.12.09 Executive LTIP 2007 Nil 39,560 ——39,560 18.09.10 31.12.09 Total 65,060 67,349 ——132,409 David Brocksom Executive LTIP 2007 Nil 44,955 ——44,955 18.09.10 31.12.09 Total Nil 44,955 ——44,955 Garold Spindler (resigned 01.09.07)(ii) Executive LTIP 2004 203,125 ——203,125 — 19.10.07 31.12.06 Executive LTIP 2006 168,683 — 168,683 ——06.03.09 31.12.08 Executive LTIP 2007 Nil 56,452 56,452 ——02.03.10 31.12.09 Total 371,808 56,452 225,135 203,125 — Christopher Mawe (resigned 17.09.07)(iii) Executive LTIP 2004 85,000 ——85,000 — 28.06.07 31.12.06 Executive LTIP 2005 86,037 ———86,037 07.11.08 31.12.07 Executive LTIP 2006 93,333 — 31,111 — 62,222 06.03.09 31.12.08 Executive LTIP 2007 Nil 31,235 31,235 ——02.03.10 31.12.09 Total 264,370 31,235 62,346 85,000 148,259

(i) The market value of the shares awarded, at the date of the awards for Messrs Lloyd, Spindler, and Mawe, on 2 March 2007, was £4.95 per share. The market value on 18 September 2007 which was the date of the award to Messrs Lloyd and Brocksom was £5.025 per share. (ii) Following his resignation as a Director an award granted in 2004 to Garold Spindler matured on 19 October 2007 when the market value was £5.235 per share giving rise to a gain of £1,063,359. In addition, he received 8,005 shares representing dividend reinvestment in line with the rules of the scheme giving rise to a gain of £41,926. (iii) The market value on 28 June 2007, which was the date that the 2004 award to Christopher Mawe matured, was £4.98 per share giving rise to a gain of £423,300. In addition, he received 3,349 shares representing dividend reinvestment in line with the rules of the scheme giving rise to a gain of £16,678. (iv) The exercise price of all outstanding awards is £nil.

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DIRECTORS’ REMUNERATION REPORT CONTINUED

DIRECTORS’ INTERESTS IN ORDINARY SHARES* The Directors’ beneficial interests in ordinary shares of the Company and its subsidiaries at the end of the financial year were as set out below. None of the Directors had an interest in shares of the Company’s subsidiaries during the year.

Beneficial interest in Beneficial interest in ordinary shares at ordinary shares at 31 December 31 December 2007 2006 David Jones 10,000 10,000 Jon Lloyd(i) — — David Brocksom(i) — — Peter Hazell — — Owen Michaelson — — Mike Toms — — Kevin Whiteman — —

(i) For the purpose of the Companies Act 1985, each of the executive Directors is deemed to have an additional interest in the ordinary shares held by the trustee of the Employee Benefit Trust.

There have been no changes in Directors’ interests in shares between the end of the year and 17 April 2008.

The market value of the Company’s shares during the year ranged from £3.83 to £5.93 per share. The market value on 31 December 2007 was £4.62 per share.

EXTERNAL APPOINTMENTS None of the executive Directors held positions as non-executive Directors with other companies during 2007.

This report has been approved by the Board for submission to shareholders at the Annual General Meeting to be held on 20 May 2008, and signed on behalf of the Board by Mike Toms.

By order of the Board MIKE TOMS, CHAIRMAN, REMUNERATION COMMITTEE, 17 APRIL 2008

* Denotes auditable elements of the Remuneration Report.

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INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF UK COAL PLC

We have audited the Group and Parent Company financial statements (the ‘‘financial statements’’) of UK COAL PLC for the year ended 31 December 2007 which comprise the consolidated income statement, the Group and Parent Company balance sheets, the Group and Parent Company cash flow statements, the Group and Parent Company statements of recognised income and expense and the related notes. These financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors’ Remuneration Report that is described as having been audited.

RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS The Directors’ responsibilities for preparing the Annual Report, the Directors’ Remuneration Report and the financial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the Statement of Directors’ Responsibilities.

Our responsibility is to audit the financial statements and the part of the Directors’ Remuneration Report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). This report, including the opinion, has been prepared for and only for the Company’s members as a body in accordance with Section 235 of the Companies Act 1985 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the Group financial statements, Article 4 of the IAS Regulation. We also report to you whether in our opinion the information given in the Directors' Report is consistent with the financial statements. The information given in the Directors’ Report includes that specific information presented in the Chairman’s Statement and the Operating and Financial Review that is cross referred from the business review section of the Directors’ Report.

In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding Directors’ remuneration and other transactions is not disclosed.

We review whether the Corporate Governance Statement reflects the Company’s compliance with the nine provisions of the Combined Code (2006) specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures.

We read other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. The other information comprises only the Directors’ Report, the unaudited part of the Directors’ Remuneration Report, the Highlights, the Chairman’s Statement, the Operating and Financial Review and the Corporate Governance Statement. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information.

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INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF UK COAL PLC CONTINUED

BASIS OF AUDIT OPINION We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the Directors’ Remuneration Report to be audited. It also includes an assessment of the significant estimates and judgments made by the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’s and Company’s circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements and the part of the Directors’ Remuneration Report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements and the part of the Directors’ Remuneration Report to be audited.

OPINION In our opinion:

■ the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Group’s affairs as at 31 December 2007 and of its profit and cash flows for the year then ended;

■ the Parent Company financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union as applied in accordance with the provisions of the Companies Act 1985, of the state of the Parent Company’s affairs as at 31 December 2007 and cash flows for the year then ended;

■ the financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the Group financial statements, Article 4 of the IAS Regulation; and

■ the information given in the Directors' Report is consistent with the financial statements.

PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors East Midlands 17 April 2008

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CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER

2007 2006 Notes £000 £000 Revenue 2 328,485 339,713 Cost of sales (319,218) (381,021) Gross profit/(loss) 9,267 (41,308)

Net appreciation in fair value of Investment Properties 66,799 68,622 Profit on disposal of Investment Properties 3,688 1,406

Gains on Investment Properties 70,487 70,028 Profit on sale of business 29 8,481 — Other operating income and expenses 4 (5,579) (1,075) Operating profit 2 82,656 27,645 Finance costs 6 (17,121) (12,376) Finance income 6 2,951 2,261 Finance costs — net 6 (14,170) (10,115) Share of post-tax profit from joint venture 14 537 105 Profit before tax 3 69,023 17,635 Tax credit/(charge) 8 25,000 (143) Profit for the year 94,023 17,492

Attributable to: Equity holders of the Company 94,023 17,492 Earnings per share pence pence Basic and diluted 11 59.9 11.7

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CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE FOR THE YEAR ENDED 31 DECEMBER

Group Group Company Company 2007 2006 2007 2006 Notes £000 £000 £000 £000 Actuarial gain on defined benefit pension schemes 23 35,733 12,478 — — Actuarial gain on Blenkinsopp pension scheme 23 464 — — — Actuarial gain/(loss) on concessionary fuel reserve 23 1,280 (855) — — Movement on deferred tax asset relating to retirement benefit liabilities 8 (22,012) 35,752 — — Impact of change in UK tax rate on deferred tax 8 (2,383) — — — Revaluation of property transferred to Investment Properties 13 6,733 — — — Net gain recognised directly in equity 19,815 47,375 — — Profit/(loss) for the year 94,023 17,492 (1,867) (1,842) Total recognised income/(expense) for the year 113,838 64,867 (1,867) (1,842)

Attributable to: Equity holders of the Company 113,838 64,867 (1,867) (1,842)

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BALANCESHEETS AT 31 DECEMBER

Group Group Company Company 2007 2006 2007 2006 Notes £000 £000 £000 £000 ASSETS Non current assets Operating property, plant and equipment 12 199,551 228,248 — — Surface mine development and restoration assets 12 20,111 9,694 — — Total operating property, plant and equipment 219,662 237,942 — — Investment Properties 13 384,291 311,677 — — Investments in subsidiaries 14 — — 473,224 473,224 Investment in joint venture 14 342 205 — — Deferred tax asset 8 36,000 35,752 — — Trade and other receivables 15 1,613 964 — — 641,908 586,540 473,224 473,224 Current assets Inventories 16 39,756 36,640 — — Trade and other receivables 17 29,953 47,604 166,101 167,340 Derivative financial instruments 22 424 675 424 675 Cash and cash equivalents 18 70,068 45,928 20,063 2,548 140,201 130,847 186,588 170,563 LIABILITIES Current liabilities Financial liabilities — Borrowings 19 (27,320) (19,281) — (12,476) Trade and other payables 20 (100,213) (106,284) (217,618) (189,687) Provisions 21 (31,061) (27,931) — — (158,594) (153,496) (217,618) (202,163) Net current liabilities (18,393) (22,649) (31,030) (31,600) Non current liabilities Financial liabilities — Borrowings 19 (97,921) (78,484) — — — Derivative financial instruments 22 (2,148) — (2,148) — Trade and other payables 20 (73) (312) — — Deferred tax liability 8 (815) (1,172) — — Provisions 21 (91,141) (119,309) — — Retirement benefit obligations 23 (73,171) (120,495) — — (265,269) (319,772) (2,148) — Net assets 358,246 244,119 440,046 441,624 Equity Capital and reserves Ordinary shares 24 1,571 1,566 1,571 1,566 Share premium 25 30,756 30,756 30,756 30,756 Revaluation reserve 26 143,014 141,040 — — Capital redemption reserve 26 257 257 257 257 Fair value reserve 26 177,851 112,342 — — Retained earnings 25 4,797 (41,842) 407,462 409,045 Total equity 358,246 244,119 440,046 441,624

The financial statements on pages 63 to 110 were approved by the Board of Directors on 17 April 2008 and were signed on its behalf by: J S LLOYD, CHIEF EXECUTIVE D G BROCKSOM, FINANCE DIRECTOR

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CASH FLOW STATEMENTS AT 31 DECEMBER

Group Group Company Company 2007 2006 2007 2006 Notes £000 £000 £000 £000 Cash flows from operating activities Profit/(loss) for the year 2 94,023 17,492 (1,867) (1,842) Depreciation/impairment of property, plant and equipment 12 38,500 44,516 — — Amortisation of surface mine development and restoration assets 12 8,723 1,061 — — Net fair value appreciation in Investment Properties (66,799) (68,622) — — Net interest payable and amortisation of discount on provisions 14,170 10,115 4,695 2,654 Net charge for share based remuneration 284 198 284 198 Share of post-tax profit from joint venture company (537) (105) — — Profit on disposal of investment property (3,688) (1,406) — — Profit on disposal of operating property, plant and equipment (1,598) (416) — — Profit on sale of business (8,481) — — — Capitalised surface mine restoration assets (14,490) (1,584) — — Decrease in provisions (38,818) (41,628) — — Tax (credit)/charge (25,000) 143 — — Operating cash flows before movements in working capital (3,711) (40,236) 3,112 1,010 (Increase)/decrease in stocks (3,116) 5,528 — — Decrease/(increase) in receivables 17,253 18,797 1,490 (30,847) (Decrease)/increase in payables (4,304) (5,073) 30,084 45,466 Cash generated from/(used in) operations 6,122 (20,984) 34,686 15,629 Financing cost (1,610) (1,028) (601) — Interest paid (11,578) (6,939) (4,669) (3,322) Cash (used in)/generated from operating activities (7,066) (28,951) 29,416 12,307 Cash flows from investing activities Interest received 2,951 2,261 575 668 Net (payment to)/receipt from insurance and subsidence security funds (6,794) 9,915 — — Net proceeds from sale of business 29 21,500 — — — Proceeds on disposal of operating property, plant and equipment 787 5,594 — — Proceeds on disposal of Investment Properties 13,335 18,597 — — Net receipts from/(investment in) joint venture company 400 (100) — — Development costs of Investment Properties (7,547) (3,256) — — Pre-coaling expenditure for surface mines (4,650) (5,115) — — Purchase of operating property, plant and equipment (23,046) (26,613) — — Cash (used in)/generated from investing activities (3,064) 1,283 575 668 Cash flows from/(used in) financing activities Proceeds from issue of ordinary shares — 29,067 — 29,067 Net drawdown/(repayments) of bank loans 27,223 8,829 (12,476) (39,919) Net proceeds/(repayments) of obligations under hire purchase and finance leases 253 (7,605) — — Cash generated from/(used in) financing activities 27,476 30,291 (12,476) (10,852) Increase in cash 17,346 2,623 17,515 2,123

At 1 January Cash 3,627 1,004 2,548 425 Cash equivalents 42,301 52,216 — — 45,928 53,220 2,548 425 Increase/(decrease) in cash equivalents (net receipt from insurance and subsidence security funds) 6,794 (9,915) — — Increase in cash 17,346 2,623 17,515 2,123 70,068 45,928 20,063 2,548 At 31 December Cash 20,973 3,627 20,063 2,548 Cash equivalents 49,095 42,301 — — Cash and cash equivalents 18 70,068 45,928 20,063 2,548

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NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER

1 ACCOUNTING POLICIES

The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

Basis of preparation These consolidated financial statements have been prepared in accordance with European Union (“EU”) Endorsed International Financial Reporting Standards (“IFRSs”), IFRIC interpretations and those parts of the Companies Act 1985 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of Investment Properties taken through the income statement. IFRSs also require an alternative treatment to the historic cost convention in certain circumstances (principally in the areas of retirement benefit obligations, share based payments and financial instruments).

The income statement has been simplified in 2007 to provide a clearer presentation of the results with profit on sale of operating property, plant and equipment and coal investment aid included in other operating income and expenses.

The following standard is effective for the first time in 2007.

IFRS 7 ‘Financial instruments: Disclosures’, and the complementary amendment to IAS 1, ‘Presentation of financial statements — Capital disclosures’, introduces new disclosures relating to financial instruments. It does not have any impact on the classification and valuation of the Group or Company’s financial instruments or the disclosures relating to taxation and trade and other payables.

In preparing the 2007 financial statements, UK COAL has not applied the following pronouncements which are not yet effective and which have not been adopted early by the Group or Company.

IFRS 8 ‘Operating segments’. The new standard requires a ‘management approach’, under which segment information is presented on the same basis as that used for internal reporting purposes. The Group will apply IFRS 8 from 1 January 2009. The expected impact is still being assessed in detail by management, but it appears likely that the number of reportable segments, as well as the manner in which the segments are reported, will not change materially from our current internal reporting provided to the chief operating decision-maker.

IAS 23 (Amendment) ‘Borrowing costs’. The standard is effective from 1 January 2008 and the amendment to the standard is still subject to endorsement by the EU. It requires an entity to capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset (one that takes a substantial period of time to get ready for use or sale) as part of the cost of that asset. The Group will apply IAS 23 (Amended) from 1 January 2009, subject to endorsement by the EU but is currently not applicable to the Group as there are no borrowings directly attributable to qualifying assets.

IFRIC 14 ‘IAS 19 — The limit on a defined benefit asset, minimum funding requirements and their interaction’ (effective from 1 January 2008). IFRIC 14 provides guidance in assessing the limit in IAS 19 on the amount of the surplus that can be recognised as an asset. It also explains how the pension asset or liability may be affected by a statutory or contractual minimum funding requirement. The Group will apply IFRIC 14 from 1 January 2008, but it is not expected to have any impact on the Group or Company’s accounts.

Going concern In forming its opinion as to going concern, the Board prepares a working capital forecast based upon its assumptions as to trading as well as taking into account the available borrowing facilities in line with the Treasury Policy noted in the Directors’ Report. The Board also prepares a number of alternative scenarios modelling the business variables and key risks and uncertainties, both as summarised in the Operating and Financial Review.

Based upon these, the Board has concluded that the Group has adequate working capital and the Board has therefore concluded that it is appropriate to use the going concern basis of preparation for the financial statements of the Company and the Group.

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Consolidation The consolidated financial information incorporates the financial statements of UK COAL (“the Company”) and its subsidiaries, together (“the Group”).

Subsidiaries are entities over which UK COAL has power to govern the financial and operating policies. Control is presumed to exist where UK COAL owns more than half of the voting rights, unless in exceptional circumstances where it can be demonstrated that ownership does not constitute control. The consolidated financial statements includes all the assets, liabilities, revenues, expenses and cash flows of the parent and its subsidiaries, after eliminating intercompany balances and transactions. The results of subsidiaries sold or acquired are included in the consolidated income statement up to, or from, the date control passes.

UK COAL uses the purchase method of accounting to consolidate subsidiaries. On acquisition, the identifiable assets, liabilities and contingent liabilities being acquired are measured at their fair values at the date of acquisition. Accounting policies are changed where necessary to bring them into line with those adopted by UK COAL. The interest of any minority shareholders is stated as the minority’s proportion of the fair values of the identifiable assets, liabilities and contingent liabilities recognised.

Joint ventures are those entities over whose activities the Group has joint control established by contractual agreement. Interests in joint ventures through which the Group carries on its business are classified as jointly controlled entities and accounted for using the equity method.

Segment reporting A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns or whose operational characteristics are different to those of other business segments. A geographical segment is engaged in providing products and services within a particular economic environment that are subject to risks and returns which are different from those of segments operating in other economic environments.

The Group manages its business primarily by reference to business segments, and this approach is adopted in the accounting policies as the primary segment. Deep mining comprises the underground mining operations of the Group and related labour services and other operations. Surface mining incorporates all mining activities at surface level, together with the plant hire operations of the Group. The Power division represents that portion of the Group which generates power, either for internal or external sale. The Property division, Harworth Estates, maintains, develops and rents the Group’s property portfolio. Any activities not falling into any of these categories is included in the other segment. As the Group is based and operates in a single geographical market, the United Kingdom, no secondary segmentation is provided.

Revenue Revenue comprises sales (excluding intra-Group sales) of coal, property rental income, and other external sales, including sales of power and of labour services.

Coal transactions Revenue is recognised when delivery of the product or service has been made and when the customer has a legally binding obligation to settle under the terms of the contract and has assumed all significant risks and rewards of ownership.

A large proportion of production is sold under medium to long-term contracts. Revenue is only recognised on individual sales when all of the significant risks and rewards of ownership have been transferred to a third party. In most instances revenue is recognised when the product is delivered to the location specified by the customer, which is typically when dispatched, where the customer pays the transportation costs.

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Service transactions Rental income is recognised during the period in which rents due to the Group accrue. Sales of power are recognised when electricity is transferred into the local distribution network.

Trading and non-trading exceptional items Items that are both material and non-recurring and whose significance is sufficient to warrant separate disclosure and identification within the consolidated financial statements are referred to as Exceptional Items and disclosed within their relevant income statement category. Items that may give rise to classification as Exceptional Items include, but are not limited to, significant and material restructuring closures and reorganisation programmes, asset impairments, and profits or losses on the disposal of businesses.

Exceptional items are divided into non-trading and trading exceptional items, depending upon the impact of the event giving rise to the cost or income on the ongoing trading operations and the nature of the costs or income involved. Non-trading exceptional items include costs and income arising from closure, rationalisation and business disposals.

Property related transactions, including changes in the fair value of Investment Properties, and profits and losses arising on the disposal of property assets are not included in the definition of Exceptional Items as they are expected to recur, but are separately disclosed on the face of the consolidated income statement, where material.

Coal Investment Aid Coal Investment Aid is received as a contribution towards qualifying expenditure, as defined by the Department for Business, Enterprise and Regulatory Reform (“DBERR”), incurred by UK COAL. If the expenditure has been charged in the consolidated income statement then the related Investment Aid is credited to the consolidated income statement in the same period. Where the Investment Aid relates to the purchase of property, plant and equipment, the Investment Aid is held on the consolidated balance sheet as deferred income and is credited to the consolidated income statement over the lives of the assets to which it relates.

Investment Properties and Operating Properties The Group holds the following types of freehold property:

— Working deep mines in production — Working surface mines in production — Property held for administrative purposes — Property held for rental income, capital appreciation or both

Working deep mines in production, working surface mines in production, and property held for administrative purposes are held as Operating Properties (as these assets are used or intended to be used within the operations of the Group) and are accounted for at historic depreciated cost, in accordance with IAS 16 ‘Property, plant and equipment’.

All other freehold properties are held as Investment Properties (as these are held to earn rentals or for capital appreciation or both) and are accounted for at valuation and in accordance with IAS 40 ‘Investment property’ or, if appropriate, in inventories as assets held for disposal.

Investment Properties Investment Properties comprise freehold land and buildings and are measured at fair value. The fair values are determined by obtaining an independent valuation prepared in accordance with the current edition of the Appraisal and Valuation Standards published by the Royal Institution of Chartered Surveyors. External, independent valuation firms having appropriate, recognised professional qualifications and recent experience in the location and category of the property being valued, value the portfolio at each reporting date.

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In accordance with IAS 40, any difference between the book value of an Investment Property and the first valuation on recognition as an Investment Property is taken to reserves. Subsequent gains or losses arising from changes in the fair values of assets are recognised in the consolidated income statement, net of any clawback on deemed disposal. Investment properties are not depreciated.

Properties being held for their long-term rental income or capital appreciation but with the added potential for coal extraction are held as Investment Properties, being transferred to Operating Properties at fair value when planning permission to mine the site has been received and mining operations have commenced, and are transferred back to Investment Properties once mining has terminated.

Where the development of Investment Property commences with a view to sale, the property is transferred from Investment Properties to inventories at fair value, which is then considered to represent deemed cost. Investment Property which is held with a view for sale without development, is retained within Investment Properties.

Operating Properties Operating Properties which are acquired or constructed are initially recorded at cost, being the purchase price of the asset and other costs incurred to bring the asset into existing use, and subsequently stated at historic cost less accumulated depreciation (other than freehold land which is not depreciated). Where properties are transferred from Investment Properties to Operating Properties, this transfer is made at fair value, which is then considered to represent deemed cost.

Properties which have historically been used as working deep mines or working surface mines (Operating Properties) are transferred to property held for rental income or capital appreciation (Investment Properties) at the point when a decision is made to pursue planning with a view to future development or rental, and once mining has ceased. IAS 16 is applied up to the date of transfer and any difference at that date between the book value and fair value is taken to the revaluation reserve.

Operating Properties: surface mines Costs incurred prior to coaling in respect of surface mines are held in debtors as deferred costs. Once coaling has commenced, these costs are transferred to surface mine development and restoration assets and a separate provision for the outstanding restoration and rehabilitation obligations is also established. Both of these costs are then charged to the consolidated Income Statement (net of any residual value) over the recoverable reserves of the mine. Expenditure on sites not expected to be worked within ten years is written off.

Overburden and other mine waste materials are often removed during the initial development of a mine site in order to access the mineral deposit. This activity is referred to as development stripping. The directly attributable costs (inclusive of an allocation of relevant overhead expenditure) are capitalised as surface mine development assets and are amortised together with restoration and pre-coaling costs, once coaling commences, over the tonnage of coal expected to be extracted.

Property clawback Under the terms of the 1994 privatisation Sale and Purchase Agreement, DBERR is entitled to a percentage of any property gain (above certain thresholds and after deducting an amount representing corporation tax thereon) accruing, or treated as accruing to UK COAL, as a result of the disposal or deemed disposal or major development of certain properties acquired at privatisation. The percentage applied is 36% for 2007, reducing by 3 percentage points per annum until 31 March 2015, when it reduces to zero. If properties are disposed of, or are deemed to have been disposed of during this period, a part of the relevant gain will become payable to DBERR. A liability for clawback in respect of property disposals is recognised only when an actual or deemed disposal occurs. A liability for clawback on a deemed disposal as a result of granting a lease is recognised over the life of the lease.

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Properties in the course of development Directly attributable costs incurred in the course of developing a property are capitalised as part of the cost of the property. For Operating Properties amortisation of these costs follows the depreciation policy for the property. Development costs on Investment Properties are capitalised and the change in value is recognised through the next revaluation.

Profit or loss on disposal Disposals are accounted for when legal completion of the sale has occurred or there has been an unconditional exchange of contracts. Profits or losses on disposal arise from deducting the asset’s net carrying value from the net proceeds (being net purchase consideration less clawback liability arising on disposal) and is recognised in the consolidated income statement. Net carrying value includes valuation in the case of Investment Properties and historic cost or deemed cost less accumulated depreciation in the case of all other property, plant and equipment.

In the case of Investment Properties, the revaluation reserve in relation to the property disposed of is treated as realised on disposal of the property and transferred to retained earnings.

Plant and equipment The cost of plant and equipment comprises its purchase price and any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in accordance with agreed specifications. Plant and equipment is stated at historic cost less accumulated depreciation.

On conversion to IFRS, UK COAL opted to continue to measure operating property, plant and equipment (excluding Investment Properties) at historic cost, less accumulated depreciation, in the consolidated balance sheet.

Colliery assets Mine development The purpose of mine development is to access and establish infrastructure in order to allow the safe and efficient extraction of recoverable reserves. Depreciation on mine development is charged from the time when full production commences or from when the assets are put to use. On commencement of full production, depreciation is charged over the estimated tonnage of the recoverable reserves. Coal extracted prior to the commencement of full production is credited against the cost of mine development.

Mines and surface works Assets acquired on the privatisation of British Coal in 1994 were valued at discounted net recoverable value, based on the contemporary mining plans, in accordance with the accounting guidance existing at that time. Depreciation is charged over the estimated recoverable reserves. Subsequent additions to mines and surface works are accounted for at cost, and depreciated over their individual estimated reserves.

Seismic and geological mapping costs Expenditure on seismic and geological mapping costs which increases the value of the reserves by identifying additional reserves over and above those previously recognised, or increases the value of the existing known reserves by providing information which enables reserve estimates to be increased, is capitalised. This expenditure is amortised over the estimated production over the shorter of four years or the life of the associated reserves. If the information does not fulfil either of these criteria, the cost is charged to the consolidated income statement as incurred.

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Depreciation The costs of Operating Properties, excluding freehold land, and the cost of all other plant and equipment, less estimated residual value, are written off on a straight-line basis over the asset’s expected useful life. Residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. Changes to the estimated residual values or useful lives are accounted for prospectively. The costs of heavy surface mining and other plant and equipment are depreciated at varying rates depending upon their expected usage.

Indicative expected lives for non-current assets are set out below:

Freehold land not depreciated Operating Properties (excluding land) 25 to 50 years Mines and surface works — Heavy mining equipment 8 to 20 years Plant and equipment — Plant and equipment 3 to 15 years — Motor vehicles 3 to 5 years

Impairment Operating property, plant and equipment and finite life intangible assets are reviewed for impairment if there is any indication that their carrying amount may not be recoverable. Goodwill and other indefinite life intangibles are tested for impairment annually.

The carrying value of cash generating units (taking into account related liabilities and allocated central net assets) is tested for impairment on a regular basis by comparison with expected relevant future cash flows discounted at the cost of capital taking into account appropriate risk; provision is made for any impairment identified. Cash generating units comprise individual mines or groups of mines depending upon the nature of the income streams derived from each.

When a review for impairment is conducted, the recoverable amount is assessed by reference to the higher of ‘value in use’ (being the present value of expected future cash flows of the relevant cash generating unit) or ‘fair value less costs to sell’. Where there is no binding sale agreement or active market, fair value less costs to sell is based on the best information available to reflect the amount UK COAL could receive for the cash generating unit in an arm’s length transaction.

Future cash flows are based on: — estimates of the quantities of the reserves and resources for which there is a high degree of confidence of economic extraction — anticipated production levels and costs — anticipated coal prices

The impairment testing is carried out under the principles described in IAS 36 ‘Impairment of assets’ which includes a number of restrictions on the future cash flows that can be recognised in respect of restructurings and improvement related to capital expenditure.

Hire purchases and leases — as lessee Leases which transfer substantially all the risks and rewards of ownership to UK COAL are treated as finance leases. All other leases are treated as operating leases. Assets held under hire purchase and finance lease arrangements are capitalised and written off according to the depreciation rate of the applicable asset category. The outstanding capital obligations are included in creditors. Interest is allocated to accounting periods over the hire purchase or lease term to reflect a constant rate of charge on the remaining balance of the obligation. Costs in respect of the operating leases are charged to the consolidated income statement as incurred.

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Hire purchases and leases — as lessor The Group grants leases over land and buildings in the course of its property business. These do not substantially transfer the risks and rewards of ownership to the lessee, and therefore they are accounted for as operating leases.

Financial instruments UK COAL recognises financial instruments when it becomes party to the contractual provisions of the instrument. Financial assets are derecognised when the contractual right to receive the cash flows expire or it has transferred the financial asset and the economic benefit of the cash flows. Financial liabilities are derecognised when the obligation specified in the contract is discharged, cancelled or expires.

Financial instruments are used to support UK COAL’s trading operations. Interest is charged to the consolidated income statement as incurred or earned. Issue costs of debt instruments are charged to the consolidated income statement over the term of the relevant facility.

From time to time, UK COAL may hold derivative financial instruments (‘derivatives’) to manage exposure to fluctuations in foreign currency exchange rates, commodity prices and interest rates. Derivatives are designated as hedges, when applicable, and treated as such from the inception of the relevant contracts. Gains or losses on hedging instruments are recognised when the hedged transaction occurs. Gains or losses arising from cancellation of hedging instruments due to the termination of the underlying transaction are taken to the consolidated income statement immediately. Amounts payable or receivable in respect of interest rate swap agreements are recognised as adjustments to the interest expense over the period of the contracts.

Financial instruments are recorded initially at cost. Subsequent measurement depends on the designation of the instrument, as follows:

a) Financial assets/liabilities held for trading or short-term gain, including derivatives and embedded derivatives other than hedging instruments, are measured at fair value and movements in fair value are credited/charged to the consolidated income statement in the period. b) Held to maturity investments, including those with a fixed maturity date, are measured at amortised cost. c) Loans and receivables/payables and non-derivative financial assets/liabilities with fixed or determinable payments that are not quoted in an active market, are measured at amortised cost. These are included in current assets/liabilities except for instruments that mature after more than 12 months which are included in non-current assets/liabilities. d) Available-for-sale financial assets, which are either those designated for sale or those not classified in any of the other categories, are measured at fair value. Movements in fair values are recognised directly in equity and these instruments are included in non-current assets unless the intention is to dispose of them within 12 months.

Foreign currencies The functional currency of UK COAL is sterling. Transactions in other currencies are translated at the exchange rate ruling at the date of the transaction.

Monetary assets and liabilities are translated at year end exchange rates and the resulting exchange rate differences are included in the consolidated income statement within the results of operating activities if arising from trading activities and within finance cost/income if arising from financing.

For consolidation purposes, income and expense items are included in the consolidated income statement at average rates, and assets and liabilities are translated at year end exchange rates. Where foreign operations are disposed of, the cumulative exchange differences of that foreign operation are recognised in the consolidated income statement when the gain or loss on disposal is recognised.

Inventories Inventories are valued at the lower of cost and net realisable value. Values of spares and consumables are based on average purchase prices. Appropriate provisions are made for slow-moving and obsolete stock. Coal is recognised as stock when delivered to the surface and is valued at the average cost of extraction.

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Cash and cash equivalents In the preparation of UK COAL’s cash flow statement, cash and cash equivalents represent short-term liquid investments which are readily realisable. Cash which is subject to restrictions, being held to match certain liabilities, is included in cash and cash equivalents in the consolidated balance sheet.

Restoration and closure costs Surface mines The total costs of reinstatement of soil excavation and rehabilitation are recognised as a provision for site decommissioning when the obligation arises, usually considered to be once coaling starts. A non-current asset is created within the surface mine development and restoration assets at an amount equal to this initial provision. The amount provided represents the discounted net present value of the expected costs. Costs are charged to the provision as incurred and the unwinding of the discount is included within finance costs.

Deep mines Closure costs relating to shaft treatment and pit top restoration are recognised as a provision on a discounted basis on the commissioning of the colliery or on acquisition. The amount provided represents the discounted net present value of the expected costs. Costs are charged to the provision as incurred and the unwinding of the discount is included within finance costs for the year. An equivalent asset is created within property, plant and equipment at an amount equal to the initial provision.

Costs of restoring spoil heaps are provided for on acquisition to the extent that an obligation has been incurred and, thereafter, on a unit of production basis as the additional obligation arises.

Provision for other colliery closure costs is made only when there is a demonstrable commitment to the colliery closure.

Other Provisions Pumping costs Pumping costs are provided where there is a legal requirement to continue pumping activities at certain mines following closure and at other pumping facilities for a period into the future. The provision is based on current experience and is calculated using the discounted net present value of future estimated costs. Pumping costs on continuing operations are expensed as incurred.

Ground and groundwater contamination A provision is established for the estimated costs of rectifying ground and groundwater contamination when a legal or constructive obligation is identified and can be quantified.

Surface damage Provision is made for the estimated cost of damage to structures on the surface as a result of settlement following underground mining. The provision is calculated in respect of each colliery, location of mining activity and type of property affected or likely to be affected based on claims expected and claims submitted and using historical settlement experience. The provision made represents the discounted net present value of the expenditure estimated to settle the current or estimated prospective obligation.

Employer and public liability claims UK COAL has established a DBERR approved and Financial Services Authority (“FSA”) regulated UK based insurance subsidiary (Harworth Insurance Company Limited). This insures employer and public liability risks, buying reinsurance with third parties above certain levels. Provision is made for the estimated value of both known, and incurred but not reported, third party claims on an actuarially determined basis taking into account expected reinsurance recoveries. Where these claims are expected to be settled over a longer period of time, the provision made represents the present value of the expenditure expected to be required to settle the obligation.

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Redundancy Provision is made for redundancy costs when there is a demonstrable commitment to terminate the employment of either an employee or group of employees. The expected amounts of redundancy payments, including any amounts in respect of ex gratia payments, are provided where the employment terminations have been communicated to employees.

Where contributions to redundancy costs have been firmly committed by third parties, these contributions are credited to the consolidated income statement in the same period to the extent that the related redundancy cost has been recognised.

Employee Benefits

Pension obligations The Group operates defined contribution schemes in respect of all employees who joined after the privatisation date in 1994. The cost of this is charged to the consolidated income statement as incurred.

The Group also operates pension schemes providing benefits based on final pensionable pay. The majority of the employees within defined benefit schemes are members of industry-wide schemes, being either the Industry Wide Coal Staff Superannuation Scheme (“IWCSSS”) or the Industry Wide Mineworkers’ Pension Scheme (“IWMPS”), both of which commenced on privatisation following the Coal Industry Act 1994. The assets of the Schemes are held separately from those of UK COAL, being funds administered by Trustees of the Schemes. A qualified actuary assesses the cost of current service and reviews the Schemes’ valuations annually for the purposes of IAS 19. A full valuation for funding purposes is carried out by the Schemes’ actuaries triennially. UK COAL accounts for pensions and similar benefits under IAS 19 ‘Employee benefits’. In respect of defined benefit plans, obligations are measured at discounted present value and plan assets are recorded at fair value. Service costs are charged systematically over the service lives of employees and financing costs are recognised in the periods in which they arise. Actuarial gains and losses are recognised in the consolidated statement of recognised income and expense.

Concessionary fuel Provision is made for the estimated liability arising from the obligation to provide concessionary fuel benefits to retired employees. The costs of the concessionary fuel benefits are determined annually by a qualified actuary. The arrangement is unfunded so no assets are held directly to meet the obligations. The regular service cost and interest on the scheme liabilities are charged to the consolidated income statement. Actuarial gains and losses are charged to the consolidated statement of recognised income and expense.

Share based payments The fair value of share plans is recognised as an expense in the consolidated income statement over the expected vesting period of the grant. The fair value of share plans is determined at the date of grant, taking into account any market based vesting conditions attached to the award. Non-market based vesting conditions (e.g. earnings per share targets) are taken into account in estimating the number of awards likely to vest. The estimate of the number of awards likely to vest is reviewed regularly and the expense charged adjusted accordingly. The fair value of employee share option plans is calculated using a generally accepted simulation model.

The proceeds received, net of any directly attributable transaction costs, are credited to share capital (nominal value) and share premium (any increment) when the options are exercised.

On conversion to IFRS, UK COAL, in recognising fair values of share-based payments to employees, chose 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.

Taxation Current Tax The charge or credit for current tax is based on the results for the year adjusted for items that are either not subject to taxation or for expenditure which cannot be deducted in computing the tax charge or credit. The tax charge or credit is calculated using taxation rates that have been enacted or substantively enacted at the balance sheet date.

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Deferred Tax Deferred tax is accounted for using the balance sheet liability method in respect of temporary imbalances in the tax charge, arising from differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of taxable profit. Deferred tax is recognised in respect of all taxable temporary timing differences, except that deferred tax assets are only recognised if it is considered more likely than not that there will be sufficient profits from which the future reversal of the underlying timing differences can be deducted. In deciding whether future reversal is more likely than not, the Directors review the Group’s forecasts and make a prudent estimate of the aggregate deferred tax asset that should be recognised. This aggregate deferred tax asset is then allocated into the different categories of deferred tax, taking account of the fact that the deferred tax asset in relation to the pension deficit will be recognised over a longer period, as the pension liability reverses over the average remaining service life of employees.

In relation to Investment Properties, a deferred tax liability is provided on the basis of normal income tax rules for the proportion of the property’s carrying amount expected to be recovered through use and is provided using capital gains tax rules in respect of the remainder of the property’s carrying amount (including all land) expected to be recovered through sale. In the case of the latter, no liability is recognised where the Group has sufficient unrecognised capital losses to cover the future tax obligations arising from these gains. Provision is made for gains on disposal of property, plant and equipment that have been rolled over into replacement assets only where, at the balance sheet date, there is a commitment to dispose of the replacement assets.

Deferred tax is calculated at the tax rates that are expected to apply in the periods in which timing differences reverse, based on tax rates and laws enacted or substantively enacted at the balance sheet date. Deferred tax is charged or credited to the consolidated income statement, except where it applies to items credited or charged to equity, in which case the deferred tax is included in the statement of recognised income and expense.

UK Emissions Trading Scheme Income arising from reductions in carbon emissions to the atmosphere as part of the UK Emissions Trading Scheme is credited to the consolidated income statement within other operating income in the year in which the credits are earned to the extent that it is virtually certain that the income entitlement is established. Surplus credits above this entitlement are not valued and are therefore not recognised in the financial statements until such time as they are sold to third parties.

Borrowing costs Borrowings are recognised at fair value, net of transaction costs incurred which are amortised over the term of the associated borrowings. Any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the consolidated statement over the period of the borrowings using effective interest method.

Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.

Dividend distribution Dividend distribution to the Company’s shareholders is recognised in the financial statements in the year in which the dividends are paid (in the case of interim dividends) or approved by the Company’s shareholders (in the case of final dividends).

Significant judgements Management exercises significant judgement in the determination of the provisions required in respect of restoration and closure costs. Amounts provided are based on management experience and historical out-turns, together with such external expert assistance as is deemed appropriate.

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Key assumptions and estimates Amounts in the consolidated financial statements that are subject to significant estimates are as follows: (a) Investment Property Valuations. The fair value of Investment Property reflects, amongst other things, rental income from our current leases, assumptions about rental income from future leases and the possible outcome of planning applications, in the light of current market conditions. A change in fair values could have a material impact on the Group’s results. (b) Retirement benefit obligations. These are subject to actuarial estimates of, amongst other items, rate of return on investments, rate of salary increases, rate of price inflation, the cost of funding future liabilities and post-retirement life expectancy. Details of the significant estimates used are set out in note 23. (c) Mine development costs. Capitalised mine development costs (deep and surface mines) are amortised over the tonnage of coal expected to be extracted in the future. If the amount of coal expected to be extracted varies, this will impact on the amount of the asset which should be carried in the consolidated balance sheet. (d) Restoration and closure provisions. Estimated provisions are established in the consolidated balance sheet and amortised in proportion to the coal expected to be extracted from a site. If that expected tonnage or the actual cost varies, then the provision may be under or over stated. The provisions are disclosed in note 21. (e) Deferred taxation. The recognition of deferred tax assets requires considerable judgement as to the future profitability of the mining business. The recognition of a deferred tax liability in relation to property revaluations requires an estimate to be made of the proportion of the value of a property which will be recovered through use, compared to the proportion of the value which will be recovered through sale. In the case of the latter, the Group does not recognise any tax liability as a result of its significant brought forward capital losses, as disclosed in note 8.

2 SEGMENTAL REPORTING

Revenue 2007 2006 Revenue from operations arises from: £000 £000 Sale of goods 318,671 326,217 Rendering of services 5,037 8,274 Rental income 4,777 5,222 328,485 339,713

The Board has determined that the primary segmental reporting format is by business segments, based on the Group management and internal reporting structure. As the Group operates in a single geographical market, the United Kingdom, no secondary segmentation is provided. The operations are divided into the following segments:

Deep mining The Group operated 4 ongoing deep mines in 2007 located in Central and Northern England. The Group has estimated total reserves and resources of around 105 million tonnes. Closed/sold deep mines comprise Rossington and Harworth collieries and Maltby colliery which was sold in February 2007.

Surface mining The Group has 6 active surface mines and planning consent to mine a further site. Planning consents in respect of estimated surface mine reserves of 14 million tonnes have either already been granted, applied for or are planned to be applied for during 2008.

Power The Group has its own power capability, which utilises waste gas from mines to generate electricity and is actively pursuing the development of alternative power generation opportunities, including wind farms.

Property The Group has a portfolio of around 46,500 acres and has identified some 3,696 net acres of this land as offering prime prospects for a mix of business park, residential, distribution and community development.

Other This includes any activities not already included within one of the above segments, the results of joint ventures and any unallocated items.

Segment results, assets and liabilities include items before non-trading exceptional items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly interest-bearing borrowings and taxation.

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NOTES TO THE FINANCIAL STATEMENTS continued FOR THE YEAR ENDED 31 DECEMBER

2 SEGMENTAL REPORTING continued Primary reporting format — business segments Year ended 31 December 2007 Closed/ Ongoing sold Deep Deep Deep Surface Mines Mines* Mining Mining Power Property Other Total £000 £000 £000 £000 £000 £000 £000 £000 Continuing operations Revenue — gross 258,404 7,375 265,779 60,399 8,575 4,803 1,286 340,842 Revenue — intra Group —— (7,542) (4,430) — (385) (12,357) Revenue 258,404 7,375 265,779 52,857 4,145 4,803 901 328,485 Operating profit/(loss) before non-trading exceptional items (14,037) (600) (14,637) 8,543 4,333 73,200 694 72,133 Non-trading exceptional items — Profit on sale of business 8,481 — Rationalisation, closure and other costs 2,042 Operating profit after non- trading exceptional items 82,656 Finance costs (17,121) Finance income 2,951 Finance costs — net (14,170) Share of post-tax profit from joint venture 537 Profit before tax 69,023 Tax credit 25,000 Profit for the year 94,023

Other segmental items Capital expenditure 16,374 1,040 17,414 1,447 3,422 8,116 194 30,593 Depreciation 33,664 529 34,193 3,079 1,056 172 — 38,500 Surface mines development costs and restoration assets capitalised — — — 19,140 — — — 19,140 Amortisation of surface mining development and restoration assets ——— 8,723 ———8,723 Provisions — non-cash charge/(credit) (245) (8,633) (8,878) 12,086 — — 17 3,225 * Closed/sold Deep Mines includes Maltby colliery which was sold in February 2007 and mothballing costs for Harworth colliery.

Property operating profit includes the gains on Investment Properties of £70,487,000, being net appreciation in fair value of properties of £66,799,000 and profit on disposal of Investment Properties of £3,688,000.

Trading exceptional items Deep mines operating loss includes Coal Investment Aid income of £2,926,000 and recovery costs for Daw Mill of £11,505,000.

Non-trading exceptional items The profit on the sale of business relates to the sale of Maltby colliery in February 2007.

Rationalisation, closure and other costs are predominantly associated with the deep mines operations and include a net credit of £8,767,000 following settlement of a dispute on tax deductions arising on redundancies with HMRC, mothballing costs of £1,811,000 for Harworth colliery, redundancy costs of £3,065,000, write-down of stores equipment in connection with a strategic review on closure of deep mine operations £1,737,000, pension curtailment gains of £668,000 and other costs of £780,000.

All trading and non-trading exceptional items are included in cost of sales except for Coal Investment Aid which is included within other operating income and expenses.

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2 SEGMENTAL REPORTING continued

Primary reporting format — business segments Year ended 31 December 2006 Closed/ sold Ongoing Deep Deep Mines Deep Surface Mines Restated* Mining Mining Power Property Other Total £000 £000 £000 £000 £000 £000 £000 £000 Continuing operations Revenue — gross 253,473 57,468 310,941 31,222 6,493 5,990 1,265 355,911 Revenue — intra Group — — — (9,561) (6,200) — (437) (16,198) Revenue 253,473 57,468 310,941 21,661 293 5,990 828 339,713 Operating profit/(loss) before non-trading exceptional items (16,459) (13,975) (30,434) 501 3,155 73,300 (245) 46,277 Non-trading exceptional items — Rationalisation, closure and other costs (18,632) Operating profit after non- trading exceptional items 27,645 Finance costs (12,376) Finance income 2,261 Finance costs — net (10,115) Share of post-tax profit from joint venture 105 Profit before tax 17,635 Tax charge (143) Profit for the year 17,492

Other segmental items Capital expenditure 15,722 5,885 21,607 497 4,509 3,256 — 29,869 Depreciation 34,223 5,440 39,663 3,885 782 — 186 44,516 Surface mines development costs and restoration assets capitalised — — — 6,699 — — — 6,699 Amortisation of surface mining development and restoration assets — — — 1,061 — — — 1,061 Provisions — non-cash charge/(credit) 10,314 (3,451) 6,863 (5,382) — — 8 1,489 * Closed/sold Deep Mines comprises Rossington and Harworth collieries as stated in the 2006 Annual Report and has been restated to include Maltby colliery which was sold in February 2007.

Property operating profit includes the gains on Investment Properties of £70,028,000, being the net appreciation in fair value of properties of £68,622,000 and profit on disposal of Investment Properties of £1,406,000.

Trading exceptional items Deep mines operating loss includes Coal Investment Aid income of £7,892,000 and recovery costs for Daw Mill and Maltby of £9,365,000.

Non-trading exceptional items Rationalisation, closure and other costs predominantly relates to the deep mines and includes mothballing and other costs of £18,865,000 for Harworth and Rossington, redundancy costs of £1,995,000, write-down of stores equipment in connection with strategic review of deep mine operations of £6,527,000, pension curtailment gains of £4,355,000 and the reversal of impairment charges of £4,400,000 following the disposal of certain surface mining plant.

All trading and non-trading exceptional items are included in cost of sales except for Coal Investment Aid which is included within other operating income and expenses.

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NOTES TO THE FINANCIAL STATEMENTS continued FOR THE YEAR ENDED 31 DECEMBER

2 SEGMENTAL REPORTING continued

Balance Sheet at 31 December 2007 Closed/ Ongoing sold Deep Deep Deep Surface Mines Mines* Mining Mining Power Property Other Total £000 £000 £000 £000 £000 £000 £000 £000 Assets and liabilities Segment assets 266,266 — 266,266 43,577 11,643 401,680 1,628 724,794 Investment in joint venture — — — — — — 342 342 Total segment assets 266,266 — 266,266 43,577 11,643 401,680 1,970 725,136 Segment liabilities (196,942) (11,346) (208,288) (67,185) (697) (15,388) (6,249) (297,807) Segment net assets/(liabilities) 69,324 (11,346) 57,978 (23,608) 10,946 386,292 (4,279) 427,329 Group borrowings (125,241) Cash and cash equivalents (unrestricted) 20,973 Net deferred tax asset 35,185 Net assets 358,246 * Closed/sold Deep Mines includes Maltby colliery which was sold in February 2007 and mothballing costs for Harworth colliery.

Cash and cash equivalents that are subject to restriction have been included within the appropriate segment, along with the related provisions.

Balance Sheet at 31 December 2006 Closed/ Ongoing sold Deep Deep Deep Surface Mines Mines* Mining Mining Power Property Other Total £000 £000 £000 £000 £000 £000 £000 £000 Assets and liabilities Segment assets 284,671 16,917 301,588 32,520 9,088 327,028 7,579 677,803 Investment in joint venture — — — — — — 205 205 Total segment assets 284,671 16,917 301,588 32,520 9,088 327,028 7,784 678,008 Segment liabilities (265,659) (18,252) (283,911) (63,644) (4,737) (15,429) (6,610) (374,331) Segment net assets/(liabilities) 19,012 (1,335) 17,677 (31,124) 4,351 311,599 1,174 303,677 Group borrowings (97,765) Cash and cash equivalents (unrestricted) 3,627 Net deferred tax asset 34,580 Net assets 244,119 * Closed/sold Deep Mines comprises Rossington and Harworth collieries as stated in 2006 Annual Report and has been restated to include Maltby colliery which was sold in February 2007.

Cash and cash equivalents that are subject to restriction have been included within the appropriate segment, along with the related provisions.

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3 PROFIT BEFORE TAX

2007 2006 £000 £000 Profit before tax is stated after (charging)/crediting: Depreciation of property, plant and equipment — owned assets (34,449) (37,966) Depreciation of property, plant and equipment — under finance leases (4,051) (6,550) Amortisation of surface mining development and restoration assets (8,723) (1,061) Coal Investment Aid 2,926 7,892 Profit on disposal of Investment Properties 3,688 1,406 Profit on disposal of operating property, plant and equipment 1,598 416 Repairs and maintenance for deep and surface mining (60,157) (63,592) Staff costs (156,975) (170,776) Spares and consumables used (20,298) (39,280) Operating expense for rental investment property (1,360) (1,256) Operating lease payments (252) (268)

4 OTHER OPERATING INCOME AND EXPENSES

2007 2006 £000 £000 Administrative expenses (13,103) (14,644) Other operating income 7,524 13,569 Other operating income and expenses (5,579) (1,075)

Due to the nature of the Group’s business, distribution expenses are treated as a part of cost of sales. Other operating income includes profit on disposal of operating property, plant and equipment £1,598,000 (2006: £416,000) and Coal Investment Aid income of £2,926,000 (2006: £7,892,000).

5 EMPLOYEE INFORMATION

The average number of persons (including the Board of Directors) employed by the Group during the year was: Group Company 2007 2006 2007 2006 Number Number Number Number Deep mining 2,690 3,319 — — Surface mining 499 457 — — Property 15 12 — — Power generation 11 6 — — Other 73 90 7 6 3,288 3,884 7 6

Total staff costs for the Group were: Group Company 2007 2006 2007 2006 Staff costs (including Executive Directors) £000 £000 £000 £000 Wages and salaries 128,842 144,694 1,428 1,906 Social security costs 12,948 13,889 403 182 Pension and post-retirement benefit costs 14,901 11,995 118 111 Share based payments 284 198 284 198 156,975 170,776 2,233 2,397

Wage and salary costs include the benefit of pension curtailment gains as disclosed within note 2.

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NOTES TO THE FINANCIAL STATEMENTS continued FOR THE YEAR ENDED 31 DECEMBER

5 EMPLOYEE INFORMATION continued

Key management compensation 2007 2006 £000 £000 Salaries and short-term employee benefits 2,512 1,473 Post-employment benefits 249 133 Share based payments 215 150 2,976 1,756

The compensation details above are for members of the Executive Management Committee during the year. Current members of the Executive Management Committee are given on page 51.

Directors’ remuneration and interests Detailed information relating to Directors’ remuneration and their interests in share options is indicated by * on pages 58 to 59 and forms part of these financial statements.

6 FINANCE INCOME AND COSTS

2007 2006 £000 £000 Interest expense — Bank borrowings (8,868) (6,377) — Hire purchase agreements and finance leases (810) (1,204) — Unwinding of discount on provisions (3,933) (4,550) — Discounting of non-current receivables — 142 — Amortisation of the issue costs of bank loans (1,610) (1,028) (Losses)/gains on interest rate swaps not eligible for hedge accounting (1,900) 641 Finance costs (17,121) (12,376) Finance income 2,951 2,261 Net finance costs (14,170) (10,115)

7 AUDITORS’ REMUNERATION During the year the Group obtained the following services from its auditors, PricewaterhouseCoopers LLP, at costs as detailed below:

2007 2006 £000 £000 Audit Services — Fees payable to the Company auditors for the audit of the parent Company and the consolidated accounts 100 100 Non-audit services — The audit of the Company’s subsidiaries pursuant to legislation 248 275 — Other services pursuant to legislation 50 14 — Tax advisory and compliance services 212 173 — Other services 115 19 725 581

It is the Group’s practice to employ PricewaterhouseCoopers LLP on assignments additional to their statutory audit duties where their expertise and experience with the Group are important, principally tax and pension advice and assurance related work, where they are awarded assignments on a competitive basis. The Audit Committee reviews non-audit assignments quarterly, and approves all assignments above a set threshold cost.

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8 TAX

2007 2006 Analysis of (credit)/charge in the year £000 £000 Deferred tax (25,000) 143 Taxation (credit)/charge (25,000) 143

The tax for the year is different to the standard rate of Corporation tax in the UK (30%). The differences are explained below:

2007 2006 £000 £000 Profit before taxation 69,023 17,635 Profit before taxation multiplied by rate of Corporation tax in the UK of 30% (2006: 30%) 20,707 5,291 Effects of: Expenses not deducted/income not chargeable for tax purposes (22,222) (19,659) Deferred tax (recognised)/not recognised (23,485) 14,511 Total taxation (credit)/charge (25,000) 143

The tax credit at 31 December 2007 relates to the recognition of previously unrecognised tax losses. These losses have been recognised at 31 December 2007 due to the reduction in the deferred tax asset relating to the pension liability and not any change in forecast Group profitability.

The credit recognised in the consolidated income statement is approximate to the change recognised in the statement of recognised income and expense, reflecting the fact there is no overall material change in the amount of deferred tax asset being recognised by the Group.

Deferred taxation Deferred tax is calculated in full on temporary differences under the liability method using a tax rate of 28% (2006: 30%). Deferred tax asset and liability are offset when there is a legally enforced right to offset current tax asset against current tax liability and when the deferred taxes relate to the same fiscal authority. The Group’s deferred tax liability in respect of fixed assets can all be offset in this way, apart from the £815,000 liability in respect of revaluation gains on Investment Properties to be recovered through use.

Group 2007 2006 £000 £000 Deferred tax asset — to be recovered after more than 12 months 36,000 35,752 Deferred tax liability — to be recovered after more than 12 months (815) (1,172) Net deferred tax asset 35,185 34,580

The movement on the deferred tax asset/(liability) is shown below: Group 2007 2006 £000 £000 At 1 January (34,580) 1,029 Amounts (credited)/charged to the consolidated income statement (25,000) 143 Amounts charged/(credited) to consolidated statement of recognised income and expense 24,395 (35,752) At 31 December (35,185) (34,580)

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NOTES TO THE FINANCIAL STATEMENTS continued FOR THE YEAR ENDED 31 DECEMBER

8 TAX continued

Deferred tax assets have been recognised to the extent that they are expected to be recovered, based on forecasts of future taxable profits resulting in assets of £36,000,000 (2006: £35,752,000). Other deferred tax assets have not been recognised owing to the uncertainty as to their recoverability. If all deferred tax assets were recognised, the total assets would be £103,615,000 (2006: £110,394,000) as set out below.

2007 2007 Total 2006 2006 Total potential Total Total amount asset/ amount potential recognised (liability) recognised asset £000 £000 £000 £000 Fixed asset timing differences (815) (2,218) (1,172) 10,291 Other timing differences — 9,073 — 22,848 Trading losses 24,643 74,049 — 41,503 Retirement benefit liabilities 11,357 20,493 35,752 35,752 Deferred tax asset 35,185 101,397 34,580 110,394

The fixed asset timing difference relates to the deferred tax liability arising from the Directors’ estimate of the tax on the proportion of revaluation gains on Investment Properties which will be recovered through use. No tax liability has been recognised in relation to the balance of the gain which is expected to be realised through sale of Investment Properties, due to the fact that the Group has unrecognised capital losses brought forward of £381,000,000 (2006: £401,100,000).

A number of changes to the UK corporation tax system were announced in the March 2007 Budget Statement, some of which are expected to be enacted in the 2008 Finance Act. These changes, namely the phased withdrawal of Industrial Building Allowances, had not been substantively enacted at the balance sheet date and, therefore, are not included in these financial statements.

The effect of the changes to be enacted in the 2008 Finance Act would be an immaterial change to the deferred tax provided at 31 December 2007.

The movement on deferred tax asset charged/(credited) to equity during the year is as follows:

2007 2006 £000 £000 Impact on deferred tax asset due to change in tax rate 2,383 — Movement on deferred tax asset relating to retirement benefit liabilities in the period 22,012 (35,752) Deferred tax asset movement charged/(credited) to equity 24,395 (35,752)

The Company has no recognised or unrecognised deferred tax in 2007 and 2006.

9 LOSS FOR THE FINANCIAL YEAR OF THE PARENT ENTITY

As permitted by section 230 of the Companies Act 1985, the Company’s income statement has not been included separately in these financial statements. The loss for the financial year was £1,867,000 (2006: £1,842,000).

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10 DIVIDENDS

No dividends have been paid or proposed in relation to either 2007 or 2006.

11 EARNINGS PER SHARE

Earnings per share has been calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of shares in issue and ranking for dividend during the year.

In calculating diluted profit per share, the weighted average number of ordinary shares is adjusted for the diluting effect of share options potentially issuable under the Group’s employee share option plans.

2007 2006 £000 £000 Profit before tax 69,023 17,635 Tax 25,000 (143) Profit for the year 94,023 17,492

Weighted average number of shares used for basic earnings per share calculation 156,839,338 150,021,625 Dilutive effect of share options — 25,588 Weighted average number of shares used for diluted earnings per share calculation 156,839,338 150,047,213 Basic and diluted earnings per share (pence) 59.9 11.7

Adjusted earnings per share, excluding tax, for the year is 44.0 pence (2006: 11.7 pence). This adjusted earnings per share is stated to enable comparability to the previous period.

12 TOTAL OPERATING PROPERTY, PLANT AND EQUIPMENT

Surface mine Deep mines development including and Operating surface Plant and restoration properties works equipment Subtotal assets Total Group £000 £000 £000 £000 £000 £000 Cost: At 1 January 2007 18,759 811,628 93,194 923,581 24,040 947,621 Additions 569 17,414 5,063 23,046 19,140 42,186 Disposals (43) (42,105) (7,642) (49,790) (5,241) (55,031) Transfer to Investment Properties (1,256) — — (1,256) — (1,256) Transfer from Investment Properties 1,647 — — 1,647 — 1,647 At 31 December 2007 19,676 786,937 90,615 897,228 37,939 935,167 Depreciation: At 1 January 2007 4,174 622,306 68,853 695,333 14,346 709,679 Charge for the year 172 34,194 4,134 38,500 8,723 47,223 Disposals — (30,238) (5,918) (36,156) (5,241) (41,397) At 31 December 2007 4,346 626,262 67,069 697,677 17,828 715,505 Net book amount: At 31 December 2007 15,330 160,675 23,546 199,551 20,111 219,662

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NOTES TO THE FINANCIAL STATEMENTS continued FOR THE YEAR ENDED 31 DECEMBER

12 TOTAL OPERATING PROPERTY, PLANT AND EQUIPMENT continued

Surface mine Deep mines development including and Operating surface Plant and restoration properties works equipment Subtotal assets Total Group £000 £000 £000 £000 £000 £000 Cost: At 1 January 2006 18,225 803,564 102,973 924,762 17,341 942,103 Additions 143 21,464 5,006 26,613 6,699 33,312 Disposals — (13,400) (14,785) (28,185) — (28,185) Transfer from Investment Properties 391 — — 391 — 391 At 31 December 2006 18,759 811,628 93,194 923,581 24,040 947,621 Depreciation: At 1 January 2006 3,987 592,184 78,260 674,431 13,285 687,716 Charge for the year 187 39,663 4,666 44,516 1,061 45,577 Disposals — (9,541) (14,073) (23,614) — (23,614) At 31 December 2006 4,174 622,306 68,853 695,333 14,346 709,679 Net book amount: At 31 December 2006 14,585 189,322 24,341 228,248 9,694 237,942

Surface mine development and restoration assets net book amounts include capitalised pre-coaling costs of £10,821,000 (2006: £8,571,000) and restoration costs of £9,290,000 (2006: £1,123,000). These are depreciated over the estimated recoverable reserves.

Surface mine asset additions in the period of £19,140,000 (2006: £6,699,000) comprise £4,650,000 (2006: £5,115,000) in respect of pre-coaling expenditure, and £14,490,000 (2006: £1,584,000) recognised as a non-current asset on the creation of a corresponding provision for restoration and rehabilitation costs.

Assets under finance leases, disclosed under deep mines including surface works, and plant and equipment have the following net book amounts: 2007 2006 £000 £000 Cost 30,334 46,213 Aggregate depreciation (10,990) (20,864) Net book amount 19,344 25,349

Certain land and buildings included above with a book value of £6,588,000 (2006: £6,684,000) are subject to security to cover surface damage provision.

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13 INVESTMENT PROPERTIES

2007 2006 At valuation — Group £000 £000 At 1 January 311,677 251,161 Additions 7,547 3,256 Disposals (8,074) (14,023) Fair value uplift 66,799 71,674 Transfer from operating property, plant and equipment at net book amount 1,256 — Revaluation of property transferred to Investment Properties 6,733 — Transfer to operating property, plant and equipment (1,647) (391) At 31 December 384,291 311,677

The properties were valued at 31 December 2007, in accordance with the Appraisal and Valuation Standards of the Royal Institution of Chartered Surveyors, by three firms, Atisreal, Smiths Gore and Bell Ingram, all independent firms with relevant experience of valuations of this nature. The valuation excludes any deduction of rehabilitation and restoration costs which costs are stated within provisions in the balance sheet.

Key assumptions within the basis of fair value are:

— The sites will be cleared of redundant buildings, levelled and prepared ready for development — The values are on a basis that no material environmental contamination exists on the subject or adjoining sites, or where this is present the sites will be remediated to a standard consistent with the intended use, the costs for such remediation being separately provisioned — No deduction or adjustment has been made in relation to clawback provisions, or other taxes which may be payable in certain events

Had the above Investment Properties been carried at cost, rather than fair value, their value would be £81,351,000 (2006: £76,219,000).

Land and buildings included above with a value of £245,765,000 (2006: £111,058,000) are subject to fixed charges to cover bank borrowings and £3,281,000 (2006: £7,166,000) are subject to security to cover insurance requirements. Other property, plant and equipment is subject to floating charges to cover bank borrowings.

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NOTES TO THE FINANCIAL STATEMENTS continued FOR THE YEAR ENDED 31 DECEMBER

14 INVESTMENTS Investment in Joint Venture The Group owns 50% of the 1,000 £1 issued equity shares in Coal4Energy Limited, a company incorporated in England and Wales which was formed in 2006, as a joint venture company with Hargreaves Services PLC (“Hargeaves”) to produce, market and distribute domestic and industrial coal products, building on the market strengths of UK COAL and Hargreaves. The joint venture company will form an important platform for the development of this market.

The Group investment of £342,000 represents the Group’s share of the joint venture’s net assets as at 31 December 2007.

2007 2006 £000 £000 Revenue 60,434 44,140 Expenses (59,360) (43,930) Profit after tax 1,074 210 Non-current assets 29 40 Current assets 14,023 9,792 Total assets 14,052 9,832 Current liabilities (13,368) (9,422) Net assets 684 410

2007 2006 Reconciliation of investment in joint venture £000 £000 1 January 205 100 Share of post-tax profit 537 105 Dividends received (400) — 31 December 342 205

Investment in subsidiaries £000 Company Cost At 1 January and 31 December 2007 473,224

Investments in subsidiaries are stated at cost. As permitted by section 133 of the Companies Act 1985, where the relief afforded under section 131 of the Companies Act 1985 applies, cost is the aggregate of the nominal value of the relevant number of the Company’s shares and the fair value of any other consideration given to acquire the share capital of the subsidiary undertakings. The Directors consider that to give full particulars of all subsidiary undertakings would lead to a statement of excessive length. A list of principal subsidiary undertakings is given below. A full list of subsidiary undertakings will be annexed to the Company‘s next annual return.

Particulars of the principal Group undertakings at 31 December 2007 are as follows: Proportion of nominal value of issued share Description capital held by of shares Company Activity held % Harworth Group Limited Holding Company Ordinary — UK Coal Holdings Limited Holding Company Ordinary 100 Harworth Insurance Company Limited Insurance Ordinary 100 Harworth Power Limited Power generation Ordinary — Mining Services Limited Surface mining plant operations Ordinary — UK Coal Mining Limited Underground and surface mining Ordinary — Centechnology (UK) Limited Labour contracting services Ordinary — EOS Inc Limited Property Company Ordinary — Harworth Estates (Agricultural Land) Limited Property Company Ordinary — Harworth Estates (Waverley Prince) Limited Property Company Ordinary —

The Group owns 100% of the issued share capital and voting rights of all of the above companies.

All of the above companies are incorporated in England and Wales; they are all included in the Group’s consolidated results.

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15 TRADE AND OTHER RECEIVABLES — NON-CURRENT

Amounts classed as non-current are as follows: Group Company 2007 2006 2007 2006 £000 £000 £000 £000 Other receivables 1,613 964 — —

Non-current receivables have been discounted using a rate of 5.8%.

16 INVENTORIES

Group Company 2007 2006 2007 2006 £000 £000 £000 £000 Coal stocks 16,282 10,037 — — Spares and consumables 23,474 26,603 — — 39,756 36,640 — —

The cost of inventories recognised as an expense and included in ‘cost of sales’ amounted to £20,298,000 (2006: £39,280,000).

Following a review of stocks in the light of mine closures, a provision of £1,737,000 (2006: £6,527,000) was created against stores stock, as disclosed within note 2.

17 TRADE AND OTHER RECEIVABLES — CURRENT

Group Company 2007 2006 2007 2006 £000 £000 £000 £000 Trade receivables 21,242 42,044 — — Less: provision for impairment of trade receivables (22) (6,140) — — Net trade receivables 21,220 35,904 — — Other receivables 3,657 3,241 235 2,196 Coal Investment Aid — 1,176 — — Prepayments and accrued income 2,744 3,284 — — Amounts owed by joint venture 2,332 3,999 — — Amounts owed by subsidiary undertakings — — 165,866 165,144 29,953 47,604 166,101 167,340

Due to the nature of the Group’s activities, a substantial amount of the Group’s sales are to a limited number of customers within the power generation sector. Whilst this concentration provides an increased credit risk, due to the financial strength of the power sector, management does not believe that this is significant.

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NOTES TO THE FINANCIAL STATEMENTS continued FOR THE YEAR ENDED 31 DECEMBER

17 TRADE AND OTHER RECEIVABLES — CURRENT continued

As of 31 December 2007, there were provisions against trade receivables of £22,000 (2006: £6,140,000), aged as follows:

Group 2007 2006 £000 £000 3 to 6 months 22 — Over 6 months — 6,140 22 6,140

As of 31 December 2007, trade receivables of £908,000 (2006: £352,000) were past due but not impaired. These relate to a number of customers for whom there is no recent history of default. The ageing analysis of these trade receivables is as follows:

Group 2007 2006 £000 £000 Up to 3 months 619 237 Over 3 months 289 115 908 352

Movements on the Group provisions for impairment of trade receivables are as follows:

Group 2007 2006 £000 £000 At 1 January 6,140 7,502 Provisions for impairment of receivables 380 28 Receivables written off during the year as uncollectable (6,490) (1,390) Unused amounts reversed (8) — At 31 December 22 6,140

The creation and releases of the provision for impaired receivables have been included in ‘other operating income and expenses’ in the income statement. Amounts charged to the allowance account are generally written off, when there is no expectation of any additional recoveries.

The other classes within trade and other receivables do not contain impaired assets.

The maximum exposure to credit risk at the reporting date is the fair value of each class of receivables as disclosed in note 22. The Group does not hold any collateral as security.

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18 CASH AND CASH EQUIVALENTS

Group Company 2007 2006 2007 2006 £000 £000 £000 £000 Cash deposited to cover insurance requirements 25,692 19,553 — — Subsidence security fund 23,403 22,748 — — 49,095 42,301 — — Cash held and other cash balances 20,973 3,627 20,063 2,548 70,068 45,928 20,063 2,548

The cash held subject to restrictions to cover insurance and surface damage liabilities at the year end amounts to £49,095,000 (2006: £42,301,000).

19 FINANCIAL LIABILITIES — BORROWINGS

Group Company 2007 2006 2007 2006 Current £000 £000 £000 £000 Borrowings due within one year or on demand: Secured — bank loans and overdrafts 21,339 13,956 — 12,476 Finance lease obligations 5,981 5,325 — — 27,320 19,281 — 12,476

Group Company 2007 2006 2007 2006 Non-current £000 £000 £000 £000 Borrowings due after more than one year: Secured — bank loans and overdrafts 90,008 70,168 — — Finance lease obligations 7,913 8,316 — — 97,921 78,484 — —

Bank loans and overdrafts due within one year or on demand are stated after deduction of unamortised borrowing costs of £1,309,000 (2006: £1,259,000). Non-current bank loans and overdrafts are stated after deduction of unamortised borrowing costs of £1,946,000 (2006: £2,072,000). The Group’s Revolving Credit Facility can be drawn when required and is thus disclosed under amounts falling due within one year. The facility is committed until 2010.

During 2007, new bank loans were taken out with a value of £42,951,000, secured on Investment Properties.

The bank loans and overdrafts are secured by way of fixed and floating charges over certain assets of the Group.

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NOTES TO THE FINANCIAL STATEMENTS continued FOR THE YEAR ENDED 31 DECEMBER

19 FINANCIAL LIABILITIES — BORROWINGS continued

The exposure of the Group to interest rate changes analysed by year of maturity is as follows:

Within More than 1 year 2–5 years 5 years Total £000 £000 £000 £000 At 31 December 2007 Secured and unsecured borrowings 21,339 90,008 — 111,347 Add back borrowing costs 1,309 1,946 — 3,255 Total borrowings 22,648 91,954 — 114,602 Effect of interest rate swaps (19,171) (91,954) — (111,125) 3,477 — — 3,477

At 31 December 2006 Secured and unsecured borrowings 13,956 70,168 — 84,124 Add back borrowing costs 1,259 2,072 — 3,331 Total borrowings 15,215 72,240 — 87,455 Effect of interest rate swaps (2,237) (52,965) — (55,202) 12,978 19,275 — 32,253

The above swaps have an average interest rate of 5.62% (2006: 4.82%). The debt under which these swaps are held are treated as fixed interest rate.

The effective interest rates at the balance sheet date were as follows: 2007 2006 Bank overdraft — 6.0% Bank borrowings 7.0% 6.7% Finance leases 7.1% 6.4%

The carrying amount of the Group’s borrowings are denominated in sterling.

The minimum lease payments under finance leases fall due as follows: 2007 2006 £000 £000 Within 1 year 6,881 6,206 Between 1 and 5 years 8,526 9,114 More than 5 years — — 15,407 15,320 Future finance charges on finance leases (1,513) (1,679) Present value of finance lease liabilities 13,894 13,641

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20 TRADE AND OTHER PAYABLES

Group Company 2007 2006 2007 2006 £000 £000 £000 £000 Current Trade payables 40,823 49,723 — — Amounts owed to subsidiary undertakings — — 217,320 188,433 Other taxation and social security 15,272 6,156 — — Accruals and deferred income 44,118 50,405 298 1,254 100,213 106,284 217,618 189,687 Non-current Trade payables — 130 — — Accruals and deferred income 73 182 — — 73 312 — —

21 PROVISIONS

At At 1 January Provided Released Utilised Unwinding 31 December 2007 in year in year in year of discount 2007 £000 £000 £000 £000 £000 £000 Group Employer and public liabilities 19,856 4,082 (1,190) (4,467) 594 18,875 Surface damage 19,820 6,418 (5,707) (4,766) 640 16,405 Claims 1,541 17 (750) (769) — 39 Restoration and closure costs of surface mines 51,749 16,590 (3,754) (11,717) 1,730 54,598 Restoration and closure costs of deep mines: — shaft treatment and pit top 17,635 2,439 (4,481) (3,857) 457 12,193 — spoil heaps 4,221 350 (1,062) (385) 100 3,224 — pumping costs 6,614 — (494) — 184 6,304 Ground/groundwater contamination 9,768 — (3,531) — 228 6,465 Redundancy 16,036 4,188 (9,890) (6,235) — 4,099 147,240 34,084 (30,859) (32,196) 3,933 122,202

Provisions released of £30,859,000 include £6,193,000 in relation to the sale of Maltby colliery.

Provisions have been analysed between current and non-current as follows: 2007 2006 £000 £000 Current 31,061 27,931 Non-current 91,141 119,309 122,202 147,240

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NOTES TO THE FINANCIAL STATEMENTS continued FOR THE YEAR ENDED 31 DECEMBER

21 PROVISIONS continued

Provisions are expected to be settled within the timescales set out in the following table. It should be noted that these are based on the information available at the time the consolidated financial statements were prepared and are subject to a number of estimates and uncertainties, as noted below.

More than Within 1 year 1–2 years 2–5 years 5 years Total £000 £000 £000 £000 £000 Employer and public liabilities 7,115 5,535 5,913 312 18,875 Surface damage 3,609 3,281 7,218 2,297 16,405 Claims 39 — — — 39 Restoration and closure costs of surface mines 14,412 18,538 15,427 6,221 54,598 Restoration and closure costs of deep mines: — shaft treatment and pit top 1,395 1,344 1,752 7,702 12,193 — spoil heaps 392 591 569 1,672 3,224 — pumping costs — — — 6,304 6,304 Ground/groundwater contamination — — — 6,465 6,465 Redundancy 4,099 — — — 4,099 31,061 29,289 30,879 30,973 122,202

The total of provisions created, net of provisions released, was £3,225,000 (2006: £1,489,000). This included a net credit of £5,702,000 (2006: £1,995,000) in respect of non-trading exceptional items.

The nature of the Group’s obligations and an indication of the uncertainties surrounding each of the above provisions is set out below:

Employer and public liabilities — provisions are made for current and estimated obligations in respect of claims made by employees, contractors and the general public relating to accident or disease as a result of the business activities of the Group, relating primarily to the claims held by the Group’s captive insurance company, Harworth Insurance Limited. Security over land and buildings and dedicated cash deposits, as set out in notes 13 and 18, has been granted to cover these provisions.

Surface damage — provision is made for the Group’s liability to compensate for subsidence damage arising from past mining operations. Claims can be lodged by the public up to six years after the date of relevant damage. The estimate is based on historical claims experience, following a detailed assessment of the nature of the damage foreseen. Security over land and buildings and dedicated cash deposits, as set out in notes 12 and 18, has been granted to cover these provisions. The provisions provided of £16,590,000 includes £14,490,000 in relation to amounts capitalised as a non-current asset within surface mine development and restoration assets. The remaining difference relates to provisions provided following management reassessment of requirements.

Claims — where surface mine sites owned by the Group are mined by external contractors and mining conditions vary from those specified in the contract, the external contractors may be entitled to claim further costs incurred. Claims are settled with individual contractors, generally on the completion of a surface mining site. All claims provisions are based on known mining conditions encountered, historical experience and contracted rates.

Restoration and closure costs of surface mines — provisions are made for the total costs of reinstatement of soil excavation and for surface restoration, such as topsoil replacement and landscaping. Costs become payable after coal mining has been completed. Further liabilities for aftercare can extend after restoration, for a period of up to six years.

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21 PROVISIONS continued

Restoration and closure costs of deep mines: Shaft treatment and pit top — provisions are made to meet the Group’s liability to fill and cap all mine shafts and return pit top areas to a condition consistent with the required planning permission. No liabilities will arise until decommissioning of each individual colliery. The current pit top provisions reflect existing planning permissions that require pit areas to be restored to former use, usually agricultural. The Group will, where possible, seek planning permission for development use, which, if successful, may reduce the expected cost.

Spoil heaps — provisions are made for the costs payable to bring spoil heaps to a condition consistent with the required planning permission and to complete approved restoration schemes. An element of spoil heap restoration is ongoing, although the majority of costs will be incurred after the decommissioning of a colliery.

Pumping costs — there is a legal requirement to continue pumping activities at certain mine sites following closure and for a period into the future. The provision is based on current experience and the net present value of future cost projections. Pumping costs on continuing operations are expensed as incurred.

Ground/groundwater contamination — provisions are made for the Group’s legal or constructive obligation to address ground and groundwater pollutants at its operating sites. The provision is based on estimates of volumes of contaminated soil and the historical contract costs of ground contamination treatment. These costs will usually be incurred following the decommissioning of a site.

Redundancy — provision is made for current estimated future costs of redundancy and ex gratia payments to be made where this has been communicated to those employees concerned.

22 FINANCIAL INSTRUMENTS

Financial risk management The Group’s activities expose it to a variety of financial risks: market risk, credit risk and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance. The Group uses derivative financial instruments to hedge certain risk exposures.

Risk management is carried out by a central treasury under policies approved by the Board of Directors. Group treasury identifies, evaluates and hedges financial risks in close co-operation with the Group’s operating units. The Board provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments and investment of excess liquidity.

a) Market risk i) Cash flow and fair value interest rate risk The Group’s interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. Group policy is to maintain its borrowings predominantly in fixed rate instruments using interest rate swaps to achieve this when necessary. During 2007 and 2006, the Group’s borrowings at variable rate were denominated in UK pounds.

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NOTES TO THE FINANCIAL STATEMENTS continued FOR THE YEAR ENDED 31 DECEMBER

22 FINANCIAL INSTRUMENTS continued

The Group manages its cash flow interest rate risk by using floating-to-fixed interest rate swaps. Such interest rate swaps have the economic effect of converting borrowings from floating rates to fixed rates. Generally, the Group raises long-term borrowings at floating rates and swaps them into fixed rates that are lower than those available if the Group borrowed at fixed rates directly. Under the interest rate swaps, the Group agrees with other parties to exchange, at specified intervals (primarily quarterly), the difference between fixed contract rates and floating rate interest amounts calculated by reference to the agreed notional amounts.

At 31 December 2007, if interest rates on UK pound-denominated borrowings at that date had been 2% higher or lower with all other variables held constant, post-tax profit for the year would have been £2,983,000 (2006: £2,779,000) lower or higher, mainly as a result of higher or lower interest expense on floating rate borrowings which do not qualify for hedge accounting.

ii) Foreign exchange risk No foreign exchange contracts were entered into during 2007 and the Group does not have any material foreign currency exposure.

b) Credit risk Credit risk or financial instruments is managed on a Group basis. Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, including outstanding receivables and committed transactions. For banks and financial institutions, only independently rated parties with a minimum rating of ‘A’ are accepted. If our customers are independently rated, these ratings are used. Otherwise, if there is no independent rating, risk control assesses the credit quality of the customer taking into account its financial position, past experience and other factors. Individual risk limits are set based on internal or external ratings in accordance with limits set by the Board. Management monitors the utilisation of credit limits regularly.

The table below shows the balance of our major counterparties which give rise to credit risk at the balance sheet date.

2007 2006 Balance Balance Counterparty Rating £000 £000 Scottish Widows AA- 23,403 22,748 Lloyds TSB AA 17,000 —

Electricity Supply Industry customers 17,740 28,291

Our Electricity Supply Industry customers are rated between A to BBB-. No credit limits were exceeded during the reporting period and management does not expect any losses from non-performance by these counterparties.

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22 FINANCIAL INSTRUMENTS continued

c) Liquidity risk We manage our liquidity requirements by the use of both short and long-term cash flow forecasts. These forecasts are supplemented by a financial headroom position which is used to demonstrate funding adequacy for at least a 12 month period.

Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, Group treasury aims to maintain flexibility in funding by keeping committed credit lines available. The Group only takes into account existing or renewing facilities and new facilities where these have received credit approval.

The table below analyses the Group’s financial liabilities which will be settled on a net basis into relevant maturity groupings based on the remaining period at the balance sheet to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash outflows/(inflows).

Less than Between Between 1 year 1 and 2 years 2 and 5 years Over 5 years £000 £000 £000 £000 At 31 December 2007 Borrowings 27,320 7,831 90,090 — Derivative financial instruments (196) 77 1,029 — Trade and other payables 100,213 73 — — At 31 December 2006 Borrowings 19,281 28,919 49,565 — Trade and other payables 106,284 312 — —

Capital risk management The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

Consistent with others in the industry, the Group monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including ‘borrowings’ as shown in the consolidated balance sheet) less cash and cash equivalents. Total capital is calculated as ‘equity’ as shown in the consolidated balance sheet plus net debt.

The gearing ratios for the Group at 31 December 2007 and 2006 were as follows:

2007 2006 £000 £000 Total borrowings 125,241 97,765 Less: Unrestricted cash and cash equivalents (note 18) (20,973) (3,627) Net debt 104,268 94,138 Total equity 358,246 244,119 Total capital 462,514 338,257 Gearing ratio 22.5% 27.8%

The decrease in the gearing ratio during 2007 resulted primarily from the increase in net assets and cash and cash equivalents at year end.

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NOTES TO THE FINANCIAL STATEMENTS continued FOR THE YEAR ENDED 31 DECEMBER

22 FINANCIAL INSTRUMENTS continued

Interest rate swaps The principal amount of the outstanding interest rate swaps at 31 December 2007 was £111,125,000 (2006: £55,202,000). At 31 December 2007 the average fixed interest rate was 5.62%. Their fair value, assessed by reference to market values, is set out below: Assets Liabilities £000 £000 At 31 December Fair value — 2007 424 2,148 Fair value — 2006 675 —

Fair value of non-derivative financial assets and liabilities Fair values of financial assets and liabilities have been calculated by discounting expected future cash flows at prevailing interest rates. The carrying amounts of short-term borrowings approximate to their fair value.

Maturity profile of financial liabilities — borrowings The maturity profile of the carrying amount of financial liabilities is set out below:

2007 2006 Finance Finance Debt leases Total Debt leases Total Group £000 £000 £000 £000 £000 £000 Within 1 year 21,339 5,981 27,320 13,956 5,325 19,281 Between 1 and 2 years 1,896 5,935 7,831 24,706 4,213 28,919 Between 2 and 5 years 88,112 1,978 90,090 45,462 4,103 49,565 Over 5 years — — — — — — 111,347 13,894 125,241 84,124 13,641 97,765

The Company had no financial liabilities at 31 December 2007 or at 31 December 2006.

Borrowing facilities The Group had the following committed bank facilities available at 31 December 2007, all of which were at floating interest rates.

2007 2006 £000 £000 Expiring within 1 year 74,091 12,237 Expiring between 1 and 2 years 2,171 81,465 Expiring between 2 and 5 years 118,082 51,250 194,344 144,952

Of the borrowing facilities, £28,300,000 (2006: £1,300,000) is linked to certain properties and can only be utilised against future development of those properties.

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22 FINANCIAL INSTRUMENTS continued

Interest rate risk of financial liabilities — borrowings 2007 2006 Weighted Weighted average fixed average fixed interest rate Principal interest rate Principal % £000 % £000 Floating interest rate 3,000 28,922 Fixed interest rate 7.02% 122,241 6.10% 68,843 125,241 97,765

Floating interest rates for liabilities are:

2007 2006 Principal Principal £000 £000 LIBOR +1.25% 3,000 3,000 LIBOR +1.50% — 25,922 3,000 28,922

Financial assets The financial assets of the Group at 31 December 2007 and 31 December 2006 were all floating rate sterling assets and earned interest based on the LIBID rate prevailing at the time of deposit for the maturity profile required.

Financial instruments by category and its fair value 2007 2006 Book value Fair value Book value Fair value Assets at Assets at Assets at Assets at fair value fair value fair value fair value through the through the through the through the Loans and income Loans and income Loans and income Loans and income receivables statement receivables statement receivables statement receivables statement Group £000 £000 £000 £000 £000 £000 £000 £000 Assets Derivative financial instruments — 424 — 424 — 675 — 675 Trade receivables 21,242 — 21,242 — 42,044 — 42,044 — Cash and cash equivalents 70,068 — 70,068 — 45,928 — 45,928 —

Liabilities Liabilities Liabilities Liabilities at at at at fair value fair value fair value fair value through through through through Other the Other the Other the Other the financial income financial income financial income financial income liabilities statement liabilities statement liabilities statement liabilities statement £000 £000 £000 £000 £000 £000 £000 £000 Liabilities Borrowings: current and non-current (125,241) — (115,288) — (97,765) — (86,331) — Derivative financial instruments — (2,148) — (2,148) ————

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NOTES TO THE FINANCIAL STATEMENTS continued FOR THE YEAR ENDED 31 DECEMBER

22 FINANCIAL INSTRUMENTS continued

2007 2006 Book value Fair value Book value Fair value Assets at Assets at Assets at Assets at fair value fair value fair value fair value through the through the through the through the Loans and income Loans and income Loans and income Loans and income receivables statement receivables statement receivables statement receivables statement Company £000 £000 £000 £000 £000 £000 £000 £000 Assets Derivative financial instruments — 424 — 424 — 675 — 675 Cash and cash equivalents 20,063 — 20,063 — 2,548 — 2,548 —

Liabilities Liabilities Liabilities Liabilities at at at at fair value fair value fair value fair value through through through through Other the Other the Other the Other the financial income financial income financial income financial income liabilities statement liabilities statement liabilities statement liabilities statement £000 £000 £000 £000 £000 £000 £000 £000 Liabilities Borrowings: current and non-current ———— (12,476) — (12,476) — Derivative financial instruments — (2,148) — (2,148) —— —

Current assets and liabilities are held at fair value, with trade receivables being net of provision for impairment.

All non-current borrowings are discounted at 5.8%.

At the 2007 and 2006 year ends, the Group did not have any held for trading or available for sale financial assets or liabilities.

23 RETIREMENT BENEFIT OBLIGATIONS

Defined Contribution Pension Schemes The Group operates defined contribution pension schemes in respect of all employees who joined after the privatisation date in 1994. Contributions to defined contribution schemes in the year amounted to £1,229,000 (2006: £1,400,000).

Defined Benefit Obligations The balance sheet amounts in respect of retirement benefit obligations are: 2007 2006 £000 £000 Industry-wide schemes 48,893 94,469 Blenkinsopp 835 1,299 Concessionary fuel 23,443 24,727 73,171 120,495

Contributions to defined benefit schemes during the year amounted to £20,118,000 (2006: £20,271,000). At 31 December 2007, December contributions of £854,000 remained unpaid (2006: £nil).

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23 RETIREMENT BENEFIT OBLIGATIONS continued

Industry-wide schemes The Group operates pension schemes providing benefits based on final pensionable pay. The majority of the employees within defined benefit schemes are members of industry wide schemes, being either the Industry Wide Coal Staff Superannuation Scheme (“IWCSSS”) or the Industry Wide Mineworkers’ Pension Scheme (“IWMPS”), both of which commenced on privatisation following the Coal Industry Act 1994. The pension schemes’ values are reviewed annually by qualified independent actuaries for the purposes of IAS 19 and the preparation of the financial statements. The assumptions which usually have the most significant effect on the results of the valuation are the discount rate, which is based on bond yields, and the rates of increases in salaries and pensions. The main assumptions underlying the valuations of the UK COAL sections of each scheme were as follows:

2007 2006 Discount rate 5.80% p.a. 5.10% p.a. Rate of return on investments 6.70% p.a. 6.70% p.a. Rate of salary increases 3.30% p.a. 3.10% p.a. Rate of price inflation 3.30% p.a. 3.10% p.a. Rate of return on equities 7.00% p.a. 7.00% p.a. Rate of return on debt 5.80% p.a. 5.10% p.a. Rate of cash commutation 22.50% p.a. 22.50% p.a.

2007 2006 Longevity at age 60 for current pensioners (years) IWMPS and IWCSSS — Men 20.4–22.3 19.4–22.3 IWCSSS — Women 26.7 26.6 Longevity at age 60 for future pensioners (years) IWMPS and IWCSSS — Men 21.4–22.9 21.0–22.9 IWCSSS — Women 27.2 27.2

IWCSSS pensions in payment are assumed to increase in line with price inflation. For the IWMPS the assumed pension increase depends on the period of service accrual (before April 1997: no increases, 1997 to 2005: in line with price inflation, after April 2005: 1% below price inflation).

The overall expected rate of return on assets is based on a historic view of the yields from equities and the rates prevailing on applicable bonds at the balance sheet date.

The amounts recognised in the consolidated balance sheet are as follows: 2007 2006 2005 2004 2003* £000 £000 £000 £000 £000 Fair value of plan assets 372,188 348,325 301,540 231,744 193,324 Present value of funding obligations (421,081) (442,794) (418,270) (344,925) (296,059) Net liability recognised in the balance sheet (48,893) (94,469) (116,730) (113,181) (102,735)

* The amounts for 2003 are disclosed under FRS 17 as originally reported.

None of the pension schemes owns any shares in the Company.

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NOTES TO THE FINANCIAL STATEMENTS continued FOR THE YEAR ENDED 31 DECEMBER

23 RETIREMENT BENEFIT OBLIGATIONS continued The amounts recognised in the consolidated income statement are: 2007 2006 £000 £000 Current service cost (13,593) (14,185) Interest cost (22,034) (19,905) Expected return on plan assets 22,925 20,577 Effect of curtailment or settlement 2,427 3,025 (10,275) (10,488)

The current service cost is charged to cost of sales, the interest cost less expected return on plan assets is included in administrative expenses, and curtailment or settlement gain is included in non-trading exceptional items. A further gain of £35,733,000 (2006: £12,478,000) has been recognised in the consolidated statement of recognised income and expense in the year. This represents the net effect of experience and actuarial gains and losses on the schemes in the year.

2007 2006 Change in assets £000 £000 Fair value of plan assets at 1 January 348,325 301,540 Expected return on plan assets 22,925 20,577 Actuarial (losses)/gains on assets (237) 9,634 Employer contributions 19,264 20,271 Plan participants’ contributions 3,381 3,837 Benefits paid (8,975) (7,534) Effect of Maltby colliery sale (13,349) — December cash contributions accrued 854 — Fair value of plan assets at 31 December 372,188 348,325

The major categories of the schemes’ assets are as follows: 2007 2006 £000 £000 Equity securities 293,493 288,574 Debt securities 78,695 59,751 372,188 348,325

The actual return on plan assets was £22,688,000 (2006: £30,211,000). 2007 2006 Change in defined benefit obligations £000 £000 Present value of defined benefit obligation at 1 January (442,794) (418,270) Current service cost (13,593) (14,185) Interest cost (22,034) (19,905) Plan participants’ contributions (3,381) (3,837) Curtailment gain 668 3,025 Actuarial gain 35,970 2,844 Benefits paid 8,975 7,534 Effect of Maltby colliery sale 15,108 — Present value of defined benefit obligation at 31 December (421,081) (442,794)

2007 2006 Analysis of the movement of the balance sheet liability £000 £000 1 January (94,469) (116,730) Total amounts recognised in the income statement (10,275) (10,488) Contributions 20,118 20,271 Net actuarial gain 35,733 12,478 31 December (48,893) (94,469)

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23 RETIREMENT BENEFIT OBLIGATIONS continued 2007 2006 Cumulative actuarial gains and losses recognised in equity £000 £000 1 January (11,833) (24,311) Net actuarial gains in the year 35,733 12,478 31 December 23,900 (11,833)

2007 2006 Experience gains and losses £000 £000 Actual return less expected return on schemes’ assets (237) 9,634 Experience losses arising on schemes’ liabilities (1,495) (3,721) Changes in assumptions underlying present value of liabilities 37,465 6,565 Net actuarial gain 35,733 12,478

2007 2006 2005 2004 2003* History of experience gains and losses £000 £000 £000 £000 £000 Actual return less expected return on schemes’ assets (237) 9,634 36,975 10,171 19,694 Percentage of year end scheme assets 0% 3% 12% 4% 10% Experience (losses)/gains arising on schemes’ liabilities (1,495) (3,721) (5,242) (7,074) 5,650 Percentage of the present value of schemes’ liabilities 0% 1% 1% 2% 2%

* The amounts for 2003 are disclosed under FRS 17 as originally reported.

Contributions are determined by a qualified actuary on the basis of triennial valuations, using the projected unit method. The most recent valuations for the purpose of determining contributions were at 31 December 2003. The 2006 valuations are currently in the process of being agreed with the trustees of the schemes.

The contribution expected to be paid to the schemes during the year ending 31 December 2008 is around £20,000,000.

Blenkinsopp Blenkinsopp is a section of the Industry Wide Mineworkers’ scheme covering the pension arrangements of the various companies comprising parts of the former British Coal. Blenkinsopp Collieries Limited was sold by UK COAL in 1998; however, it has since gone into liquidation and the retirement liabilities have reverted to UK COAL. The liability as at 31 December 2007 is £835,000 (2006: £1,299,000) and the amount recognised in the statement of recognised income and expense is £464,000 (2006: £nil). Cumulative actuarial gains recognised in equity for the Blenkinsopp section were £464,000 (2006: £nil).

Concessionary fuel The Group operates a concessionary fuel arrangement. Provision for concessionary fuel is made to cover the future retirement costs for those employees who currently benefit as part of their regular terms of employment, or former employees who are benefiting in retirement. This relates only to employees who transferred under privatisation. A 1% annual allowance is made to reduce the provision for employees who are expected to be unable to take the benefits.

An actuarial valuation was carried out by an independent actuary at 31 December 2007. The major assumptions used by the actuary were:

2007 2006 Discount rate 5.80% p.a. 5.10% p.a. Inflation assumption 3.30% p.a. 3.10% p.a.

The amounts recognised in the balance sheet are as follows: 2007 2006 2005 2004 2003* £000 £000 £000 £000 £000 Net liability recognised in the balance sheet (23,443) (24,727) (24,309) (22,579) (23,444)

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NOTES TO THE FINANCIAL STATEMENTS continued FOR THE YEAR ENDED 31 DECEMBER

23 RETIREMENT BENEFIT OBLIGATIONS continued The amounts recognised in the consolidated income statement are: 2007 2006 £000 £000 Current service cost (424) (392) Interest cost (1,214) (1,138) Effect of curtailment or settlement 946 1,330 (692) (200)

The current service cost is charged to cost of sales, the interest cost is included in administrative expenses, and curtailment or settlement gain is included in non-trading exceptional items. A further gain of £1,280,000 (2006: loss of £855,000) has been recognised in the consolidated statement of recognised income and expense in the year. This represents the net effect of experience and actuarial gains and losses on the scheme in the year.

2007 2006 Analysis of the movement of the balance sheet liability £000 £000 Concessionary Fuel reserve at 1 January (24,727) (24,309) Current service cost (424) (392) Benefits paid to former employees during the year 696 637 Interest cost (1,214) (1,138) Actuarial gain/(loss) 1,280 (855) Effect of curtailment or settlement 946 1,330 Concessionary Fuel reserve at 31 December (23,443) (24,727)

2007 2006 Cumulative actuarial gains and losses recognised in equity £000 £000 1 January (2,543) (1,688) Net actuarial gain/(loss) in the year 1,280 (855) 31 December (1,263) (2,543)

2007 2006 Experience gains and losses £000 £000 Experience gains on Concessionary Fuel reserve 444 1,258 Changes in assumptions underlying present value of liabilities 836 (2,113) Total amount recognised in statement of income and expense 1,280 (855)

2007 2006 2005 2004 2003* History of experience gains and losses £000 £000 £000 £000 £000 Experience gains on Concessionary Fuel reserve 444 1,258 — 3,186 4,297 Percentage of Concessionary Fuel reserve 2% 5% 0% 14% 17%

* The amounts for 2003 are disclosed under FRS 17 as originally reported.

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24 CALLED UP SHARE CAPITAL

2007 2006 Number of Number of Group and Company shares £000 shares £000 Authorised share capital At 1 January and 31 December Ordinary shares of 1 pence each 250,000,000 2,500 250,000,000 2,500 Issued and fully paid Ordinary shares of 1 pence each At 1 January 156,651,482 1,566 148,508,167 1,485 Issued during the year 476,738 5 8,143,315 81 At 31 December 157,128,220 1,571 156,651,482 1,566

265,608 ordinary shares were issued at par on 22 June 2007 and 211,130 ordinary shares on 10 October 2007, to fulfil awards crystallised under the Long Term Incentive Plan (“LTIP”).

Long Term Incentive Plan A Long Term Incentive Plan was introduced in 2000 for Executive Directors and Senior Executives. Details of the plan are set out in the Directors’ Remuneration Report. During the year, 476,738 (2006: 600,877) shares were reserved against the award of shares under the LTIP. The shares are awarded at an exercise price of £nil. The shares outstanding at 31 December 2007 are as follows:

2007 2006 Number Number Exercisable from 2008 124,527 124,527 Exercisable from 2009 377,221 600,877 Exercisable from 2010 292,083 —

The awards granted in the year were valued using a Monte Carlo simulation utilising Black-Scholes methodology as follows:

2007 2007 2006 2006 Grant date 18 September 2 March 3 July 6 March Share price at grant date £5.03 £4.95 £1.69 £1.53 Exercise price £nil £nil £nil £nil Number of employees 10 17 1 15 Shares under option 144,406 241,411 65,060 535,817 Vesting period (years) 3333 Expected volatility 33.5% 33.5% 30% 32.5% Option life (years) 3333 Expected life (years) 2.23 2.84 2.50 2.83 Risk-free rate 4.97% 5.05% 4.80% 4.30% Possibility of ceasing employment before vesting 5% p.a. 5% p.a. 5% p.a. 5% p.a. Fair value per option £2.83 £2.91 £0.50 £0.43

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NOTES TO THE FINANCIAL STATEMENTS continued FOR THE YEAR ENDED 31 DECEMBER

24 CALLED UP SHARE CAPITAL continued

The expected volatility is based on historical volatility over the last nine years. The expected life is the average expected period to exercise. The risk-free rate of return is the yield on zero-coupon UK Government bonds of a term consistent with the assumed option life. A reconciliation of option movements over the year to 31 December 2007 is shown below:

2007 2006 Number Number Outstanding at 1 January 1,191,186 1,377,833 Granted 385,817 600,877 Exercised* (458,668) (625,294) Expired (324,504) (162,230) Outstanding at 31 December 793,831 1,191,186

* The total number of shares awarded to participants of the LTIP included an adjustment of 18,070 shares for dividend reinvestment in line with the rules of the scheme. Following this adjustment the gross total of shares exercised and issued was 403,887.

Bonus Share Matching Plan A Bonus Share Matching Plan for Executive Directors and Senior Executives was introduced in 2000. It is no longer operated by the Group. A reconciliation of option movements over the year to 31 December 2007 is shown below:

2007 2006 Number Number Outstanding at 1 January 22,322 124,242 Expired — (5,787) Interests matured (22,322) (96,133) Outstanding at 31 December — 22,322

The total charge for the year relating to employee share based payment plans was £284,000 (2006: £198,000) all of which related to equity settled share based payment transactions.

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25 STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

Share Other Ordinary premium reserves Retained Total shares account (note 26) earnings equity Group £000 £000 £000 £000 £000 At 1 January 2006 1,485 1,771 181,965 (35,233) 149,988 New shares issued 81 28,985 — — 29,066 Profit in the year — — — 17,492 17,492 Actuarial gains on post-retirement benefits — — — 11,623 11,623 Accrual for long term incentive plan liabilities — — — 198 198 Movement on deferred tax asset in relation to retirement benefit liabilities — — — 35,752 35,752 Fair value gain on revaluation of Investment Properties — — 71,674 (71,674) — At 31 December 2006 1,566 30,756 253,639 (41,842) 244,119 New shares issued 5 — — — 5 Profit in the year — — — 94,023 94,023 Actuarial gains on post-retirement benefits — — — 37,477 37,477 Accrual for long term incentive plan liabilities — — — 284 284 Movement on deferred tax asset in relation to retirement benefit liabilities — — — (24,395) (24,395) Disposal of Investment Properties — — (6,049) 6,049 — Revaluation of Investment Properties — — 6,733 — 6,733 Fair value gain on revaluation of Investment Properties — — 66,799 (66,799) — At 31 December 2007 1,571 30,756 321,122 4,797 358,246

Retained earnings include a cumulative actuarial gain on the Group’s retirement benefit obligations of £23,101,000 (2006: loss of £14,376,000).

Share Other Ordinary premium reserves Retained shares account (note 26) earnings Total Company £000 £000 £000 £000 £000 At 1 January 2006 1,485 1,771 257 410,689 414,202 New shares issued 81 28,985 — — 29,066 Loss in the year — — — (1,842) (1,842) Accrual for long term incentive plan liabilities — — — 198 198 At 31 December 2006 1,566 30,756 257 409,045 441,624 New shares issued 5 — — — 5 Loss in the year — — — (1,867) (1,867) Accrual for long term incentive plan liabilities — — — 284 284 At 31 December 2007 1,571 30,756 257 407,462 440,046

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NOTES TO THE FINANCIAL STATEMENTS continued FOR THE YEAR ENDED 31 DECEMBER

26 OTHER RESERVES

Capital Fair Revaluation redemption value reserve reserve reserve Total Group £000 £000 £000 £000 At 1 January 2007 141,040 257 112,342 253,639 Fair value gain on recognition of Investment Properties 6,733 — 66,799 73,532 Disposal of Investment Properties (4,759) — (1,290) (6,049) At 31 December 2007 143,014 257 177,851 321,122

Capital Fair Revaluation redemption value reserve reserve reserve Total Company £000 £000 £000 £000 At 1 January 2006, 31 December 2006 and 31 December 2007 — 257 — 257

None of the other reserves balances at either the 2006 or 2007 year ends represented realised reserves.

27 CAPITAL AND OTHER FINANCIAL COMMITMENTS

2007 2006 Group £000 £000 Operating property, plant and equipment 12,200 11,379 Investment Property 2,100 — 14,300 11,379

28 OPERATING LEASE ARRANGEMENTS

Group (i) As lessor Future minimum lease payments receivable to the Group under non-cancellable operating leases, all of which relate to property rentals, are as follows: 2007 2006 £000 £000 Lease expiring: Within one year 5,444 4,243 Later than one year and less than five years 9,063 7,536 After five years 19,055 19,332 33,562 31,111

(ii) As lessee Future minimum lease payments payable by the Group under non-cancellable operating leases, all of which relate to rights over land usage, are as follows: 2007 2006 £000 £000 Lease expiring: Within one year 127 170 Later than one year and less than five years 124 145 After five years 119 138 370 453

The Company had no interest in any operating leases (2006: £nil).

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29 SALE OF BUSINESS

On 26 February 2007, Maltby colliery was sold to Hargreaves Services PLC (Hargreaves) with a transfer of operational assets and liabilities, together with the workforce. Hargreaves was the second largest customer for Maltby. The consideration of £21,500,000 resulted in a profit on sale of £8,481,000.

30 CONTINGENT LIABILITIES

Guarantees have been given in the normal course of business for performance bonds of £2,558,000 (2006: £2,500,000) to cover the performance of work under a number of Group contracts.

The Company is liable for the pension schemes contributions and deficits on the Industry Wide Schemes.

There are no other material contingent liabilities at 31 December 2007 for which provision has not been made in these financial statements.

31 RELATED PARTY TRANSACTIONS

Group During the year, the Group made various payments to industry-wide defined benefit pension schemes. Details of these transactions are set out in note 23 to the financial statements.

Key management compensation is disclosed in note 5.

Transactions with joint venture The following transactions were carried out with the joint venture, Coal4Energy Limited: 2007 2006 £000 £000 Sales of goods and services to related parties: — Coal 29,114 24,128 — Services 516 293 — Finance costs — 3 29,630 24,424 Purchases of goods and services from related parties: — Coal 24 244 — Finance costs 23 — 47 244

Sales and purchases to and from Coal4Energy Limited were carried out on commercial terms and conditions and at market prices.

Year-end balance arising from sales of goods and services was £2,332,000 (2006: £3,999,000) owed by the joint venture, and the year-end balance arising from purchase of goods and services was £nil (2006: £nil).

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NOTES TO THE FINANCIAL STATEMENTS continued FOR THE YEAR ENDED 31 DECEMBER

31 RELATED PARTY TRANSACTIONS continued

Company The Group manages its financing arrangements centrally. Amounts are transferred within the Group, dependent on the operational needs of individual companies. The Directors do not consider it meaningful to set out the gross amounts of transfers between individual companies. Details of the Company’s cash and indebtedness are set out in notes 18 and 19 and amounts due from or owed to subsidiary undertakings are set out in notes 17 and 20.

The Company received vehicle hire services from Mining Services Limited of £6,000 (2006: £26,000).

32 GOVERNMENT GRANTS

The Group has received support from the Government, in the form of Coal Investment Aid, in order to provide assistance towards investment in the industry. Details of how this Aid is treated are set out in note 1 to the financial statements. Amounts credited to the income statement are as follows:

2007 2006 £000 £000 Revenue Aid — 4,885 Release of deferred income 2,926 3,007

The Group has received £457,200 from the East Midlands Development Agency towards the building of one of its business parks. No further receipts are expected in 2008. The full amount has been treated as deferred income and will be released to income in line with depreciation on the buildings.

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SHAREHOLDER NOTES

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SHAREHOLDER NOTES

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PRODUCTION FROM SURFACE MINE SITES MORE THAN DOUBLED IN 2007 TO 1.5 MILLION TONNES.

OUR LOCATIONS BRITAIN’S BIGGEST PRODUCER OF COAL, UK COAL SUPPLIES AROUND 5% OF THE COUNTRY’S ENERGY NEEDS FOR ELECTRICITY GENERATION AND EMPLOYS 3,100 PEOPLE WITHIN THE GROUP.

MININGANDPOWER

DEEP MINING The Group operates 4 deep mines, located in Central and Northern England. The Group has reserves and resources of over 100 million tonnes at these mines.

HARWORTH ESTATES

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CONTENTS

UK COAL PLC Harworth Park Blyth Road Harworth Doncaster South Yorkshire DN11 8DB

t: +44 (0)1302 751751 f: +44 (0)1302 752420 [email protected]

www.ukcoal.com

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