Aligning our business for future growth A u g e a n P L C A n n u a l R e p o r t 2 0 1 1 Augean PLC Annual Report 2011 Review of the year Highlights The complete waste solution About us Chairman’s statement Business review Corporate governance Board of directors Corporate governance Directors’ report Directors’ remuneration report Financial statements Independent auditor’s report Consolidated statement of comprehensive income Statements of financial position Statements of cash flows Statements of changes in shareholders’ equity 01 02 04 06 08 22 24 26 29 32 34 35 36 37 Notes to the financial statements 38 Guidance for shareholders 73 Notice of annual general meeting 75 Advisers and company information IBC Augean PLC is a market‑leading, UK‑based specialist waste and resource management group focused on providing a broad range of services to the hazardous waste sector. The group’s comprehensive management service covers the complete solution to the final disposal of hazardous and difficult waste streams. Our service is underpinned by quality assets and skilled people, able to respond to a broad range of customer needs. Turn to pages 2-3 to learn about our fully integrated waste solution. www.augeanplc.com Visit us online: www.augeanplc.com Augean PLC Annual Report 2011 01 Revenue £37.5m* (2010: £34.1m) EBITA £6.5m (2010: £5.6m) Earnings per share 1.59p (2010: 0.42p) Profit before tax £1.4m (2010: £0.5m) Net debt £4.0m (2010: £3.9m) * including landfill tax Financial highlights – Revenue including landfill tax: increase of 10% to £37.5m (2010: £34.1m) – Revenue excluding landfill tax: increase of 8% to £31.3m (2010: £29.0m) – EBITDA increased to £6.5m (2010: £5.6m) – Adjusted profit before tax £1.1m (2010: £0.4m) – Profit before tax £1.4m (2010: £0.5m) – Earnings per share 1.59p (2010: 0.42p) – Cash flow from operations £4.7m (2010: £5.8m) – Net debt stable at £3.968m (2010: £3.890m) Operational highlights – Increased sales volumes and revenues in both operating divisions – Significant increase in volumes treated at remediation centres – – – Improvement to operating margins Restructuring of Cannock site and transfer of assets to Port Clarence Waste Recovery Park Capital expenditure focused on landfill cell engineering and asset development – Positive start to trading in 2012 Strategic developments – Divisional reorganisation completed to align activities more closely with key markets – Strategic opportunities entering delivery phase – – Low Level Waste (LLW) planning permission upheld and first consignments received Framework agreement in place to deliver LLW from licensed nuclear sites – Planning permission granted for mineral extraction at Cook’s Hole – Extended activities in offshore waste management – Group restructuring underway to enable a reduction of share capital www.augeanplc.com i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s 02 Augean PLC Annual Report 2011 The complete waste solution Offering a fully integrated waste management solution. At Augean we specialise in difficult to handle, specialist waste streams, using a national network. Our focus on an integrated waste management system aims to protect our environment and provide solutions for our customers. Logistics. Through our own fleet of vehicles we are able to collect and transport waste safely to its required destination. Transfer activities allow us the flexibility to handle an extremely wide range of waste types and enables us to maximise our levels of service both in terms of logistical efficiency and by procuring the best available solution for the waste streams not suitable for our own treatment or recycling processes. We have a dedicated network of permitted hazardous waste sites across the UK, providing customers with access to a range of waste management services. Landfill and treatment sites www.augeanplc.com Augean PLC Annual Report 2011 03 Landfill. Landfill remains an appropriate disposal solution for a range of hazardous and non-hazardous wastes and the integration of our treatment and landfill operations provides a complete solution. Hazardous and non-hazardous landfill capacity allows disposal of soils, building rubble, asbestos, incinerator ashes and treated materials. Integrated waste management solution. Recovery and recycling. In addition to treatment and transfer activities we are able to provide a diverse range of recycling and recovery options for hazardous wastes. These include waste oil recovered from sludges and oil/water mixes; a range of materials recovered from bins and containers; solvent recycling and toll recovery; and remediation of soils and aggregates. i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e i F n a n c a i Treatment. Legislation aims to reduce our reliance on landfill and this complements our policy of sustainable waste management. Our treatment division is able to offer specialist services for a broad range of hazardous wastes which are not suitable for direct disposal to landfill, using treatment processes including thermal desorption, stabilisation, neutralisation, physical and chemical separation. l s t a t e m e n t s Committed to running a responsible business... We recognise the importance of CSR. A key theme of our approach is promoting a positive relationship with the environment. Learn more in our CSR section Turn to page 18 www.augeanplc.com 04 Augean PLC Annual Report 2011 About us Transforming the business by aligning our divisions with future markets. 2011 has been a transformational year for Augean. We have successfully implemented a reorganisation of our operating divisions, as shown in the chart. The new divisions began operations on 1 January 2012. Read about our strategy in more detail Turn to page 10 www.augeanplc.com Landfill sites and other land assets Cash generation Total waste management solutions Revenue growth Waste type Soils Asbestos Ash VLLW & LLW Minerals Markets Chemicals Packaged wastes WEEE Remediation companies Construction companies Incinirators Site licence companies (SLCs) SMEs Waste companies Assets ENRMF Thornhaugh Port Clarence Laboratory Services Cooks Hole Worcester Hinckley Rochdale Cannock Logistics Augean PLC Annual Report 2011 05 Number of customer accounts: 790 (2010: 500) How are we reorganising our business? The previous two operating divisions, Landfill and Treatment, have been reorganised into three, each with the necessary assets and resources to focus on driving our growth through the markets they serve. Each division has its own profit and cashflow targets for 2012. Market update Volumes of waste are flat – Contraction of 2008/09 slowed but continued into 2010 – – – 8% reduction in total hazardous landfill tonnage from 2009 to 2010* Overall market trends show limited growth in the medium term Increased exportation of waste into Europe Price pressures continue – Gradual reduction of market price for larger contracts Waste hierarchy development – Growth in recycling & recovery – Trend towards waste as a resource New technologies – Consistent development of small-scale recovery innovations * (Source: Environment Agency) i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s www.augeanplc.com Onshore and offshore oil-based waste streams. Development platform Drill cuttings Rig wastes Oils slops Oil/water mixes Oil sludge Filters Offshore service companies Decommissioning companies Refineries Garages Oil treatment Waste network Waste Recovery Park Avonmouth Paisley Industrial Services Aberdeen 06 Augean PLC Annual Report 2011 Chairman’s statement In summary We have had a year of steady development, during which, despite market challenges, we achieved good positive forward momentum. Net revenue excluding landfill tax for the year increased to £31.3m (2010: £29.0m). The year under review has been characterised by decent progress and although Ogden Nash may have once said that “progress might have been alright once, but it has gone on too long” at Augean we don’t subscribe to that maxim. We have had a year of steady development, during which, despite market challenges, we achieved good positive forward momentum both in trading and strategic terms, whilst avoiding banana skins! In 2011 in the core business we were able to build on the gains made in the later half of 2010 and improve year on year revenues and operating margins. However, market conditions remained challenging and revenue growth in the second half, while positive, was impacted slightly as underlying economic conditions curtailed waste movements from producers. Net revenue excluding landfill tax for the year increased to £31.3m (2010: £29.0m). Operating profit before exceptional costs was in line with our expectations at £1.6m (2010: £0.8m) and, following a net benefit from exceptional items, this allowed us to deliver total profit attributable to our shareholders of £1.6m (2010: £0.4m). Operating cashflows of £4.7m (2010: £5.8m) allowed continued capital investment without causing an increase in net debt, which remained consistent throughout the year. In my 2010 statement I expressed confidence that the team and resources developed at Augean would support a return to sustainable profitability during this year and I believe that these results do represent a further positive step, but we recognise there remains a lot of work to be done. We have also continued to focus attention on the improvement of Health & Safety and Compliance performance during the year. Accident reduction initiatives and improvements to near miss reporting have been delivered alongside rolling internal audits of compliance performance. It was particularly pleasing to note that the business delivered upper quartile performance in the Environment Agency’s annual report for those waste companies under account management. In 2012 we look forward to the next stage in the strategic evolution of the Group. Following a sustained effort we now have all necessary permissions in place to allow the disposal of Low Level Waste at our East Northants Resource Management Facility and expect to see the commercial benefits from this during the year ahead. We also have new business opportunities with our partner Scomi Oiltools in the North Sea which dovetails with our disposal capabilities and we are pursuing other opportunities to develop the treatment capabilities of the Group. I am very excited at the potential of all of the above developments which I believe will prove to be of significant value to the Group. Add to that the minerals exploitation at Cook’s Hole and it promises to be another busy year. www.augeanplc.com Augean PLC Annual Report 2011 07 The team at Augean have worked with diligence and creativity to position the business for excellent value development which I am confident we have the skills required to deliver. i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e The team at Augean have worked with diligence and creativity to position the business for excellent value development which I am confident we have the skills required to deliver; I would like to thank them for their efforts. With stable market conditions I would expect to see a material improvement in performance in 2012. Lastly, when I took the Chair at Augean I was of the belief that the business and the team would benefit if an industry veteran took the role. Having recruited and then worked with Jim Meredith for over a year I’m confident he will continue the progress we have begun. So with a slightly heavy heart I will be handing over the Chair to Jim at the AGM in June (although staying on the Board to continue to bang the drum for progress!). Roger McDowell Non‑executive chairman 27 March 2012 i F n a n c a i l s t a t e m e n t s Strategy goals Share price appreciation and dividends What we have achieved 2012 2013 – Quality customer service – Improve asset utilisation – Energy delivery – Offshore treatment delivery – Offshore capabilities – Develop new capabilities – – LLW delivery Realign assets and people with markets – Minerals delivery – Capital reduction – Revenue growth with direct customers – Maiden dividend payment www.augeanplc.com 08 Augean PLC Annual Report 2011 Business review As in previous years the Group continued to develop several strategic opportunities throughout 2011, all of which are expected to improve profitability. Introduction The Group experienced a return to stability in its core hazardous waste markets during 2011 and opportunities emerged to generate some growth in the core business. Whilst the market recovery was not as significant as we had hoped we were still able to deliver an increase to net revenues of 7.9% and an increase to total operating profit of £1.0m from 2010’s results. The Landfill division delivered improvements to operating margins through changing the mix of its activities, including a greater use of the remediation centres at Port Clarence and East Northants Resource Management Facility (ENRMF), winning work on large projects and absorbing the processing of incinerator ash wastes. The Treatment division delivered stable trading in a competitive marketplace, making use of the Group’s established sales infrastructure. Significant restructuring was also undertaken, with the closure of one site and an evolution in the use of several others to reflect market requirements. The final quarter of the year also saw a reorganisation of the operating divisions, creating three units from the previous two (Landfill and Treatment). This change will be effective from January 2012 and is expected to align activities more closely with the Group’s core markets and provide a platform for further growth. The new divisions are described in the Strategy section below. The Group continued to demonstrate its ability to generate operating cash flows during the year, allowing us to fund all maintenance capex and capital projects, particularly at the landfill sites. This has not required any associated increase in net debt. The £10m banking facility with HSBC was used to support working capital needs and has subsequently been renewed for a further three year term. The board is grateful, as ever, for the valuable contribution made by our employees during the year, particularly in demonstrating their ability to solve challenging technical issues and provide a high quality service to our customers. The Group employed an average of 206 staff (2010: 218) over the period. As in previous years the Group continued to develop several strategic opportunities throughout 2011, all of which are expected to improve profitability and the return available from the capital employed. Significant work was undertaken by the management teams during the year to bring these opportunities into a delivery phase and we were particularly pleased to secure planning permission to dispose of Low Level Waste (LLW) at ENRMF and begin receiving the first consignments of waste. In summary The Group experienced a return to stability in its core hazardous waste markets during 2011 and opportunities emerged to generate some growth in the core business. The £10m banking facility with HSBC was used to support working capital needs and has subsequently been renewed for a further three year term. A Group reorganisation was undertaken during Q4 and from January 2012 sales and operations have been delivered through three divisions, (Land Resources, Waste Networks and Oil & Gas Services). www.augeanplc.com Augean PLC Annual Report 2011 09 The hazardous waste market Data published by the Environment Agency during 2011 on the production of hazardous waste indicated that the significant market decline seen in 2009 had stabilised, although certain sectors continued to lose volumes and total volumes to hazardous landfill declined by 8% from December 2009 to December 2010 (Source: Environment Agency: www.environmentagency.gov.uk). The market in 2011 was characterised by a period of relative stability, with limited growth. The market remained competitive and price sensitive, with sectors such as asbestos disposal and contaminated oils continuing to see softening of prices as capacity remained available in the market. Despite the challenging trading conditions the Group was able to grow its share in the hazardous landfill market and generate revenue and operating margin growth from treatment operations. From a technical perspective the market has continued the previous trend towards more sustainable methods of managing waste and the development of treatment, recycling and recovery remains the key focus for future waste management activities. A range of technologies are available to waste producers to achieve recycling status for their waste, rather than rely on the historic propensity towards disposal. The implementation of the Waste Framework Directive and the development of the hazardous waste National Policy Statement (NPS) are both expected to reinforce this trend. i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e Low Level Waste There is currently no readily available solution for wastes containing small amounts of low level radiation, LLW, that result from the nuclear decommissioning process and other sources such as science and research facilities, hospitals and manufacturing, as there are very few sites that can accept them. Consequently, these wastes accumulate at the places where they originate or are sent to the Low Level Waste Repository (LLWR) near the village of Drigg in Cumbria, which is designed for wastes with higher levels of radioactivity and has limited capacity. ENRMF is regarded as a highly suitable facility for LLW because of the way the site is engineered and because of the specialist experience of Augean staff in handling and disposing of difficult to manage wastes. The site will only accept wastes at the lower end of the scale for LLW, with levels of radioactivity below 200 Bq/g*. At this level no special measures are necessary to handle the waste and in the unlikely event of an accident the risks are negligible. * Bq/g is becquerels per gram, where Bq measures the radioactivity of a substance. More information on levels of radioactivity expected at ENRMF can be found at www.augeanplc.com/llw-proposal. i F n a n c a i l s t a t e m e n t s www.augeanplc.com 10 Augean PLC Annual Report 2011 Business review Despite the challenging trading conditions the Group was able to grow its share in the hazardous landfill market. The hazardous waste market continued The Group continues to take a strong role in the development of regulation and policy for hazardous waste. By engaging with government departments, local authorities and the regulators, we promote the industry viewpoint and modernisation of the sector, seeking to establish a positive regulatory and policy framework for the business. During 2011 representatives from the Group took a high profile role in the development of the Hazardous Waste NPS, directly engaging with government departments and giving evidence at the Parliamentary Select Committee inquiry. The Strategy for Hazardous Waste Management promotes the development of a modern hazardous waste management sector based on the waste hierarchy. The Strategy has a strong emphasis on investment and development of new infrastructure for hazardous waste treatment and recovery, in particular for organic waste. In 2011 this was underpinned by the implementation in England and Wales of the Waste Framework Directive and the Hazardous Waste Hierarchy Guidance. Anticipating the direction of policy, the Augean business model, developed over the last four to five years, is strongly aligned with the Strategy and the associated guidance. The establishment of stabilisation, recovery by thermal desorption and soil treatment and recycling centres (‘remediation centres’) are supported by, and contribute significantly to, this critical policy initiative. The final publication of the Hazardous Waste NPS in 2012 is anticipated to demonstrate the continuing need for the portfolio of facilities and services developed by Augean and the Group is therefore well positioned to take full advantage of the policy as the market responds to the new requirements. Whilst the hazardous waste market is expected to continue its evolution during 2012 once the NPS has been published, further significant legislative developments are not expected in the near term. Strategy The Group remains focused on the management of specialist wastes, usually of a hazardous nature and often in niche markets, using proven technology to fully utilise the Group’s assets and enhance the return on capital employed. Investment continued during 2011 in the infrastructure and assets required to operate in the waste management sector, based on strict criteria around the expected returns on capital invested. Divisional reorganisation The board reported during 2011 that reshaping of the Group’s core business divisions in response to emerging market opportunities would take place during the year as we continued the alignment of key services with market needs. A Group reorganisation was undertaken during Q4 and from January 2012 sales and operations have been delivered through three divisions, (Land Resources, Waste Networks and Oil & Gas Services), utilising the established asset platform and business infrastructure to focus on core business growth within and beyond existing business sectors. Each division is described below. Land Resources Within the Land Resources division each opportunity is derived from the effective utilisation of the available land bank, either through the existing landfill assets, or the development of new land uses. This includes the use of the remediation centres at ENRMF and Port Clarence sites to treat and recycle materials rather than dispose directly to landfill. Land use opportunities are also being unlocked by the Group in the development of renewable energy and mineral extraction at Cook’s Hole, whilst delivery of LLW activities fit naturally with the existing skills and assets of the division. www.augeanplc.com Augean PLC Annual Report 2011 11 During 2010 four strategic growth areas were identified, namely: Low Level Waste; Energy; Offshore; and Minerals. These opportunities are now at varying stages of development and delivery. Waste Network The Waste Network division holds significant strategic value for the Group, providing a broad range of waste management solutions to our customers, supported by a national network of transfer stations. The division has the sales and operational capability to deal with a range of hazardous wastes ensuring that each is transferred to the most appropriate final disposal route, either within the Group or with third party partners. The key objective of the division is growth in sales and market share, improving profitability for the Group. Oil & Gas Services The Oil & Gas Services division has expertise in the treatment and disposal of various chemicals and oil-based wastes, including those generated in the offshore oil & gas sector. The division continues to focus on expanding its customer base to offer services which will allow it to fully utilise existing assets and provide thermal, biological and mechanical treatment solutions for domestic and offshore waste streams. The key objectives will be process capacity utilisation and development of technology-led waste management solutions for the evolving oil, gas and offshore markets. Given the focus of the Group, and the efforts to align with the regulatory framework, strategy has continued to evolve in response to new market information and emerging opportunities, aiming to expand from the core business. During 2010 four strategic growth areas were identified, namely: LLW; Energy; Offshore; and Minerals. These opportunities are now at varying stages of development and delivery, building on the existing core business, as set out below. i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e the Augean Waste Network Our integrated network allows us the flexibility to handle an extremely wide range of waste types and enables us to maximise our levels of service both in terms of logistical efficiency and by procuring the best available solution for the waste streams not suitable for treatment or recycling processes. Our transfer facilities allow for smaller quantities of waste to be collected and stored at the Augean site nearest to the customer prior to being sorted and segregated for onward transfer to an Augean processing site or approved third party facility. The transfer routes used by our division encompass all the technologies currently available in the UK and our compliance teams ensure that each third party facility is rigorously audited to deliver compliance with all relevant legislation. i F n a n c a i l s t a t e m e n t s www.augeanplc.com 12 Augean PLC Annual Report 2011 Business review During 2012 the Group will focus on developing the commercial market for LLW disposal and to do so have engaged with a range of potential customers. www.augeanplc.com Strategy continued Strategic opportunities continued Following a protracted planning and legal process, the Group implemented its planning permission to dispose of LLW at its ENRMF site and commenced the receipt of consignments of waste during December 2011. This was followed by a further legal challenge to the planning permission which was heard in the Court of Appeal during January 2012, resulting in rejection of the appeal, refusal of access to further courts and confirmation that the planning permission was legally granted by the Secretary of State for Communities and Local Government. Whilst it remains possible that an appeal could be launched in the Supreme Court, the board has taken the view that following several unsuccessful appeals against the permission the legal basis to dispose of LLW at ENRMF is now well established and commercial operations can begin at the site following successful disposal trials. During 2012 the Group will focus on developing the commercial market for LLW disposal and to do so have engaged with a range of potential customers, who we believe will benefit from the disposal route now available at ENRMF. We are also pleased to announce that Augean South Limited has been confirmed as a supplier of disposal services to Low Level Waste Repository Limited, under a framework agreement which will allow lower activity LLW to be disposed at ENRMF on behalf of existing licensed nuclear site operators. This positions the site as a key part of the infrastructure which will allow the decommissioning of redundant nuclear facilities across the UK. An agency agreement has also been signed with two specialist contractors to further develop access to the new markets. Contracted volumes of waste are expected to be received at the site throughout 2012 but particularly from Q2 onwards, providing the Group with a valuable revenue stream. Additional activities will be required at the site to meet the obligations set out in the environmental permit and planning consent, including ongoing monitoring, which have all been put in place. From 2012 onwards the LLW business will be operated and managed through the Land Resources division. The opportunities anticipated from extraction of up to 3m tonnes of minerals from the Group’s Cook’s Hole site in Northamptonshire took a significant step towards operational delivery during the year following confirmation of planning permission to extract minerals from the site. The Land Resources division has since undertaken a tender process and has appointed a minerals extraction partner under a long term agreement (up to 20 years) which will guarantee certain rent of £175,000 per annum plus royalty income based on volumes extracted. Full scale extraction is expected to commence during Q2 2012. In the offshore arena, the Group has also continued to increase its access to these markets for treatment of hazardous wastes. We have extended our relationship with Scomi Oiltools (Europe) Ltd to provide waste management services to North Sea operators at Aberdeen and embed our position as a provider of waste recycling solutions for offshore drilling waste. The offshore markets continue to present future opportunities for the Oil & Gas division, both in disposal of waste generated during the operational phase of exploration and drilling and also in the future as offshore structures are decommissioned. These opportunities were reaffirmed by the proposals outlined in the 2012 Budget regarding tax relief measures for the decommissioning process. In addition to the developments outlined above the Group is also activity pursuing other opportunities to develop its treatment capabilities and the range of services it makes available to customers. These opportunities are focused on assets which will require minimal investment and can be funded through existing financial resources. The board expects strategic development in response to emerging markets to continue as the Group responds to changes in the waste markets and aligns its key services Augean PLC Annual Report 2011 13 Total throughput for the division during 2011 was driven by an ability to win market share, the capacity to handle a range of wastes and a willingness to support key customers as they undertook large remediation projects. with market needs. Where investment is required to realise strategic opportunities the Group will utilise its existing loan facilities in the first instance, where capacity exists to increase debt. On 2 March 2012 the Group signed a new banking facility agreement with HSBC plc, renewing the previous agreement which was due to expire in November 2012. The new facility is based on commercial terms and covenants similar to those previously in place and will provide access to up to £10m of funding to support the capital needs of the business and the development of strategic opportunities. 2011 divisional review Landfill division Revenue excluding landfill tax and inter-segment sales was £14.8m (2010: £11.7m) from total landfill volumes of 340,383 tonnes (2010: 303,261 tonnes), representing a volume increase of 12% year on year. Hazardous volumes increased from the previous year to 252,477 tonnes (2010: 192,910 tonnes) whilst non-hazardous volumes fell to 87,906 tonnes (2010: 110,351 tonnes). These apparent significant shifts in activity reflected the increasing use of the remediation centres at ENRMF and Port Clarence to provide pre-treatment solutions to hazardous wastes before landfill disposal. These centres treated remediated soils, building rubble, industrial by-products and air pollution control residue incinerator ash (APCR or ‘ash’), handling a total volume of 139,138 hazardous tonnes in the year and trebling volumes from those treated in 2010 (45,145 tonnes). We outlined in the Interim Report 2011 the movement of APCR processing activity from the Cannock site to ENRMF where the necessary resources were put in place during Q1. Whilst small volumes of ash were received into the Port Clarence site the vast majority of the 47,000 tonnes of ash treated by the Group were received into ENRMF. The financial impact of the movement of this waste stream from the Treatment to Landfill divisions can be seen in the segmental results shown in note 2 of the Accounts, on page 46. Hazardous wastes were disposed at an improved average price of £48/tonne (2010: £45/tonne) allowing the overall gross margin of the division to improve by 4% from the previous year. By contrast non-hazardous revenues fell to £17/tonne (2010: £20/tonne) reflecting the competitive nature of this market, which continues to be based on price with limited scope or need for technical solutions. Asbestos disposal prices fell to an average of £38/tonne (2010: £45/tonne) despite a 47% increase in volumes over the previous year to 54,631 tonnes. Total revenues were based on increased average prices of £40/tonne (2010: £36/tonne) following the change in mix towards remediation centres operations. We expect to sustain pricing, and therefore margins, in the medium term through offering appropriate treatment solutions to customers. Total throughput for the division during 2011 was driven by an ability to win market share, the capacity to handle a range of wastes and a willingness to support key customers as they undertook large remediation projects. Project work included the disposal of hazardous waste from rail development projects, supporting the decommissioning of redundant gasworks and treatment of wastes from the brownfield remediation required before the development of new housing estates. To enable the use of the landfill capacity at our three landfill sites planning permission for their operations must be regularly renewed. The renewal process for both the Thornhaugh and ENRMF sites was begun during 2011, requesting extensions to their activities until 2029 and 2026 respectively. Each renewal is expected to conclude during 2012. Operating profit for the division before exceptional items was £3.9m (2010: £3.0m) after charging central costs and overheads. www.augeanplc.com i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s 14 Augean PLC Annual Report 2011 Business review The overall performance of the division during 2011 was split between those sites delivering positive contributions and those where work is ongoing to achieve sustainable profit delivery. 2011 divisional review continued Treatment division Revenue for the division showed a reduction to £16.7m (2010: £18.1m) but this was driven by the transfer of ash revenues out of the Cannock site and into the Landfill division and also the closure of the loss-making Ellesmere Port site in June. After adjusting for these changes, underlying revenue increased by 4.7% from the previous year (2011: £15.6m versus 2010: £14.9m). The second half of the year was also impacted by these operational changes with H2 revenues showing a fall once the Ellesmere activities had ceased (H1: £8.8m; H2: £7.9m). A key feature of the sales activity was the growth in revenues from direct customers, rather than third party waste operators. The mix of direct to third party customers reached a 50/50 share by the end of the year. The overall performance of the division during 2011 was split between those sites delivering positive contributions and those where work is ongoing to achieve sustainable profit delivery. The Ellesmere Port closure was triggered by underperformance over a two year period and no prospect of improvements in the medium term, resulting in 13 redundancies, although certain industrial services assets have been retained to support activities elsewhere in the Group. Restructuring was also undertaken at Avonmouth, leading to a small number of redundancies, delivering positive profit contributions during H2. Activities at the transfer stations at Rochdale, Worcester, Hinckley and the newly established Port Clarence Waste Recovery Park (PCWRP) all delivered positive contributions during the year. The Cannock site was transformed from a processing site to a transfer station following the loss of ash activities and the cost base was reduced to align it with the expected revenues available from the revised customer base. The board approved a decision during the year not to reinstate the tank farm and mixing plant at the site following the safety incident in 2010 and instead transfer the assets to PCWRP. The relevant assets were decommissioned and transported to PCWRP during Q4, where they will contribute to the site’s growing service offering. The Cannock incident remains subject to an ongoing investigation by the Health & Safety Executive and the board remains committed to co-operate fully with this process. The insurance claim for capital reinstatement of the tank farm and mixing plant, and the associated loss of margin following business interruption, was settled with our insurers in September, resulting in a £1.6m payment to offset the additional operating costs incurred to divert waste during the shut down and conversion of activities at Cannock. The profit performance of the division includes a £1.4m contribution from this insurance settlement. The closure of loss-making operations and restructuring during the first half of the year allowed gross margins to improve from 40% in H1 to 45% in H2 but this was not sufficient to recover the earlier losses. The operating result was in line with the previous year at a loss of £2.3m (2010: loss £2.2m) before exceptional items and after charging central costs and overheads. The recent reorganisation of the divisions within the business is expected to allow a keener focus on revenue growth and site utilisation, which remain the key drivers of future profitability, and also promote the changes to performance still required to deliver an acceptable level of return from the capital employed in the treatment sites. www.augeanplc.com Augean PLC Annual Report 2011 15 The recent reorganisation of the divisions within the business is expected to allow a keener focus on revenue growth. Key performance indicators The board and management teams within the Group regularly reviewed the performance of the Group and the two divisions during 2011 using a balanced scorecard of key performance indicators (KPIs). Certain KPIs are set out in the table below, relating to the priority areas of profit generation (through revenue delivery and asset utilisation), compliance with regulations (specifically Environment Agency audit results) and health and safety (monitored through near miss incidents). KPI Net revenues Volumes to landfill Utilisation of site capacity(1) Environment Agency compliance scores(2) Near misses reported(3) Landfill division Treatment division £14.8m £16.7m 340,383 tonnes n/a B 280 n/a 59% B 769 (1) Defined as the total actual throughput of waste at the site in the year compared with the theoretical maximum throughout (2) Defined as the average of Environment Agency audit scores notified during the year on a scale from A to E (3) Shows the total number of incidents recorded which could have resulted in an accident or injury or damage to property i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e Offshore Waste Management By working with our partners we provide supply chain solutions to offshore oil exploration markets. A sophisticated logistics infrastructure is available to manage drill cutting wastes from rig to shore before transportation to our Port Clarence Waste Recovery Park for recycling. Using thermal treatment technology allows oil to be recovered from these wastes, reducing the residues that require landfill disposal. We have also developed new services for the management of liquid wastes, which require treatment prior to final disposal, and are investigating new technologies to recover oil from the original liquids. i F n a n c a i l s t a t e m e n t s www.augeanplc.com 16 Augean PLC Annual Report 2011 Business review Operating profit before exceptional items increased to £1.6m (2010: £0.8m) and profit before tax and exceptional items to £1.1m (2010: £0.4m), slightly ahead of revised market expectations of £1.0m. Financial review Trading Net revenue excluding landfill tax for the year ended 31 December 2011 increased by 7.9% to £31.3m (2010: £29.0m). With the inclusion of landfill tax charged to customers, on which the Group makes no margin, of £6.2m (2010: £5.1m), total Group revenue rose by 10% to £37.5m (2010: £34.1m). Operating profit and exceptional items Operating profit before exceptional items increased to £1.6m (2010: £0.8m) and profit before tax and exceptional items to £1.1m (2010: £0.4m), slightly ahead of revised market expectations of £1.0m. This improvement reflected consistent trading performance across the year. Statutory operating profit benefited from the release of a provision of £0.7m relating to landfill tax liabilities, treated as an exceptional item in the same way as during 2010. Exceptional items also included restructuring charges and project costs relating to development of strategic opportunities, totalling £0.4m (2010: £0.2m). The net benefit of £0.3m (2010: £0.2m) derived from the exceptional items increased profit before tax to £1.4m (2010: £0.6m). Finance costs Total finance charges reflected the payment of interest on bank debt and finance leases, totalling £0.6m (2010: £0.4m). This also included a £0.1m (2010: £0.1m) unwinding of discounts on provisions. The comparable charge for 2010 included a credit of £0.2m following an interest receipt. Jointly controlled entity The Group’s Terramundo joint venture with DEC NV continued to be on hold during 2011. There was no trading during the year and as a result Terramundo delivered a small loss of £0.03m (2010: £0.03m), relating to loan interest and depreciation charges. Both joint venture parties remain committed to this strategic venture and expect a return to trading as markets evolve and the demand for its services become re-established. Corporation tax The Group paid tax of £0.1m during the year in respect of 2010 liabilities. A deferred tax asset of £0.9m (2010: £0.004m) was recognised in the statement of financial position, the board believing that future profits are probable and future tax liabilities will be incurred, as was a current tax liability of £0.5m (2010: £0.004m). This recognition led to a corporation tax credit of £0.2m in the income statement (2010: charge £0.1m). Profit for the year The total profit attributable to equity shareholders increased by £1.2m from the previous year to £1.6m (2010: £0.4m), benefiting from improved year on year trading and also the positive impact of exceptional items and the tax credit. Dividend The board does not recommend the payment of a dividend for the year ended 31 December 2011. The board announced during 2011 that it had begun a reorganisation of the Group, including striking off dormant subsidiaries and reallocating investment balances, which would ultimately lead to a reduction of capital through the cancellation of the share premium account. This exercise is expected to complete during 2012 and a resolution recommending the reduction of capital has been included in the annual general meeting notice, which will be sent to shareholders during April 2012. www.augeanplc.com Augean PLC Annual Report 2011 17 Basic earnings per share (EPS) adjusted to exclude the impact of exceptional costs was 1.26p (2010: 0.24p). Earnings per share Basic earnings per share (EPS) adjusted to exclude the impact of exceptional costs were 1.26p (2010: 0.24p) and unadjusted EPS were 1.59p (2010: 0.42p). The number of shares in issue at 31 December 2011 was unchanged from 31 December 2010, at 99.7m. There were no dilutive outstanding share options at either year end. Cash flow The Group delivered Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA) of £6.5m (2010: £5.6m) and net cash generated from operations of £4.7m (2010: £5.8m). Net cash used in investing activities increased to £4.2m (2010: £3.4m), which reflects purchases of property, plant and equipment as the Group invested in processing plant at its Port Clarence Waste Recovery Park, three new landfill cells for disposal of hazardous and non-hazardous waste and continued investment in planning and development of certain sites. Net debt was in line with the previous year at £4.0m (2010: £3.9m) and as a result gearing (net debt / shareholders’ equity) was unchanged at 9% (2010: 9%). When adjusted for cash due to be collected in December 2011 but not received until January 2012 adjusted net debt fell to £3.4m. Impairment review Under IFRS, an annual impairment review must be performed for each cash-generating unit (CGU) in accordance with IAS 36 ‘Impairment of Assets’. The Group has completed this exercise and determined that no change is required to the carrying value of the goodwill at the year end date and no changes have been required to the statement of financial position. Financing The Group continued to use a revolving loan facility of £10.0m, supplemented by finance leases secured on certain plant, as the sources of financing its activities. The facility was subject to covenants on the ratio of Net Debt to EBITDA and the ratio of Net Debt costs to Earnings before Interest and Tax (EBIT). These covenants were tested at the end of each trading quarter and each test was achieved at the relevant dates throughout the year. At 31 December 2011, the undrawn loan facilities available to the Group were £6.7m. Principal risks and their mitigation The performance of the business is linked to economic activity in the waste markets it serves, including the industrial, construction and oil and gas sectors. Fluctuations in the economy in general and these sectors in particular affect Group performance, as do inflationary and other pressures from the wider economy. Risks are mitigated by diversifying the customer base as far as possible and by linking gate fees, wherever possible, to prevailing operating costs and commodity prices, including the costs of waste disposal outside of the Group. In addition to this general economic risk there are a number of risks specific to the waste industry. The Group uses a range of resources to manage and mitigate against its risks, including the adoption of a broad range of internal controls and regularly reviews the risks faced. The risks noted here are the same as those notified in the 2010 Report but this position is kept under continuous review. www.augeanplc.com i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s 18 Augean PLC Annual Report 2011 Business review Committed to running a responsible business. The environment, employees and the community Augean recognises the important role that it has within local communities and aims to maintain an open dialogue with its neighbours about its activities and plans. This is achieved through regular liaison committees, newsletters and open days. 2011 was no exception and the Group invested significant time and resources to explain its plans, particularly for the disposal of Low Level Waste at ENRMF. We are committed to mitigating adverse effects of our operations and this is explained further in the detailed CSR report published alongside this annual report. Learn more in our CSR section www.augeanplc.com Augean PLC Annual Report 2011 19 Principal risks and their mitigation continued Environmental legislation Regulation is a key driver of the waste market. Changes in legislation (including tax legislation with environmental goals) or its interpretation can have a significant and far reaching impact on waste management markets. The Group endeavours to mitigate this risk by employing high quality technical management to interpret the evolving legislative framework and its impact on the Group’s operations. In addition, the Group maintains a presence on a number of industry Groups to have influence in the shaping of policy. Environmental compliance All operating sites and activities are regulated by environmental authorities in line with the requirements set out within licences and permits. These licences and permits are required to carry on the business of the Group and compliance with their terms is essential to its success. Withdrawal or temporary suspension could have a significant impact on the Group’s ability to operate. Adherence to the highest environmental standards is also important to ensure the maintenance of good relations with local communities and to satisfy customers that the techniques, practices and procedures adopted by the Group are consistent with those of a responsible business. The Group mitigates this risk through the employment of technical expertise, by working to well established policies and procedures, through the provision of training to develop the knowledge and competence of its staff and through regular monitoring and review of compliance performance. Further details of how the Group monitors and controls environmental compliance are given in the Group’s corporate social responsibility (CSR) report. Health and safety As acknowledged earlier in this review, the waste industry has inherent risks in the area of health and safety. The Board believes that the Group’s employees are its most important and valuable assets and their health and safety is vital to the continued success of the business. The Group continues to invest and resource the business to ensure that the highest health and safety standards are required and applied. Price risk Price pressure remains a key feature of the waste market, where customers often have a range of technological options for the ultimate disposal of their wastes and access to several companies competing to service their needs. The Group reviews its pricing policies on an ongoing basis to ensure that it influences and stabilises the market, whilst responding to emerging trends and customer needs. As part of the Group’s established sales infrastructure specialist roles exist to assess and price waste consignments in line with market rates and available disposal solutions. All services are kept under review to ensure that price changes in the market do not lead to uneconomic activities being undertaken by the Group. Input prices The Group is subject to the same inflationary pressures as other businesses with the potential impact on local operating costs, transportation and the viability of certain third party waste disposal routes. Any cost increases which could restrict the movement of wastes from producers could subsequently impact revenue streams. This position is closely monitored by management and feeds into decisions around pricing and disposal. Transport disruption The Group relies on the delivery of wastes to its sites to secure revenues and any disruption to local or national networks, for example in severe weather conditions, can delay or possibly lose revenue for the Group. Mitigation is provided as far as possible through the use of its own fleet of vehicles and the ability to accept wastes into sites in different geographical locations before onward transfer to their final treatment or disposal destinations. www.augeanplc.com i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s 20 Augean PLC Annual Report 2011 Business review Principal risks and their mitigation continued Tax legislation The use of tax legislation to drive environmental objectives, particularly the diversion of wastes away from landfill disposal and towards greater treatment and recycling, represents a long term risk. The escalation of landfill tax by £8/tonne in each year up to 2013 may encourage some customers to divert volumes away from our sites. The full rate of landfill tax will rise to £64/tonne on 1 April 2012 and existing landfill tax exemption certificates for contaminated soils will no longer be valid. Landfill tax will reach £72/tonne on 1 April 2013. To mitigate against this risk the Group has developed a range of treatment solutions for customers. The environment, employees and the community The board recognises the important role played by the Group in the environment and communities within which it operates. The health and safety of our employees and compliance with regulation are two of the top three business priorities (profit performance being the third). Augean is committed to conducting its business operations in a responsible manner and we recognise the need to continually improve our operations where practical to do so in order to reduce our impact on the environment and ensure the safety and welfare of our employees and neighbours. The Group has a commitment to mitigating any adverse effects of its operations and this is explained further in the detailed CSR report published alongside the annual report. The environment All operating sites and activities are strictly regulated by environmental authorities through a range of regulations. In the context of hazardous waste the principal instrument driving standards is the Integrated Pollution Prevention and Control directive, which provides an integrated approach to pollution control to prevent emissions into air, land or water. The standards expect the techniques and procedures adopted by the Group to represent the Best Available Technique (BAT). BAT requires a review of each activity and the implementation of the highest standards to minimise emissions, be energy efficient, reduce waste and consumption of raw materials, manage noise, vibration and heat loss and ensure accident prevention is in place. The business continues to deliver the objectives of BAT through its operations and works closely with the regulators to ensure that Augean is a leader in compliance in the sector. The Group operates through well developed environmental controls and compliance systems, involving suitably qualified people in the management of all aspects of its operations. Reported environmental data, both internally used and provided to regulators, continues to show that the Group’s operations do not result in a significant impact on the local environment. Employees The Group’s employees are vital to its ongoing success and during the year have continued to deliver a high quality service to customers. In recognition of their commitment and efforts the board removed the pay freeze imposed in 2008 during the most challenging economic conditions and awarded a 2% increase to non-management staff from April 2011. The board has also approved a 2% pay increase for all staff from January 2012. Training and development activity continued throughout the year, equipping employees with the knowledge and skills to operate safely and compliantly within the waste management sector. The Group appointed a Training Manager and undertook a review of the skills matrix required to fully support the Group’s activities. Recruitment focused on establishing a workforce with a range of technical qualifications in the fields of chemistry, engineering, project management and general operations. www.augeanplc.com Augean PLC Annual Report 2011 21 The board has always regarded the health and safety of employees and all those who come into contact with its operations as a key priority and in 2011 that undertaking was reinforced with safety performance clearly stated as the number one priority for the Group. The Group technical department was strengthened with the recruitment of managers with safety and compliance expertise and ongoing training was undertaken to ensure that all staff have the necessary skills and knowledge to undertake the sometimes difficult work required to safely manage hazardous waste. In addition, safety campaigns and toolbox talks were refreshed each month to highlight key risks. There was particular focus during the year on the reporting of near miss incidents as part of encouraging all staff to be activity involved in the identification and mitigation of safety hazards. On average each member of staff reported a near miss every two months during 2011 and, whilst a good start to the initiative, more needs to done during 2012 when the expected profile will be one report per person per month. The community Augean recognises the important role that it has within local communities and aims to maintain an open dialogue with its neighbours about its activities and plans. This is achieved through regular liaison committees, newsletters and open days. 2011 was no exception and the Group invested significant time and resources to explain its plans, particularly for the disposal of Low Level Waste at ENRMF. The Group recognised the concerns raised by local residents around the site and undertook an extensive programme of consultation, including visiting numerous parish council meetings and hosting open days at the site. The board remains committed to maintaining this dialogue in the future as the Group develops its plans for the ENRMF site and at all other locations where changes to business activities may be required. The Group continued to contribute to the communities around its landfill site through the Landfill Tax Credit Scheme. A total of £367,000 was contributed through this scheme during the year. Donations were also made to local charities and sports clubs, including the Underground Youth Club at Kings Cliffe and the Cannock Chase community Centre near to the Cannock site. Outlook As set out in the pre-close trading update on 25 January, the board approaches the year ahead with some optimism. There has been a positive start to trading in 2012, particularly in the Land Resources division. Risks to volumes and revenues may still materialise if general economic conditions worsen in the UK, but the recent changes to the Group are expected to provide some resilience. The Board’s confidence in the core business remains unchanged and we expect to deliver profit before tax of £1.5m in the year. Trading in Low Level Waste is now active and forecasts suggest that new contracts will contribute an additional £1m, with potential for future increases from new volumes, whilst other strategic opportunities will deliver £0.2m. The board has therefore raised its forecast for profit before tax to a total of £2.7m and looks forward to generating higher levels of value for shareholders. Paul Blackler Chief executive 27 March 2012 Richard Allen Finance director 27 March 2012 www.augeanplc.com i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s 22 Augean PLC Annual Report 2011 Board of directors Roger McDowell Chairman, non-executive director and Chairman of the remuneration committee, 56 Roger is a seasoned senior manager of 30 years’ standing. Having developed the Oliver Ashworth Group through dramatic growth, main market listing and sale to St. Gobain, he then took a number of non-executive roles including chairmanships in both public and private equity backed businesses. Roger is currently chairman of Avingtrans Plc, Chairman of Ultimate Finance Group and a non-executive director of IS Solutions Plc and Swallowfield Plc. He joined the board of Augean in 2004 and became chairman on 23 March 2010. Richard Allen Group finance director, 41 Richard joined Augean and was appointed to the board in September 2010 as Group Finance Director from Kelda Holdings, the ultimate owner of Yorkshire Water and a number of water-related businesses. Richard held a number of senior finance roles at Kelda, latterly as interim Group Finance Director. Prior to Kelda Richard spent 10 years with the Nestlé SA group and before leaving was Finance Director at Nestlé Ireland, based in Dublin. Andrew Bryce Non-executive director and Chairman of the nominations committee, 64 Andrew has had a long career in environmental law in the UK and currently runs his own law firm, Andrew Bryce & Co, which specialises in regulatory defence and board level advice on environmental management, strategy and liability issues. He was previously an equity partner and head of environmental services at City law firm Cameron Markby Hewitt (now part of CMS Cameron McKenna). He has held the chairmanship of the United Kingdom Environmental Law Association of which he is an honorary life member. He was appointed to the board of Augean in June 2005. www.augeanplc.com Augean PLC Annual Report 2011 23 Paul Blackler Chief executive, 42 Paul is a Member of the Royal Society of Chemistry and has extensive experience in the leadership of businesses in the emerging waste sector. Prior to joining the group in December 2004, Paul held senior positions with Shanks Group Plc and was instrumental in developing innovative service solutions and technologies to the market whilst also taking on the challenges of delivering business growth strategies. Paul joined Augean on its formation heading up transaction, operational, development and commercial roles before becoming Chief Executive in December 2007. Rory Macnamara Non-executive director and Chairman of the audit committee, 57 Rory is a chartered accountant with a wide range of corporate finance transaction experience. He was previously head of mergers and acquisitions at Deutsche Morgan Grenfell and latterly a managing director at Lehman Brothers. He currently holds a number of directorships including Izodia plc, Carpathian plc, Dunedin Income Growth Investment Trust plc, Mears Group plc and Sportingbet plc. He was appointed to the board of Augean in November 2006. i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s Jim Meredith Non-executive director, 51 Jim is currently CEO of SCAID Capital, a manufacturer of Holiday Homes and Modular housing and has significant experience of the waste industry having held several senior roles within the sector. He was formerly Chief Executive of FCC’s UK asset base with revenues of c.£700m, c.180 active business units and c.2,400 employees following their acquisition in 2006 of Waste Recycling Group (WRG) the UK’s largest landfill and waste disposal business, which also provides services to the decommissioning markets. He had previously worked with TerraFirma Capital Partners (TFCP) during the acquisition of WRG in 2003. Prior to TFCP Jim was an Executive Director of Shanks Plc, a major European player in the environmental services markets with revenues of c.£600m and c.4,200 employees on c.125 sites in three European countries. He was appointed to the board of Augean in December 2010. www.augeanplc.com 24 Augean PLC Annual Report 2011 Corporate governance Augean is committed to high standards of corporate governance in all its activities. While the company is not required under AIM rules to comply with the Corporate Governance Code of June 2010 (the Code), the board recognises the value of the Code and has regard to its requirements as far as is practicable and appropriate for a public company of its size and nature. The board regularly reviews guidance from the FRC and other regulatory bodies and responds as appropriate. The board of directors The board currently comprises a non-executive chairman, three further independent non-executive directors, the chief executive and the group finance director. A senior independent director has not been appointed, as given the size and nature of the company, the directors do not believe that such an appointment is necessary. The chairman has primary responsibility for running the board and its effectiveness and the chief executive, supported by the finance director, is responsible for developing strategic plans and initiatives for consideration by the board and for their operational delivery. The non-executive directors bring a variety of different experience to the board, are considered to be independent of management and ensure that rigour is applied to board decisions. The composition of the board is reviewed regularly. Appropriate training, briefings and induction are available to all directors on appointment and subsequently as necessary, taking into account existing qualifications and experience. All directors have access to the advice and services of the group’s company secretarial partner, Addleshaw Goddard LLP and any director may take independent professional advice, if necessary, at the company’s expense. The board meets formally at least eight times a year but additional meetings are held to review and approve special matters if necessary. Each director is provided with sufficient timely information to enable full consideration of matters in advance of meetings and proper discharge of duties. There is a formal schedule of matters reserved for the board which includes published financial statements, strategy, acquisitions, significant capital projects, budgets and borrowing facilities. Under the company’s articles of association one third of all directors required to retire from office at each annual general meeting and may stand for re-appointment by shareholders each year. Additionally, each director is required to retire in the third calendar year following his last appointment and may stand for re-election. Any director appointed to the board during the year is subject to election by shareholders at the following annual general meeting (AGM). With effect from 1 October 2008, the Companies Act 2006 introduced a statutory duty on directors to avoid conflicts of interest. Shareholders approved new Articles of Association at the 2008 AGM giving directors authority to approve situations involving any such conflicts and to allow conflicts of interest to be dealt with by the board. All directors are required to notify the company on an ongoing basis of their other commitments and these are formally recorded in the minutes of board meetings. The company has established procedures for ensuring that the board’s powers for ensuring that the board’s powers for authorising director’s conflicts of interest are operated effectively. Board committees The company has established a number of committees, details of which are set out below: Audit committee The audit committee comprises the non-executive directors, is chaired by Rory Macnamara, and meets at least twice a year. The external auditor and the executive directors are regularly invited to attend the meetings but the committee also has access to the external auditor’s advice without the presence of the executive directors. The audit committee considers the adequacy and effectiveness of the risk management and control systems of the group. It reviews the scope and results of the external audit, its cost effectiveness and the objectivity and independence of the auditor. It also reviews, prior to publication, the interim report, the results announcement, the annual financial statements and other information included in the annual report. Remuneration committee The remuneration committee comprises the non-executive directors and is chaired by Roger McDowell. It meets at least twice a year and reviews and advises upon the remuneration and benefits packages of the executive directors and other senior management of the group, including the Long Term Incentive Plan (LTIP). The remuneration of the chairman and non-executive directors is agreed upon by the full board. www.augeanplc.com Augean PLC Annual Report 2011 25 Board committees continued Nomination committee The nomination committee comprises the non-executive directors and is chaired by Andrew Bryce. It meets as required in order to review the structure, size and composition of the board. It is responsible for the selection and recommendation of suitable candidates for appointment to the board. Internal controls The board has overall responsibility for the group’s system of internal control and for reviewing its effectiveness, while the role of management is to implement board policies on risk management and control. The system is designed to provide reasonable but not absolute assurance against material misstatement or loss. The group operates a series of controls to meet its needs. Key features of the control system include the following: – maintenance of a risk register, covering the key health and safety, regulatory and financial risks faced by the group; – – – – – – – – monthly reviews of business risks affecting the group, identifying procedures and action required to manage and mitigate those risks; reports provided to the board at every meeting setting out the key risks and their management; a clearly defined organisational structure with terms of reference for board committees and responsibilities and authorisation limits for executive and senior management; regular visits by the executive directors and senior management to key operating locations to meet with local management and review business performance; regular visits by the group’s technical team to all sites to identify risks and propose improvements to be implemented by senior management; a range of compliance management systems at the group’s sites subject to external review, including certification to ISO 9001:2008; 14001:2004; 18001:2007 and the Publicly Available Specification of common management system requirements PAS 99:2006; an annual strategic planning and budgeting process; and reviews by senior management and the board of monthly financial and operating information, including comparisons with budgets and forecasts. The group uses balanced scorecard reports, containing key performance indicator targets, as a mechanism for monitoring and managing the monthly performance of key operations. The audit committee receives reports from executive management and the auditor concerning the system of internal control and any control weaknesses. A description of the principle risks faced by the group can be found on page 17 of the Business Review. The board does not believe it is currently appropriate to establish a separate, independent internal audit function given the size of the group but this position is kept under review. Investor relations The board has an active investor relations programme and believes in maintaining good communication with all stakeholders including institutional and private shareholders, analysts and the press. The executive directors are available to meet with institutional shareholders and analysts following the announcement of interim and final results. The group’s brokers and financial PR advisers provide feedback from these meetings to the board. The chairman is available to shareholders at any time to discuss strategy and governance matters. All shareholders have access to the interim and annual reports and are invited to attend the annual general meeting at which all board directors are present. The group periodically hosts presentations at its sites for the investor community and provides detailed information for shareholders and the general public on its website www.augeanplc.com. www.augeanplc.com i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s 26 Augean PLC Annual Report 2011 Directors’ report Annual general meeting At the annual general meeting on 8 June 2012, Roger McDowell and Rory Macnamara will retire by rotation in accordance with the articles of association. Roger McDowell will also retire as chairman of the board. Being eligible, both offer themselves for re-election as non-executive directors. Jim Meredith will be nominated for the role of chairman of the board. No director has a contract with an unexpired notice period of more than twelve months. The directors present their report and the audited financial statements for the year ended 31 December 2011. Principal activity and business review The principal activity of the group is the provision of hazardous waste management services. These services include hazardous landfill and waste treatment, recovery and recycling. The group operates solely within the United Kingdom. The chairman’s statement and business review on pages 6 to 21 provide a review of the business of the group together with an indication of future prospects. Results and dividends The group’s profit after tax for the year was £1.6m (2010: £0.4m) on turnover of £37.5m (2010: £34.1m). The directors have not recommended a dividend for the year (2010: £nil). Environmental policy The quality of the environment is an important concern for the group, its employees, customers, suppliers and the communities in which the group operates. The group continues to adopt high standards of environmental practice and aims to minimise its impact on the environment wherever possible. Further details of the group’s actions in this area can be found in the separately published CSR report. Payment of creditors The group’s policy is to settle invoices promptly according to terms and conditions as far as is practicable. During the year the group updated the policy, which was communicated to all suppliers, committing to settle invoices 40 days after the month of the invoice. Trade creditors at the year end date represented 34 days’ purchases (2010: 39 days). The company adopts the same policy and its trade creditors at the year end date represented 36 days’ purchases. Management of risks The group has developed procedures for the management of risks relating to price, credit, liquidity and cash flow. Further details of these are included in note 23 to the financial statements. Employees The group’s policy is to ensure the adequate provision for the health, safety and welfare of its employees and of other people who may be affected by its activities. Health and safety is the top priority of the group and to support this all accidents are reported and thoroughly investigated and all employees are encouraged to contribute to reporting of ‘near miss’ incidents to promote accident reduction. The success of the group depends on the skill and motivation of its workforce and it is the group’s policy to ensure close consultation with employees on matters of concern to them. Regular newsletters and briefings are provided to employees and announcements and notices are provided on the group’s intranet website and also directly through regular team briefings. The group aims to recruit and retain people with the appropriate skills and behaviours to fully contribute to the future success of the business. Ongoing training is provided to ensure that all employees have the requisite knowledge to perform their role. The group encourages the employment of disabled persons wherever this is practicable. Every endeavour is made to ensure that disabled employees, and those who become disabled whilst in the group’s employment, benefit from training and career development programmes in common with all employees. All employees are included in bonus or incentive schemes designed to align the group’s priorities in safety, regulatory compliance and profit generation to the rewards available to individuals. www.augeanplc.com Augean PLC Annual Report 2011 27 Charitable and political donations During the year the group contributed £367,000 (2010: £243,000) of its landfill tax liability to Entrust registered environmental bodies as permitted by Government regulations. It also made other charitable donations amounting to £10,000 (2010: £7,000). No political donations were made during the year (2010: £nil). Directors The composition of the board of directors is shown on pages 22 and 23. Details of the directors’ interests and remuneration are given in the directors’ remuneration report on pages 29 to 31. There were no changes to the composition of the board during the year. Substantial shareholdings The company had been notified of the following interests of more than 3% in its shares as at 29 February 2012: Ingot Capital Management One51 Harwood Capital Henderson Global Investors Aviva Investors Octopus Investments Invesco Perpetual Number of shares 18,839,442 17,610,200 10,700,000 9,534,435 5,017,879 4,468,368 3,500,000 Fund manager % 19.04 17.80 10.81 9.64 5.07 4.52 3.54 Corporate governance A statement by the directors on corporate governance immediately precedes this report. Qualifying third party indemnity provisions (as defined in Companies Act 2006) have been entered into by the company for the benefit of all directors, which indemnify the directors against third party claims brought against them in their capacity as directors of the company to the extent permitted by law and such provisions continue in force at the date of this report. Going concern The group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the business review on pages 8 to 21. Details of the group’s financial position, cash flows, liquidity position and borrowing facilities are included in the financial review section of the business review. Further information on the group’s financial risks and their management is given in note 23 to the financial statements, on page 67 to 70. As highlighted in note 23 the group met its short term working capital requirements during 2011 through an overdraft and revolving loan facility with HSBC Bank plc, which was due for renewal on 30 November 2012. This facility was renewed on 2 March 2012 for a further 3 year period and is now due for renewal on 2 March 2015. Financial forecasts and projections, taking account of reasonably possible changes in trading performance and market value of the group’s assets, have been prepared and show that the group should be able to operate within the level of the facility, both for ongoing working capital funding and any capital investment expenditure. The group has previously been successful in generating cash flow from operating activities despite challenging economic conditions. The single greatest influence on free cash flow over recent years has been the level of capital investment required to maintain and develop the group’s asset base. The group retains some discretion over the nature and timing of significant capital expenditure, allowing future liquidity to be managed, with the only exception to this being the need to engineer new landfill cells as available void space nears exhaustion. Cell engineering is aligned with cash flows through well developed capital planning processes, all of which provides confidence that cash generation can be expected in the future. www.augeanplc.com i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s 28 Augean PLC Annual Report 2011 Directors’ report Going concern continued The loan facility is subject to certain covenants, focused on the cover of interest costs and the ratio of net debt to available operating profit. Cash flow forecasts for the twelve months from the date of the financial statements indicate the group’s ability to operate within these covenants. After making enquiries, the directors have a reasonable expectation that the company and the group have adequate resources to continue in operational existence for the foreseeable future. On the basis of detailed forecast cash flows for the next twelve months the directors are confident that the company will be able to meet its liabilities as they fall due. As a result these financial statements have been prepared on a going concern basis. Statement of directors’ responsibilities for the financial statements The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the parent company financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs). Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs and profit or loss of the company and group for that period. In preparing these financial statements, the directors are required to: – select suitable accounting policies and then apply them consistently; – make judgements and accounting estimates that are reasonable and prudent; – – state whether applicable IFRSs have been followed, subject to any material departures disclosed and explained in the financial statements; and prepare the financial statements on the going concern basis unless it is inappropriate to assume that the company will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company’s transactions and disclose with reasonable accuracy at any time the financial position of the company and Group and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. In so far as each of the directors is aware: – – there is no relevant audit information of which the company’s auditor is unaware; and the directors have taken all steps that they ought to have taken to make themselves aware of any relevant audit information and to establish that the auditor is aware of that information. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Auditors Grant Thornton UK LLP has expressed willingness to continue in office. In accordance with Section 489(4) of the Companies Act 2006, a resolution to reappoint Grant Thornton UK LLP will be proposed at the annual general meeting. By order of the board Paul Blackler Chief executive 27 March 2012 www.augeanplc.com Augean PLC Annual Report 2011 29 Directors’ remuneration report Remuneration committee The remuneration committee comprises the non-executive directors and is chaired by Roger McDowell. The principal objective of the remuneration committee is to attract, retain and motivate talented people with a competitive package of incentives and awards linked to performance and the interests of shareholders. The committee uses the services of independent external advisers as required. Remuneration of the non-executive directors, including the chairman, is determined by the board as a whole. Current remuneration package The current remuneration package of the executive directors comprises: (i) Basic salaries Basic salaries for executive directors take into account the performance, experience and responsibilities of the individuals concerned, as well as the salaries of those with similar positions and responsibilities. External advice is taken as appropriate and basic salaries are reviewed annually. No increases have been applied to executive directors’ salaries for the past four years. (ii) Performance related bonus The executive directors participate in a bonus scheme based on the achievement of annual profit targets approved by the remuneration committee. The achievement of these targets would result in a bonus of up to 50% of basic salary. No bonus was awarded in respect of 2011. (iii) Pension provision and other benefits Pension provision is made at a rate of 10% of basic salary for executive directors, which is payable directly into a nominated pension fund. Other benefits include a car allowance, life assurance and private healthcare. (iv)Long Term Incentive Plan Under the Long Term Incentive Plan (LTIP’) senior employees may be granted an award annually of up to 100% of basic salary. The award vests in the form of shares in the company and is subject to the attainment of pre-determined performance conditions over a three year period. The expected costs of the scheme are given in note 18 to the financial statements. No LTIP award was made in 2011. The remuneration committee reviewed the LTIP scheme during the year and concluded that it remained a suitable mechanism to incentivise future performance. They resolved to consider making new awards to the executive directors during 2012. (v) Share options Under the share options scheme the remuneration committee may annually grant options of up to 100% of basic salary to purchase shares in the company at a future date. These options may be subject to the attainment of pre-determined performance conditions but this is not an absolute requirement. The remuneration committee reviewed the use of share options during the year and concluded that the scheme remained a suitable mechanism to incentive future performance. Awards were made to the executive directors during the year, as shown in the Director’s share plans section of this report. Service contracts Executive directors have rolling service contracts with notice periods of not more than twelve months. www.augeanplc.com i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s 30 Augean PLC Annual Report 2011 Directors’ remuneration report Directors’ interests The beneficial, family and contingent interests of the directors in the share capital of the company were as follows: At 31 December 2011 Paul Blackler Richard Allen Roger McDowell Andrew Bryce Jim Meredith Rory Macnamara At 31 December 2010 Paul Blackler Richard Allen Roger McDowell Andrew Bryce Jim Meredith Rory Macnamara Beneficial shares Number Share options Number LTIP Number Total shares Number 33,000 1,076,385 603,448 10,000 — 691,342 — 11,419 — 200,000 — 15,224 Beneficial shares Number 23,000 — 191,342 11,419 — 15,224 Share options Number 455,695 — — — — — — 1,076,385 — 613,448 — 691,342 — 11,419 — 200,000 — 15,224 LTIP Number 610,057 — — — — — Total shares Number 1,088,752 — 191,342 11,419 — 15,224 Directors’ emoluments The emoluments of the directors were as follows: Paul Blackler Richard Allen Roger McDowell Andrew Bryce Jim Meredith Rory Macnamara 2011 Basic fee/salary £’000 2011 Bonus £’000 2011 Pension contributions £’000 2011 Other emoluments £’000 180 134 43 26 24 26 433 50 — — — — — 50 18 20 — — — — 38 13 12 — 17 — — 42 2011 Total £’000 261 166 43 43 24 26 563 2010 Total £’000 211 55 47 63 — 26 402 Other emoluments for Paul Blackler and Richard Allen include a car allowance and other benefits such as medical insurance. For Andrew Bryce they relate to specialist assistance provided to the board in connection with certain legal matters. A discretionary bonus of £50,000 was awarded to Paul Blackler by the Remuneration Committee, reflecting his contribution to the delivery of strategic opportunities on behalf of the group. www.augeanplc.com Augean PLC Annual Report 2011 31 Directors’ share plans LTIP Paul Blackler Share option schemes Paul Blackler Richard Allen Award date Earliest vesting date 05.07.2007 05.07.2010 29.04.2011 29.04.2008 21.12.2012 21.12.2009 Market price at award date 130.25p 78.50p 39.50p Number of shares 2010 74,403 193,882 341,772 Lapsed in year 74,403 193,882 341,772 610,057 610,057 Number of shares 2011 — — — — Award date Earliest vesting date 14.12.2005 14.12.2008 21.12.2009 21.12.2012 18.05.2011 18.05.2014 18.05.2011 18.05.2014 Market price at award date 147.50p 39.50p 29.00p 29.00p Number of shares 2010 Granted in year Lapsed in year Number of shares 2011 — 455,695 — — — 620,690 — 603,448 — — — 455,695 — 620,690 — 603,448 455,695 1,224,138 — 1,679,833 The latest date for exercise of all share options is ten years after the award date. The mid market price of the company’s shares at 31 December 2011 was 27.00p. The range of the share price during the year was 23.75p to 33.25p. On behalf of the remuneration committee Roger McDowell Chairman of the remuneration committee 27 March 2012 i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s www.augeanplc.com 32 Augean PLC Annual Report 2011 Independent auditor’s report to the members of Augean PLC We have audited the financial statements of Augean PLC for the year ended 31 December 2011 which comprise the consolidated statement of comprehensive income, the group and parent company statements of financial position, the group and parent company statements of cashflows, the group and parent company statements of changes in shareholders’ equity and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditor As explained more fully in the Directors’ Responsibilities Statement set out on page 28, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the APB’s website at www.frc.org.uk/apb/scope/private.cfm. Opinion on financial statements In our opinion: – – – the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2011 and of the group’s profit for the year then ended; the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and – the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. www.augeanplc.com Augean PLC Annual Report 2011 33 Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: – – – adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or the parent company financial statements are not in agreement with the accounting records and returns; or certain disclosures of directors’ remuneration specified by law are not made; or – we have not received all the information and explanations we require for our audit. Andrew Wood Senior Statutory Auditor for and on behalf of Grant Thornton UK LLP Statutory Auditor, Chartered Accountants Leeds 27 March 2012 i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s www.augeanplc.com 34 Augean PLC Annual Report 2011 Consolidated statement of comprehensive income for the year ended 31 December 2011 Revenue Operating expenses Operating profit Net finance charges Share of loss of jointly controlled entity Profit before tax Tax Profit for the year attributable to equity shareholders of the parent company Total comprehensive income attributable to equity holders of the parent company Earnings per share Basic and diluted Before exceptional items 2011 £’000 37,459 (35,814) 1,645 (571) (16) 1,058 193 Exceptional items 2011 £’000 Before exceptional items 2010 £’000 Exceptional items 2010 £’000 Total 2011 £’000 — 331 331 — — 331 — 37,459 (35,483) 34,120 (33,353) 1,976 (571) (16) 1,389 193 767 (399) (14) 354 (117) — 185 185 — — 185 — Total 2010 £’000 34,120 (33,168) 952 (399) (14) 539 (117) 1,251 331 1,582 237 185 422 Note 3 4 8 6 3 1,251 331 1,582 237 185 422 7 1.26p 0.33p 1.59p 0.24p 0.18p 0.42p The notes on pages 38 to 78 form an integral part of these financial statements. www.augeanplc.com Augean PLC Annual Report 2011 35 Statements of financial position at 31 December 2011 Non-current assets Goodwill Other intangible assets Investments Property, plant and equipment Deferred tax asset Trade and other receivables Current assets Inventories Trade and other receivables Non-current assets classified as held for sale Cash and cash equivalents Current liabilities Trade and other payables Current tax liabilities Financial liabilities Net current liabilities Non-current liabilities Financial liabilities Provisions Share of losses of jointly controlled entity Net assets Shareholders’ equity Share capital Share premium account Retained losses Total shareholders’ equity Group Company Note 2011 £’000 2010 £’000 2011 £’000 2010 £’000 9 10 11 12 6 13 13 12 14 15 15 16 8 21,705 21,705 49 — 49 — 35,415 35,245 854 492 4 482 — 45 — 45 55,581 55,581 767 50 492 782 — 482 58,515 57,485 56,935 56,890 217 7,660 200 4 116 6,918 — 160 8,081 7,194 — 376 — — 376 — 446 — 156 602 (8,079) (7,231) (9,019) (9,033) (538) (1,332) (4) (201) — (436) (3,871) (4,034) (9,949) (7,671) (13,091) (13,067) (1,868) (477) (12,715) (12,465) (2,640) (6,668) (476) (3,614) (7,737) (460) (2,244) (2,882) — — — — (9,784) (11,811) (2,244) (2,882) 46,863 45,197 41,976 41,543 17 9,970 9,970 9,970 9,970 114,960 114,960 114,960 114,960 (78,067) (79,733) (82,954) (83,387) 46,863 45,197 41,976 41,543 The notes on pages 38 to 72 form an integral part of these financial statements. The financial statements were approved by the board on 27 March 2012 and signed on its behalf by: Paul Blackler Chief executive Richard Allen Finance director Augean PLC Registered number: 5199719 www.augeanplc.com i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s 36 Augean PLC Annual Report 2011 Statements of cash flows for the year ended 31 December 2011 Operating activities Cash generated from/(used in) operations Interest paid Tax paid Net cash generated from/(used in) operating activities Investing activities Proceeds on disposal of property, plant and equipment Purchases of property, plant and equipment Purchases of intangible assets Purchase of businesses Net cash used in investing activities Financing activities Repayments of borrowings Drawdown of loan facilities Repayments of obligations under finance leases Net cash (used in)/generated from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Note 20 22 15 15 15 Group Company 2011 £’000 2010 £’000 2011 £’000 2010 £’000 4,713 (469) (123) 4,121 19 (4,186) (32) — 5,816 (297) (72) 5,447 32 (3,159) (27) (204) (4,199) (3,358) 336 — (414) (78) (156) 160 4 (1,810) — (454) (2,264) (175) 335 160 1,292 (565) — 727 — (50) (32) — (82) (801) — — (801) (156) 156 — (1,476) (391) — (1,867) — (47) (27) (204) (278) (1,864) 4,034 — 2,170 25 131 156 www.augeanplc.com Augean PLC Annual Report 2011 37 Statements of changes in shareholders’ equity for the year ended 31 December 2011 Group At 1 January 2010 Total comprehensive income for the year Retained profit Total comprehensive income for the year Transactions with owners of the company Share-based payments Total transactions with the owners of the company Share capital £’000 Share premium account £’000 Retained losses £’000 Shareholders’ equity £’000 9,970 114,960 (80,159) 44,771 — — — — — — — — 422 422 4 4 422 422 4 4 At 1 January 2011 9,970 114,960 (79,733) 45,197 Total comprehensive income for the year Retained profit Total comprehensive income for the year Transactions with owners of the company Share-based payments Total transactions with the owners of the company — — — — — — — — 1,582 1,582 1,582 1,582 84 84 84 84 At 31 December 2011 9,970 114,960 (78,067) 46,863 Company At 1 January 2010 Total comprehensive income for the year Retained profit Total comprehensive income for the year Transactions with owners of the company Share-based payments Total transactions with the owners of the company Share capital £’000 Share premium account £’000 Retained losses £’000 Shareholders’ equity £’000 9,970 114,960 (83,579) 41,351 — — — — — — — — 188 188 4 4 188 188 4 4 At 1 January 2011 9,970 114,960 (83,387) 41,543 i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e i F n a n c a i Total comprehensive income for the year Retained profit Total comprehensive income for the year Transactions with owners of the company Share-based payments Total transactions with the owners of the company — — — — — — — — 349 349 84 84 l s t a t e m e n t s 349 349 84 84 At 31 December 2011 9,970 114,960 (82,954) 41,976 www.augeanplc.com 38 Augean PLC Annual Report 2011 Notes to the financial statements for the year ended 31 December 2011 1 Accounting policies (a) Basis of accounting The financial statements have been prepared in accordance with International Financial Reporting Standards, IFRS, International Financial Reporting Interpretations Committee (IFRIC) interpretations endorsed by the European Union and those parts of the Companies Act 2006 that remain applicable to companies reporting under IFRS. The financial statements have been prepared on the historical cost basis with the exception of certain items which are measured at fair value as disclosed in the principal accounting policies set out below. These policies have been consistently applied to all years presented unless otherwise stated. The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge of the amount, event or actions, actual results ultimately may differ from these estimates. The company has taken advantage of Section 408 of the Companies Act 2006 and has not included its individual statement of comprehensive income in these financial statements. The company’s overall result for the year is given in the statement of changes in shareholders’ equity. (i) Subsidiaries The consolidated financial statements incorporate the financial statements of the company and entities controlled by the company (its subsidiaries) made up to 31 December each year. Control is achieved where the company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. Results of subsidiary undertakings acquired or sold during the year are consolidated from or to the date on which control passes. The trading results of companies acquired during the year are accounted for under the purchase method of accounting. All intra-group transactions, balances, income and expenses are eliminated on consolidation. (ii) Jointly controlled entities A jointly controlled entity is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control. Joint control exists where the strategic, financial and operating decisions relating to the activity require the unanimous consent of the parties. Jointly controlled entities are accounted for using the equity method under which the carrying value of the group’s investment is made up of the cost plus the group’s share of post-acquisition profits and less equivalent losses as recognised in the statement of comprehensive income. Should a jointly controlled entity result in losses in excess of the group’s interest they will be recognised where the group has a legal or constructive obligation to fund those losses. Unrealised gains on transactions with jointly controlled entities are eliminated to the extent of the group’s interest in the jointly controlled entity. Unrealised losses are also eliminated unless the transactions provide evidence of impairment of the asset transferred. The group ceases to use the equity method of accounting on the date from which it no longer has joint control in the jointly controlled entity or when the interest becomes held for sale. (iii) Business combinations The acquisition method is used to account for all acquisitions. The cost of an acquisition is measured at the fair values on the acquisition date, which is the date on which control is transferred to the Group. In assessing control, the Group, takes into consideration potential voting rights that currently are exercisable. The Group measures goodwill at the acquisition date as: – – – the fair value of the consideration transferred; plus the recognised amount of any non-controlling interests in the acquiree; less the net recognised amount of the identifiable assets acquired and liabilities assumed, measured at their fair value. www.augeanplc.com Augean PLC Annual Report 2011 39 1 Accounting policies continued (a) Basis of accounting continued (iii) Business combinations continued When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts generally are recognised in profit or loss. Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred. (b) Revenue recognition The group’s responsibility for waste arises as soon as the waste is accepted into one of its facilities. Revenue is therefore recognised at the point of acceptance, except when contractual agreements provide for specific services in which case revenue is recognised at point of delivery of each separate service. Revenue shown in the statement of comprehensive income represents charges for all waste accepted, inclusive of landfill tax where appropriate, but exclusive of value added tax. (c) Exceptional items Items that are material in size and non-recurring in nature are presented as exceptional items in the statement of comprehensive income. The directors are of the opinion that the separate recording of the exceptional items provides helpful information about the group’s underlying business performance. Examples of events which may give rise to the classification of items as exceptional include restructuring of the business, compensation for loss of office, impairment of goodwill and non-recurring income or expenditure. (d) Goodwill Goodwill arising on the acquisition of subsidiary undertakings and businesses, representing the excess of the fair value of the consideration given over the fair value of the identifiable assets and liabilities acquired, is capitalised as an intangible asset. On capitalisation the goodwill is allocated to the specific Cash Generating Unit (CGU) to which it relates. It is tested for impairment at least annually by reference to this CGU and is carried at cost less accumulated impairment losses. Any impairment is recognised immediately in profit or loss and is not subsequently reversed. Goodwill arising on acquisitions before the date of transition to IFRS has been retained at the previous UK GAAP amounts subject to being tested for impairment at that date and on an annual basis going forward. (e) Other intangible assets Intangible assets purchased separately, such as software licences that do not form an integral part of related hardware, are capitalised at cost and amortised on a straight-line basis over their useful economic life of three years. Intangible assets acquired through a business combination such as customer contracts are initially measured at fair value and amortised on a straight-line basis over their useful economic lives which are taken to be the length of the contract. An intangible asset is considered identifiable only if it is separable or if it arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations. After initial recognition assets acquired as part of a business combination are carried at cost less accumulated amortisation and any impairment losses. Methods of amortisation, residual value and useful lives are reviewed, and if necessary adjusted, at each statement of financial position date. (f) Investments Investments are in respect of subsidiaries and a jointly controlled entity. Investments held as non-current assets are stated at historic cost less any provision for impairment. www.augeanplc.com i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s 40 Augean PLC Annual Report 2011 Notes to the financial statements for the year ended 31 December 2011 1 Accounting policies continued (g) Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and any recognised impairment loss. The cost of an item of property, plant and equipment comprises its purchase price and any costs directly attributable to bringing the asset into use. Borrowing costs related to the purchase of property, plant and equipment are capitalised where the cost is directly attributable to the property, plant or equipment being purchased. Subsequent costs are included in an asset’s carrying value or recognised as a separate asset, when it is probable that future economic benefits associated with the additional expenditure will flow to the group and the cost of the item can be measured reliably. All other costs are charged to profit or loss when incurred. The acquisition, commissioning and site infrastructure costs for each landfill site are capitalised when incurred. These costs are then depreciated over the useful life of the site, which is assessed with reference to the usage of the void space available. Cell engineering costs are capitalised when incurred. The depreciation charged to profit or loss is calculated with reference to actual costs to date and expected future costs for each cell including the cost of the future cap, the total of which is spread over the useful life of the cell. Useful life is assessed by reference to the usage of the void space available and the rate at which the void space is filled. Freehold land which is not part of a landfill site is not depreciated. Depreciation is provided evenly on all other property, plant and equipment at rates calculated to write off the cost, less estimated residual value, of each asset over its useful life as follows: Freehold buildings – 50 years Plant and machinery – two to ten years Methods of depreciation, residual values and useful lives are reviewed and adjusted, if appropriate, at each statement of financial position date. Assets held under finance leases are depreciated over the shorter of their expected useful lives or, where there is no reasonable certainty that title will be obtained at the end of the lease term, the term of the relevant lease. The gain or loss arising from the disposal or retirement of an item of property, plant and equipment is determined as the difference between the net disposal proceeds and the carrying amount of the item and is included in profit or loss. Finance leases and hire purchase arrangements Where the group enters into a lease which entails taking on substantially all of the risks and rewards of ownership of an asset, the lease is treated as a finance lease and the asset is capitalised. Future instalments under such leases, net of finance charges, are recognised as a liability. Rentals payable are apportioned between the finance element, which is charged to profit or loss so as to give an approximate constant rate of charge on the outstanding obligation and the capital element which reduces the outstanding obligation for future instalments. The asset and associated liability are recorded in the statement of financial position within property, plant and equipment and financial liabilities respectively at their fair value or, if lower, at the present value of the minimum lease payments, both determined at the inception of the lease. Depreciation is calculated in accordance with the above depreciation policies. Other leases are treated as operating leases, the rentals for which are charged to profit or loss on a straight-line basis over the lease term. Restoration, capping and after-care provisions The anticipated total cost of restoration, capping, post-closure monitoring and after-care is charged to profit or loss over the expected useful life of the sites in proportion to the amount of void consumed at the sites during the period. The costs of restoration and post-closure monitoring are charged against the provision when incurred. The provision has been estimated using current costs and is discounted. When the effect is material, the expected future cash flows required to settle the obligation are discounted at the pre-tax rate that reflects the current market assessments of the time value of money and the risks specific to the obligation. www.augeanplc.com Augean PLC Annual Report 2011 41 1 Accounting policies continued (h) Impairment of non-current assets At each statement of financial position date, the group assesses whether there is any indication that its assets have been impaired. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment, if any. If it is not possible to estimate the recoverable amount of the individual asset, the recoverable amount of the CGU to which the asset belongs is determined. The recoverable amount is defined as the higher of fair value less costs to sell and value in use at the date the impairment review is undertaken. Value in use represents the present value of expected future cash flows discounted on a pre-tax basis, using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. If the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. That reduction is recognised as an impairment loss. An impairment loss relating to assets carried at cost less any accumulated depreciation or amortisation is recognised immediately in profit or loss. Goodwill is tested for impairment on an annual basis. An impairment loss is recognised for CGUs if the recoverable amount of the unit is less than the carrying amount of the unit. The impairment loss is allocated to reduce the carrying amount of the assets of the unit by first reducing the carrying amount of any goodwill allocated to the CGU and then reducing the other assets of the unit pro rata on the basis of the carrying amount of each asset in the unit. If an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount but limited to the carrying amount that would have been determined had no impairment loss been recognised in prior years. A reversal of an impairment loss is recognised in profit or loss. Any impairments of goodwill cannot be subsequently reversed. (i) Inventories Inventories are stated at the lower of cost (measured on a first-in first-out basis) and net realisable value and, where appropriate, are stated net of provisions for impairment. (j) Tax Current tax Current tax is provided at amounts expected to be paid (or recovered) using tax rates and laws that have been enacted or substantively enacted at the statement of financial position date. The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the statement of comprehensive income because it excludes items of income that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. Deferred tax Deferred tax on temporary differences at the statement of financial position date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes is accounted for using the statement of financial position liability method. Using the liability method, deferred tax liabilities are recognised in full for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which deductible temporary differences can be utilised. However, if the deferred tax asset or liability arises from the initial recognition of goodwill or the initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither accounting nor taxable profit, it is not recognised. Deferred tax on temporary differences associated with shares in subsidiaries and jointly controlled entities is not provided if reversal of these temporary differences can be controlled by the group and it is probable that the reversal will not occur in the foreseeable future. Deferred tax is measured on an undiscounted basis at the tax rates that are expected to apply when the asset is realised, or the liability settled, based on tax rates and laws enacted or substantively enacted at the statement of financial position date. Current and deferred tax are recognised in profit or loss except when they relate to items recognised in other comprehensive income, where they are similarly recognised in other comprehensive income. www.augeanplc.com i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s 42 Augean PLC Annual Report 2011 Notes to the financial statements for the year ended 31 December 2011 1 Accounting policies continued (k) Retirement benefits Contributions made by the group to individual money purchase pension schemes are charged to profit or loss during the period to which they relate. (l) Equity-settled share-based payments All share-based payment arrangements granted after 7 November 2002 that had not vested prior to 1 January 2006 are recognised in the financial statements. IFRS 2 ‘Share-based Payments’ requires that an expense for equity instruments granted is recognised in the financial statements based on their fair values at the date of the grant. This expense, which is in relation to employee share options and executive LTIP schemes, is recognised over the vesting period of the scheme based on the number of instruments expected to vest. The fair value of employee services is determined by reference to the fair value of the awarded grant calculated using the Black Scholes model or Binomial Lattice model, excluding the impact of any non-market vesting conditions. At the statement of financial position date, the group revises its estimate of the number of share incentives that are expected to vest. The impact of the revisions of original estimates, if any, is recognised in profit or loss, with a corresponding adjustment to equity, over the remaining vesting period. (m) Assets held for sale Non-current assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale rather than through continuing use, are classified as held for sale. Immediately before classification as held for sale, the assets, or components of a disposal group, are re-measured in accordance with the Group’s accounting policies. Thereafter, generally the assets, or disposal group, are measured at the lower of their carrying amount and fair value less costs to sell. Impairment losses on initial classification as held for sale and subsequent gains and losses on revaluation are recognised in the consolidated statement of comprehensive income. Gains are not recognised in excess of any cumulative impairment loss. Once classified as held for sale, intangible assets and property, plant and equipment are no longer amortised or depreciated. (n) Cash and cash equivalents Cash and cash equivalents comprise demand deposits and cash in hand together with short term highly liquid deposits with a maturity of three months or less, from the date of acquisition, which are subject to an insignificant risk of change in value. (o) Financial instruments (i) Financial assets Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial recognition these are measured at amortised cost using the effective interest method, less any provision for impairment. Any change in their value is recognised in profit or loss. Discounting, however, is omitted where the effect is immaterial. www.augeanplc.com Augean PLC Annual Report 2011 43 1 Accounting policies continued (o) Financial instruments continued (i) Financial assets continued Financial assets are categorised as other loans and receivables. The group’s trade and other receivables fall in the ‘loans and receivables’ category. Financial assets are assigned to this category on initial recognition, depending on the characteristics of the instrument and its purpose. A financial instrument’s category is relevant for the way it is measured and whether any resulting income and expenses is recognised in profit or loss or other comprehensive income. Augean recognises all financial assets when the group becomes party to the contractual provisions of the instrument. Financial assets are recognised initially at fair value plus transaction costs. An annual assessment is made to ascertain whether there is objective evidence that the financial assets are impaired. All income and expense relating to financial assets are recognised in profit or loss. Significant receivables are considered for impairment on a case-by-case basis when they are past due at the statement of financial position date or when objective evidence is received that a specific counterparty will default. Provision against trade receivables is made when there is objective evidence that the group will not be able to collect all amounts due to it in accordance with the original terms of those receivables. The amount of the impairment is determined as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the original effective interest rate. (ii) Financial liabilities The group’s financial liabilities include trade payables, debt and finance liabilities. Trade payables are not interest bearing and are recognised initially at fair value and carried at amortised cost. Debt is initially recognised at fair value and carried at amortised cost. The group’s policy is that no trading in financial instruments or derivatives shall be undertaken. Financial liabilities are recognised when the group becomes a party to the contractual agreements of the instrument. All interest-related charges and, if applicable, changes in an instrument’s fair value that are reported in profit or loss are included in the statement of comprehensive income under ‘finance charges’. (iii) Free cash flow This is a measure used by the Group to assess capital management performance. It is defined as net operating cash flow less cash spent in investment activities. It is determined as part of the capital management assessment and is reconciled in note 23. (iv) EBITDA EBITDA is a non-IFRS measure used by management as a tool for assessing operating cash flows. It represents Earnings before Interest, Tax, Depreciation and Amortisation. It is determined as part of the cash flow reconciliation shown in note 20. (p) Equity Equity comprises share capital, share premium and retained profit and (losses). Share capital represents the nominal value of equity shares. Share premium account represents the excess over nominal value of the fair value of consideration received for equity shares, net of expenses of the share issue. Retained profit and (losses) represent retained profit and (losses) and equity-settled share-based payment employee remuneration. www.augeanplc.com i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s 44 Augean PLC Annual Report 2011 Notes to the financial statements for the year ended 31 December 2011 1 Accounting policies continued (q) Significant judgements and key sources of estimation uncertainty The preparation of the financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income, expenses and related disclosures. The estimates and underlying assumptions are based on historical experience, the best available information and various other factors that are believed to be reasonable under the circumstances. This forms the basis of making judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may however differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Changes in accounting estimates may be necessary if there are changes in the circumstances on which the estimate was based, or as a result of new information or further information. Such changes are recognised in the period in which the estimate is revised. Certain accounting policies are particularly important to the preparation and explanation of the group’s financial information. Key assumptions about the future and key sources of estimation uncertainty that have a risk of causing a material adjustment to the carrying value of assets and liabilities over the next twelve months are set out below. Impairment of goodwill and fixed assets The group has property, plant and equipment with a carrying value of £35,415,000 (note 12) and goodwill with a carrying value of £21,705,000 (note 9). These assets are reviewed annually for impairment as described on pages 53 and 54 to ensure that goodwill and property, plant and equipment are not carried above their estimated recoverable amounts. To assess if any impairment exists, estimates are made of the future cash flows expected to result from the use of the asset and its eventual disposal. Actual outcomes could vary from such estimates of discounted future cash flows. Factors such as changes in expected use of property, plant and equipment, closure of facilities, or lower than anticipated revenues could result in impairment. For further details of assumptions see note 9. Site development and cell engineering/capping Total anticipated site development and cell engineering/capping costs are charged to profit or loss as void usage progresses. Costs of site development and cell engineering/capping are estimated using either the work of external consultants or internal experts. Management uses its judgement and experience to provide for these estimated costs over the life of the site and cell. See note 16 for further details of calculation methodology, assumptions used and potential sensitivities to these calculations. After-care costs Provision is made for after-care costs as soon as the obligation arises and is charged to profit or loss as void usage progresses. After-care costs are estimated using either the work of external consultants or internal experts. Management uses its judgement and experience to provide for these estimated costs over the life of the site. See note 16 for further details of calculation methodology, assumptions used and potential sensitivities to these calculations. Other provisions Other provisions are made where management judges that a probable future outflow of resources will occur, which can be reliably estimated, arising from a past event. Estimates are based on the work of internal experts and previous operational and commercial experience. See note 16 for further details of calculation methodology, assumptions used and potential sensitivities to these calculations. Income taxes At 31 December 2011, the net liability for current income tax is £538,000 (2010: £4,000). A deferred tax asset of £854,000 (2010: £4,000) has also been recognised. Estimates may be required in determining the level of current and deferred income tax assets and liabilities, which the directors believe are reasonable and adequately recognise any income tax related uncertainties. Various factors may have favourable or adverse effects on the income tax assets or liabilities. These include changes in tax legislation, tax rates and allowances, future levels of spending and the group’s level of future earnings. www.augeanplc.com Augean PLC Annual Report 2011 45 1 Accounting policies continued (r) New IFRS standards and interpretations not applied The following new standards, amendments to standards and interpretations are mandatory for the first time for the financial year beginning 1 January 2011: – – – – – – – – – – – Improvements to IFRS issued May 2010; IFRS 1 First-time Adoption of IFRSs – Revaluation as deemed cost; IFRS 1 First-time Adoption of IFRSs – Use of deemed cost for rate regulated operations; IFRS 7 Financial Instruments: Disclosures – Amendments to disclosures; IAS 1 Presentation of Financial Statements – Presentation of statement of changes in equity; IAS 24 (Revised 2009) ‘Related Party Disclosures’; Amendment to IAS 32 ‘Classification of Rights Issues’; IAS 34 Interim Financial Reporting – Significant events and transactions; IFRIC 13 Customer Loyalty Programmes – Fair value of award credit; Amendments to IFRIC 14 ‘Prepayments of a Minimum Funding Requirement’; and IFRIC 19 ‘Extinguishing Financial Liabilities with Equity Instruments’. The IASB and IFRIC have issued additional standards and interpretations which are effective for periods starting after the date of these financial statements. The following standards and interpretations have yet to be adopted by the group: – – – – – – – – – – – – – Amendments to IAS 1 – Presentation of Other Comprehensive Income; IFRS 9 ‘Financial Instruments’ (effective 1 January 2013); Amendments to IFRS 7 ‘Disclosures – Transfers of Financial Assets’ (effective 1 July 2011); Amendments to IAS 12 Income Taxes – Deferred tax - Recovery of Underlying Assets (effective 1 January 2012); Amendments to IFRS 1 ‘Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters – First-time Adoption of International Financial Reporting Standards’ (effective 1 July 2011); IFRS 13 Fair Value Movements (effective 1 January 2013); Amendments to IAS 27 Separate Financial Statements (effective 1 January 2013); Amendments to IAS 28 Investment in Associates and Joint Ventures (effective 1 January 2013); Amendments to IAS 19 Employee Benefits (effective 1 January 2013); IFRIC 20 Stripping costs in the production phase of a surface mine (effective 1 January 2013); Amendments to IFRS 7 – Disclosures – Offsetting Financial Assets and Financial Liabilities (effective 1 January 2013); Amendments to IAS 32 – Disclosures – Offsetting Financial Assets and Financial Liabilities (effective 1 January 2014); and IFRS 9 Financial instruments (effective 1 January 2015). The revised standards will be adopted when effective in the group’s consolidated financial statements, although are not anticipated to have a significant impact on the group. www.augeanplc.com i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s 46 Augean PLC Annual Report 2011 Notes to the financial statements for the year ended 31 December 2011 2 Operating segments The Group has 2 reportable segments, as described below, which are the Group’s strategic operating divisions. These operating divisions are monitored and strategic decisions are made on the basis of the division’s operating performance. The Group’s operating divisions provide different services to their customers, and are managed separately as they are subject to different risks and returns. The Group’s internal organisation and management structure and its system of internal financial reporting are based primarily on these operating divisions. For each of the operating divisions, the Group’s Chief Executive (CE) (the chief operating decision maker) reviews internal management reports on at least a monthly basis. The following summary describes the operations of each of the Group’s reportable segments, with further details provided in the business review (pages 13 to 15): – – Landfill division – Augean operates three modern hazardous and non-hazardous landfill operating sites based at East Northants Resource Management Facility (ENRMF), Thornhaugh in Northamptonshire and Port Clarence on Teesside. Treatment division – Augean operates seven waste treatment sites across the UK. Activities include waste recovery, recycling, transfer activities and treatment prior to final disposal. Information regarding the results of each reportable segment is included below. Performance is measured based on the segment profit before tax and exceptional items, as included in the internal management reports that are reviewed by the Group’s CE. This profit measure for each operating division is used to measure performance as management believes that such information is the most relevant in evaluating the results of each of the divisions relative to other entities that operate within these industries. Information about reportable segments Assets Segment assets Unallocated segment assets Non-current assets classified as held for sale Deferred tax asset Cash and cash equivalents Group total assets Liabilities Segment liabilities Unallocated segment liabilities Bank overdraft and loans Current tax liabilities Share of losses in jointly controlled entity Group total liabilities 2011 Landfill division £’000 Treatment division £’000 Group £’000 Landfill division £’000 2010 Treatment division £’000 Group £’000 41,178 25,164 66,342 37,793 26,726 64,519 200 50 4 66,596 160 64,679 (12,369) (4,443) (16,812) (9,584) (6,556) (16,140) (2,244) (201) (476) (19,733) (2,882) (460) (19,482) www.augeanplc.com Augean PLC Annual Report 2011 47 i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e Group £’000 8,538 2,372 10,000 217 2,214 6,419 29,760 5,147 34,907 (787) 34,120 767 185 952 (399) (14) 539 (117) 422 i F n a n c a i l s t a t e m e n t s 2 Operating segments continued Information about reportable segments continued Revenue Hazardous landfill activities Non-hazardous landfill activities Waste treatment activities Energy generation APCR management Waste transfer activities Total revenue net of landfill tax Landfill tax Total revenue including inter-segment sales Inter-segment sales 2011 Landfill division £’000 Treatment division £’000 11,175 1,564 — 170 1,846 — 14,755 6,172 20,927 (164) — — 10,271 — 416 6,009 16,696 — 16,696 — Group £’000 11,175 1,564 10,271 170 2,262 6,009 31,451 6,172 37,623 (164) Landfill division £’000 8,538 2,372 — 217 572 — 11,699 5,147 16,846 (787) Revenue 20,763 16,696 37,459 16,059 2010 Treatment division £’000 — — 10,000 — 1,642 6,419 18,061 — 18,061 — 18,061 Result Operating profit/(loss) before exceptional items Exceptional items Operating profit/(loss) Finance charges Share of loss of jointly controlled entity Profit before tax Tax Profit for the year attributable to equity shareholders of the parent company Other information Capital expenditure Depreciation and amortisation 3,919 713 4,632 (2,274) (382) (2,656) 2,996 185 3,181 (2,229) — (2,229) 1,645 331 1,976 (571) (16) 1,389 193 1,582 3,901 (2,722) 1,087 (1,689) 4,988 (4,411) 2,294 (2,720) 1,268 (1,792) 3,562 (4,512) All activities above are continuing and arise solely within the United Kingdom. Inter-segment trading is undertaken on normal commercial terms. www.augeanplc.com 48 Augean PLC Annual Report 2011 Notes to the financial statements for the year ended 31 December 2011 3 Operating profit for the year Total operating profit for the year is arrived at after charging/(crediting): Fees payable to the company’s auditor for the audit of the annual financial statements Fees payable to the company’s auditor for other services: – audit of the financial statements of the company’s subsidiaries pursuant to legislation – other services relating to tax – compliance and advice – other services Amortisation of intangible assets Depreciation of property, plant and equipment: – owned assets – assets held under finance leases and hire purchase contracts Operating leases: – land and buildings – plant and machinery Loss/(profit) on sale of property, plant and equipment Exceptional items: – unjust enrichment provision release (see note 16) – restructuring charges – legal and professional due diligence charges 2011 £’000 2010 £’000 56 3 18 28 105 32 4,088 291 115 359 188 (740) 254 155 52 3 12 — 67 108 4,087 317 147 324 (13) (332) 147 — Following the incident at the Cannock site in November 2010, the Group has received £1.6m from its insurers as full and final settlement of the cost of the clean up, assets replacement and refurbishment and any other required expenditure. The assets which have been relocated to the Port Clarence site and the mixing plants at Cannock are now fully operational. 4 Net finance charges Interest payable Interest and charges payable on bank loans, guarantees and overdrafts Interest on finance leases and hire purchase contracts Unwinding of discount on provisions Interest receivable Bank and other interest receivable Net finance charges 2011 £’000 2010 £’000 429 56 96 581 (10) (10) 571 400 55 94 549 (150) (150) 399 www.augeanplc.com Augean PLC Annual Report 2011 49 5 Group and company employees The average monthly number of employees analysed by function was: Sales Operations Administration Wages and salaries Social security costs Other pension costs 2011 Number 2010 Number 31 139 36 206 2011 £’000 6,283 612 258 7,153 29 154 35 218 2010 £’000 6,381 658 244 7,283 Details of other statutory directors’ remuneration disclosures, as required by the AIM rules, are given in the directors’ remuneration report on pages 29 to 31 under directors’ emoluments and directors’ share plans. The directors have identified eleven (2010: eleven) key management personnel. The total key management personnel compensation, now including the non-executive directors, presented below, was as follows: Short term employment benefits Post employment benefits 6 Tax Current tax UK corporation tax on profit for the period Adjustments in respect of prior periods Deferred tax Charge in respect of the current period Adjustments in respect of prior periods Tax credit/(charge) on the result for the year 2011 £’000 866 75 941 Restated 2010 £‘000 891 69 960 2011 £’000 2010 £’000 (538) (119) (657) 135 715 850 193 — — — (117) — (117) (117) www.augeanplc.com i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s 50 Augean PLC Annual Report 2011 Notes to the financial statements for the year ended 31 December 2011 6 Tax continued Tax reconciliation Profit before tax Tax at theoretical rate Effects of: – expenses not deductible for tax purposes – adjustment relating to prior year re deferred tax – research and development tax relief – utilisation of tax losses previously unrecognised – change in unrecognised deferred tax asset – change in tax rate – adjustments in respect of prior periods Tax (credit)/charge on results 2011 2010 £’000 1,389 361 25 (715) — — — 17 119 (193) % £’000 — 26% 2% (51%) — — — 1% 8% (14%) 539 151 — — (54) (65) 85 — — 117 % — 28% — — (10%) (12%) 16% — — 22% During the year the corporation rate was reduced from 28% to 26% with effect from 1 April 2011. The theoretical tax rate for the financial year ending 31 December 2011 has been calculated at 26% with the impact of the first quarter of the year at 28% being reflected in the change in tax rate of £17,000 (2010: nil). Deferred tax A previously unrecognised deferred tax asset, relating to timing differences between the tax base of the assets and their carrying amount in the statement of financial position, has been utilised during the year, as the directors now believe that it is probable that future taxable profits will be available against which the deductable temporary differences will be utilised. The impact of this can be seen in the above tax reconciliation, reflected as an adjustment relating to prior year £0.7m (2010: nil). Deferred tax asset Deferred tax liability 2011 £’000 1,286 (432) 854 2010 £’000 — — — All deferred tax assets and liabilities have arisen on the temporary timing differences between the tax base of the assets and their carrying value in the statement of financial position as detailed within note 12, Property, Plant and Equipment. IAS 12 Income taxes permits the offsetting of tax assets and liabilities within the same tax jurisdiction and the company has the intention to do so. All of the deferred tax assets were available for offset against deferred tax liabilities and as such have been presented net in the statement of financial position. At beginning of the year Credited/(charged) to the income statement during the year Adjustment in respect of prior periods At end of the year 2011 £’000 4 135 715 854 2010 £’000 121 (117) — 4 www.augeanplc.com Augean PLC Annual Report 2011 51 6 Tax continued Deferred tax continued On the 5 July 2011, the corporation tax rate reduction to 25% was substantially enacted, and will take effect from 1 April 2012. Hence all deferred tax assets and liabilities recognised have been calculated at 25% (2010: 26%), as this is the rate substantially enacted at which they are expected to be recovered. The impact of the rate change on the £4,000 has not been presented separately due to its size. The current expectation is that the full corporation tax rate will continue to reduce by 1% per year on 1 April until it reaches 22% with effect from April 2014. No deferred tax has been recognised during the year in respect of certain temporary differences as there is uncertainty over the extent and timing of their recovery. The potential deferred tax assets in respect of the temporary differences are analysed as follows: Depreciation in excess of capital allowances Other temporary differences (mainly relating to specific tax rules for the timing of landfill deductions) Unrecognised deferred tax asset 2011 £’000 — 43 43 2010 £’000 2,302 183 2,485 The result of a detailed review of the unrecognised deferred tax assets in respect of capital allowances in excess of depreciation has resulted in elements of the previous unrecognised deferred tax asset being eliminated during the year. 7 Earnings per share The calculation of basic earnings per share at 31 December 2011 was based on the profit attributable to ordinary shareholders of £1,582,000 (2010: £422,000) and a weighted average number of ordinary shares outstanding of 99,699,414 (2010: 99,699,414), calculated as follows: i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e Profit after tax for the purposes of basic and diluted earnings per share Exceptional items Profit after tax for the purposes of basic and diluted adjusted earnings per share 2011 £’000 1,582 (331) 1,251 2010 £’000 422 (185) 237 The exceptional items (note 3) have been adjusted, in the adjusted earnings per share, to better reflect the underlying performance of the business, without the impact of one off distorting factors, when presenting the basic and diluted earnings per share. Number of shares Weighted average number of shares for basic earnings per share Effect of dilutive potential ordinary shares from share options Weighted average number of shares for diluted earnings per share Earnings per share Basic and diluted Adjusted earnings per share Basic and diluted 2011 Number 2010 Number 99,699,414 — 99,699,414 — 99,699,414 99,699,414 1.59p 0.42p 1.26p 0.24p www.augeanplc.com i F n a n c a i l s t a t e m e n t s 52 Augean PLC Annual Report 2011 Notes to the financial statements for the year ended 31 December 2011 8 Jointly controlled entity Terramundo Limited (‘Terramundo’) is a 50:50 jointly controlled entity between Augean PLC and DEC NV. Terramundo is a ground remediation facility which uses various proven techniques to clean contaminated soils of both organic and inorganic contaminant leading to a by product which can be used in composting. No trading has taken place during the current or previous periods, however both parties have agreed to maintain their interest in the entity and believe that the future trading will support the net liabilities owed to its parent companies. The cost of investment held by Augean PLC, in its 50% interest at 31 December 2011 was £100 (2010: £100). During the period ended 31 December 2011 the jointly controlled entity generated the following revenue and costs: Revenue Costs Loss for the year Augean PLC’s share of the loss for the period 2011 £’000 2010 £’000 — (32) (32) (16) — (28) (28) (14) At 31 December 2011 the jointly controlled entity held net liabilities of £952,000 (2010: £920,800), of which the group’s 50% share was £476,000 (2010: £460,400). The net liabilities of the jointly controlled entity are analysed below, for information purposes: Non-current assets Current assets Current liabilities Non-current liabilities Net liabilities 9 Goodwill Cost At 1 January 2010 At 1 January 2011 At 31 December 2011 Provision for impairment At 1 January 2010 At 1 January 2011 At 31 December 2011 Net book value At 31 December 2011 At 1 January 2011 At 1 January 2010 www.augeanplc.com 2011 £’000 10 22 — (984) (952) 2010 £’000 24 26 (7) (964) (921) £’000 103,768 103,768 103,768 (82,063) (82,063) (82,063) 21,705 21,705 21,705 Augean PLC Annual Report 2011 53 9 Goodwill continued The goodwill arose on the acquisition of subsidiary undertakings and businesses, and represents the excess of the fair value of the consideration given over the fair value of the identifiable assets and liabilities acquired. The Goodwill which arose before the date of transition to IFRS has been retained at the previous UK GAAP amounts. Goodwill has been allocated to the group’s two Cash Generating Units (CGU’s), the Landfill and Treatment divisions, which are defined as the group’s reportable segments, in note 2 and are the lowest level at which goodwill is monitored for internal management purposes. The allocation of goodwill by CGU is as follows: Landfill division Treatment division Total 2011 £’000 12,420 9,285 21,705 Inter- segment transfer 857 (857) — 2010 £’000 11,563 10,142 21,705 Following the restructuring of the Cannock site during 2011, the APCR processing capabilities, which were acquired with the Cannock operations, have been transferred to the East Northants Resource Management Facility (ENRMF). The revenues and costs of this activity are now reflected in the Landfill division’s performance. The goodwill of £857,000 which arose on acquisition, reflecting the APCR capabilities, has therefore been transferred to the Landfill division. Goodwill is tested for impairment annually at the balance sheet date and as and when other events or changes in circumstance indicate that the carrying amount may not be fully recoverable. The goodwill impairment test is performed by comparing the net book value of the goodwill and other non-current assets for a particular CGU to its value in use estimated on a discounted cash flow basis. The discounted cash flows have been prepared separately for the Landfill and Treatment division. The key assumptions for the landfill division’s cash flows are: – – – – – based on approved budgets and plans for 2012 and, beyond this period, have been forecast until expected site closure; revenue streams, based on anticipated waste volumes, are expected to remain flat with no change to average price, as the competitive nature of the landfill market leads to ongoing pricing pressures; forecast gross margin (GM) has been based upon past performance and the approved budgets and plans. Gross margin has been forecast to improve on a compound basis by 1% of GM per annum from years 1 to 5, where it will become fixed as management focus maintaining efficient operations. The GM improvements are expected to be delivered through improved and innovative waste treatment processes, continued targeting of margin enhancing waste streams and focus on cost control; using the discount rate below there is no indication of impairment of £4.1m (2010: £6.8m); and sensitivity analysis has been performed over the key assumptions which indicate the following impact, meaning reduction or increase in headroom: Discount factor Gross margin Revenue growth rate Sensitivity 1% 1% 1% Impact in 2011 £3.4m £1.0m £8.0m Impact in 2010 £3.6m £0.8m £8.8m www.augeanplc.com i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s 54 Augean PLC Annual Report 2011 Notes to the financial statements for the year ended 31 December 2011 9 Goodwill continued The key assumptions for the treatment division’s cash flows are: – – – – – – based on approved budgets and plans for 2012 and, beyond this period, have been forecast until expected site closure; revenue growth over the period to 2015 is expected to achieve 4.7% per annum, consistent with the current underlying growth rate of the division. This reflects the impact of the new sales team in 2011, the existing asset base becoming more fully utilised and throughput increases at the major processing sites (particularly Cannock, Paisley and Port Clarence Waste Recovery Park). Revenue growth from 2016 is expected of 2% per annum; a 1% compound growth in gross margin per annum is assumed from years 1 to 3. This represents the improved waste acceptance procedures which focusing on higher margin waste, improved treatment techniques and the impact of the closure of Ellesmere Port. From 2016 gross margin is assumed to remain constant as increased process efficiencies are offset by inflationary cost increases; fixed costs are anticipated to rise at 0.5% per annum for the life of the site reflecting the impact of cost inflation offset by effective underlying cost control; using the discount rate below there is no indication of impairment with headroom of £11.1m (2010: £0.6m); and sensitivity analysis has been performed over the key assumptions which indicate the following impact, meaning reduction or increase in headroom: Discount factor Gross margin Revenue growth rate Sensitivity 1% 1% 1% Impact in 2011 £3.7m £2.2m £7.4m Impact in 2010 £3.6m £1.9m £4.4m The cash flows for both CGUs have been discounted using a pre-tax discount rate of 11.0% (2010: 14.5%), which reflects management’s best estimate of the current market’s assessment of the time value of money and the business, operational and financial risks specific to the CGUs. The decrease in the discount rates from 2010 reflects the increased stability of performance, lower costs of borrowing and the lower equity market risk premiums. Based on the assumptions above and consideration of appropriate sensitivity analysis, management is satisfied that no impairment of goodwill exists at the date of these financial statements. The principal risks which will apply to future reviews of goodwill continue to include the changes in rate of waste production in the markets in which the group operates; significant increases to price competition beyond that experienced to date or anticipated and the impact of changes in legislation on operations. www.augeanplc.com Augean PLC Annual Report 2011 55 10 Other intangible assets Customer contracts £’000 Group Computer software £’000 Company Computer software £’000 Total £’000 Cost At 1 January 2010 Additions At 1 January 2011 Additions At 31 December 2011 Amortisation At 1 January 2010 Charge for the year At 1 January 2011 Charge for the year At 31 December 2011 Net book value At 31 December 2011 At 31 December 2010 At 1 January 2010 11 Investments Cost At 1 January 2010 At 1 January 2011 At 31 December 2011 Provision for impairment At 1 January 2010 At 1 January 2011 At 31 December 2011 Net book value At 31 December 2011 At 1 January 2011 At 1 January 2010 374 — 374 — 374 295 79 374 — 374 — — 79 291 27 318 32 350 240 29 269 32 301 49 49 51 665 27 692 32 724 535 108 643 32 675 49 49 130 248 27 275 32 307 206 24 230 32 262 45 45 42 £’000 130,031 130,031 130,031 (74,450) (74,450) (74,450) 55,581 55,581 55,581 www.augeanplc.com i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s 56 Augean PLC Annual Report 2011 Notes to the financial statements for the year ended 31 December 2011 11 Investments continued The principal trading subsidiary companies of the group are as follows: Name of company Augean Treatment Limited Augean North Limited Augean South Limited Country of registration or incorporation Proportion held % Nature of business England and Wales England and Wales England and Wales 100 100 100 Waste treatment Landfill operations Landfill operations These companies are owned directly by Augean PLC with the exception of Augean South Limited. In addition to the above, the company holds 50% of the issued share capital of Terramundo Limited, a jointly controlled entity with DEC NV (note 8). The full list of subsidiaries will be shown in the next annual return. All other subsidiaries are dormant. 12 Property, plant and equipment Group Cost At 1 January 2010 Additions Disposals At 1 January 2011 Additions Disposals At 31 December 2011 Accumulated depreciation At 1 January 2010 Charge for year Disposals At 1 January 2011 Charge for year Disposals At 31 December 2011 Net book value At 31 December 2011 At 1 January 2011 At 1 January 2010 Freehold land and buildings £’000 33,318 1,611 — 34,929 1,223 — Engineered cells £’000 Plant and machinery £’000 6,908 451 — 7,359 2,339 — 11,963 1,473 (63) 13,373 1,394 (708) Total £’000 52,189 3,535 (63) 55,661 4,956 (708) 36,152 9,698 14,059 59,909 6,610 1,221 — 7,831 991 — 5,523 1,251 — 6,774 1,484 — 3,923 1,932 (44) 5,811 1,904 (301) 16,056 4,404 (44) 20,416 4,379 (301) 8,822 8,258 7,414 24,494 27,330 27,098 26,708 1,440 585 1,385 6,645 35,415 7,562 8,040 35,245 36,133 Additions of £1.2m (2010: £1.6m) to freehold land and buildings during the year include £0.2m (2010: £0.8m) in respect of the development of the landfill asset at the East Northants Resource Management Facility. The additions have been made on the expectation of future economic benefits from ongoing planning and permitting development which will support the future extension of the site and also the disposal of low level waste at the facility. www.augeanplc.com Augean PLC Annual Report 2011 57 12 Property, plant and equipment continued Group continued During the year the Group has re-assessed the depreciable lives of the landfill site land assets in line with the useful economic lives of the landfill sites based on the current levels of void consumption and remaining void space available. 2011 saw an increase in the rate of void consumption, reflecting the growth in landfill volumes. The impact of this on the depreciation charge has been offset by the re-assessment exercise which has reduced the charge in 2011 by £1.1m. There were no outstanding contractual commitments for acquisitions of property, plant or equipment at 31 December 2011 (2010: nil). Plant and machinery includes the following amounts in respect of assets held under finance leases and hire purchase contracts: Cost Accumulated depreciation Net book value 2011 £’000 2,001 (644) 1,357 2010 £’000 2,473 (647) 1,826 During the year the group reclassified surplus plant and machinery at the Cannock site, with a net book value of £204,000 as assets held for sale. The external market value of the asset as at 31 December 2011 is £200,000, the difference has been taken to the income statement during the year. The asset is being actively marketed for sale in its current condition. Company Cost At 1 January 2010 Additions At 1 January 2011 Additions At 31 December 2011 Accumulated depreciation At 1 January 2010 Charge for year At 1 January 2011 Charge for year At 31 December 2011 Net book value At 31 December 2011 At 1 January 2011 At 1 January 2010 Freehold land and buildings £’000 Plant and machinery £’000 778 — 778 — 778 58 13 71 13 84 694 707 720 296 47 343 50 393 212 56 268 52 320 73 75 84 Total £’000 1,074 47 1,121 50 1,171 270 69 339 65 404 767 782 804 www.augeanplc.com i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s 58 Augean PLC Annual Report 2011 Notes to the financial statements for the year ended 31 December 2011 13 Trade and other receivables Non-current assets Amounts due from jointly controlled entity Further detail is provided in notes 8 and 26. Current assets Trade receivables Other receivables Prepayments and accrued income Group Company 2011 £’000 492 2010 £’000 482 2011 £’000 492 2010 £’000 482 Group Company 2011 £’000 7,069 — 591 7,660 2010 £’000 5,893 338 687 6,918 2011 £’000 — — 376 376 2010 £’000 — 90 356 446 All amounts are anticipated to be recoverable in the short term. The carrying amount of trade receivables is considered a reasonable approximation of fair value. All trade and other receivables have been reviewed for indicators of impairment. Certain trade receivables were found to be impaired and a provision of £124,000 (2010: £329,000) has been recorded accordingly, see note 23. 14 Trade and other payables Current Trade payables Amounts due to subsidiary undertakings Other taxes and social security Accruals and deferred revenue Group Company 2011 £’000 2,652 — 896 4,531 8,079 2010 £’000 2,476 — 1,035 3,720 7,231 2011 £’000 269 8,226 76 448 9,019 2010 £’000 229 8,377 185 242 9,033 All amounts are anticipated to be payable in the short term. The carrying values are considered to be a reasonable approximation of fair value. www.augeanplc.com Augean PLC Annual Report 2011 59 15 Financial liabilities This note provides information about the group’s and company’s interest bearing borrowings which are carried at amortised cost. Group Company Current Bank overdraft Obligations under finance leases and hire purchase contracts Non-current Bank loans Obligations under finance leases and hire purchase contracts Analysis of total financial liabilities Bank overdraft Bank loans Obligations under finance leases and hire purchase contracts Total financial liabilities are repayable as follows: – on demand or within one year – in the second year – in the third to fifth years inclusive Obligations under finance leases and hire purchase contracts are repayable as follows: – on demand or within one year – in the second year – in the third to fifth years inclusive 2011 £’000 996 336 1,332 2,244 396 2,640 996 2,244 732 3,972 1,332 287 2,353 3,972 336 287 109 732 2010 £’000 2011 £’000 22 414 436 2,882 732 3,614 22 2,882 1,146 4,050 436 336 3,278 4,050 414 336 396 1,146 3,871 — 3,871 2,244 — 2,244 3,871 2,244 — 6,115 3,871 — 2,244 6,115 — — — — i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e 2010 £’000 4,034 — 4,034 2,882 — 2,882 4,034 2,882 — 6,916 4,034 — 2,882 6,916 — — — — i F n a n c a i l s t a t e m e n t s The obligations under finance leases and hire purchase contracts are secured against the specific assets financed with a carrying amount of £1,357,000 (2010: £1,826,000). The bank overdraft, bank loan and guarantees are secured by way of cross guarantees and indemnities across the group. For more information about the Group’s exposure to interest rate, credit risk and liquidity risk, see note 23. www.augeanplc.com 60 Augean PLC Annual Report 2011 Notes to the financial statements for the year ended 31 December 2011 16 Provisions At 1 January 2010 Charged to profit or loss during the year – unwinding of discount – other Additional capping provision Utilised during the year At 1 January 2011 Charged to profit or loss during the year – unwinding of discount – other Utilised during the year Released during the year Additional capping provision At 31 December 2011 Group Restoration and after-care costs of landfill sites £’000 Capping provision £’000 Other provisions £’000 2,161 3,043 116 94 — (22) — — 446 — 987 — 987 — (75) 2,349 3,489 1,899 96 92 — — — — — — — 566 2,537 4,055 — — (200) (1,623) — 76 Total £’000 6,191 116 1,081 446 (97) 7,737 96 92 (200) (1,623) 566 6,668 The provision for restoration and after-care relates to closure and post-closure costs for all landfill sites, charged over the estimated active life of the sites. The expenditure is incurred partially on completion of the landfill sites (restoration) and in part after the closure of the landfill sites (after-care) over a period up to 60 years from the site closure dates. After-care expenditure relates to items such as monitoring, gas and leachate management and may be influenced by changes in legislation and technology. The provision is based on managements’ best estimate of the annual costs associated with these activities over the 60 year period, using current costs and discounted using discount rate of 3%. The capping provision reflects the expected costs of capping established and active landfill cells. Capping is required following the end of a cell’s useful economic life and the build up of the provision is based on the rate of use of the available void space within each cell. During the year £566,000 has been provided to reflect the cost of capping the cell volumes consumed. This provision is not discounted as the costs are expected to be incurred shortly after consumption of the void, which is due to start in 2012. Other provisions included amounts for the disposal of stocks of disused tyres which were incorporated, during the year, in the engineering of new landfill cells at the East Northants Resource Management Facility (ENRMF). This resulted in the utilisation of £348,000 of the £424,000 provision, of which £200,000 has been used in the construction of new landfill cells and capitalised in line with the group’s accounting policies. The remaining tyre provision is anticipated to be utilised during the next landfill cell construction cycle. The remaining release of other provisions during the year of £1,475,000 reflects the resolution of the review of the Group’s landfill tax liabilities. Following appropriate advice, including legal advice, obtained during the year, it has been established that the provisions are no longer needed and as such been released. 17 Share capital Authorised – 103,000,000 (2010: 103,000,000) shares of 10p Allotted, called up and fully paid – 99,699,414 (2010: 99,699,414) shares of 10p 2011 £’000 2010 £’000 10,300 10,300 9,970 9,970 www.augeanplc.com Augean PLC Annual Report 2011 61 18 Share-based payments At 31 December 2011 outstanding awards to subscribe for ordinary shares of 10p each in the company, granted in accordance with the rules of the Augean share option schemes and the Augean LTIP, were as follows: Exercise or vesting date Augean Share Option Schemes December 2004 – December 2014 December 2012 – December 2019 May 2011 - May 2021 Augean LTIP 29 April 2011 21 December 2012 Of which exercisable Exercise price At 01 January 2011 180.0p 39.5p 29.0p 700,000 1,810,122 1,496,552 4,006,674 10.0p 10.0p 362,632 841,768 1,204,400 5,211,074 Exercised Lapsed Granted At 31 December 2011 — — — — — — — — — 700,000 — 1,810,122 — 1,496,552 — 4,006,674 — (362,632) — (841,768) — (1,204,400) — — — — — — — (1,204,400) — 4,006,674 700,000 Share option scheme (equity settled) On 21 May 2011 the Group established a further share option program that entitled Group’s directors and senior management to purchase shares in the company. These options were granted on similar terms to the 21 December 2009 grant, except for the exercise price. The fair value of remaining share options has been calculated using the Black Scholes model. The assumptions used in the calculation of the fair value of the share options outstanding during the year were: i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e Grant date Exercise period Share price at grant date Exercise price Shares under option Expected volatility Expected life (years) Risk-free rate Expected dividend yield Fair value per option 2011 Share options 20 May 2011 May 2014 – May 2021 28.9p 29.0p 1,496,552 35% 4 years 2.3% 0.0% £0.09 2009 Share options 21 December 2009 December 2012 – December 2019 39.5p 39.5p 1,810,112 43% 4 years 2.5% 0.0% £0.14 Expected volatility was determined by reviewing the historical volatility of the company’s share price since its formation by comparison to the average volatility of comparable listed companies. The risk-free rate of return is the yield on zero coupon UK government bonds of a term equal to the expected term of the options. The share options have a vesting period of three years but no market or non-market performance criteria attached to them (with the exception of the December 2004 grant which vested immediately). Rights under the share option scheme are usually forfeited if the employee leaves the group of his or her own accord before the rights vest. For options outstanding at 31 December 2011, the weighted average remaining contractual life is 6.92 (2010: 7.86 years). www.augeanplc.com i F n a n c a i l s t a t e m e n t s 62 Augean PLC Annual Report 2011 Notes to the financial statements for the year ended 31 December 2011 18 Share-based payments continued LTIP Under the LTIP senior employees may be granted an award annually of up to 100% of basic salary. The award vests in the form of shares in the company and is subject to the attainment of pre-determined performance conditions over a three year period. For the 2008 award which vests on 29 April 2011, participants were to receive 100% of the award if the group’s normalised pre-tax earnings for the year ended 31 December 2010 are greater than £7.1m. No award would vest unless the group‘s normalised pre-tax earnings for year ended 31 December 2010 are greater than £5.6m, at which level 30% of the award would apply. For the 2009 award which vests on 21 December 2012, participants would receive 100% of the award if the group’s normalised pre-tax earnings for the year ending 31 December 2011 were greater than £11.3m. No award would vest unless the group‘s normalised pre-tax earnings for year ending 31 December 2011 was greater than £3.3m, at which level 30% of the award would apply. The performance conditions for the 2008 award, which was due to vest on 29 April 2011, were not met and therefore the options have now lapsed. In addition, the performance conditions for the 2009 award, due to vest on 21 December 2012, were not met and have now lapsed. Rights under the LTIP scheme are usually forfeited if the employee leaves the group of his or her own accord before the rights vest. The fair value of rights to acquire shares has been calculated based on the value of the shares on grant adjusted for future dividend streams. During the year the group recognised total expenses of £84,000 (2010: £4,000) related to equity-settled share-based payment transactions. No options under either the share option or LTIP schemes were exercised or vested during the year. 19 Operating lease commitments The group has commitments to make minimum lease payments under non-cancellable operating leases as follows: 2011 £’000 2010 £’000 352 351 703 115 252 71 438 352 640 992 132 252 199 583 Plant and machinery Leases which expire: – within one year – within two to five years Land and buildings Leases which expire: – within one year – within two to five years – after five years www.augeanplc.com Augean PLC Annual Report 2011 63 20 Reconciliation of operating profit to net cash generated from operating activities Operating profit Amortisation of intangible assets Depreciation Aftercare provisions Earnings before interest, tax, depreciation and amortisation (EBITDA) Loss/(profit) on sale of property, plant and equipment Share based payments (Increase)/decrease in inventories (Increase)/decrease in trade and other receivables Decrease in net payables from subsidiary undertakings Increase/(decrease) in trade and other payables (Decrease)/increase in provisions Cash generated from/(used in) operations Interest paid Tax paid Net cash generated from/(used in) operating activities 21 Analysis of changes in net debt The table below presents the net debt of the Group at the balance sheet date. Cash and cash equivalents Overdraft Bank loans due after one year Finance leases Net debt Group Company 2011 £’000 1,976 32 4,379 92 6,479 188 84 (101) (752) — 438 (1,623) 4,713 (469) (123) 4,121 2010 £’000 952 108 4,404 94 5,558 (13) 4 14 137 — (796) 912 5,816 (297) (72) 5,447 2011 £’000 1,071 32 65 — 1,168 — 84 — 60 (151) 131 — 1,292 (565) — 727 2010 £’000 587 24 69 — 680 — 4 — (320) (755) (1,085) — (1,476) (391) — (1,867) 31 December 2010 £’000 160 (22) (2,882) (1,146) (3,890) Cash flow £’000 (156) (974) 638 414 31 December 2011 £’000 4 (996) (2,244) (732) (78) (3,968) i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s www.augeanplc.com 64 Augean PLC Annual Report 2011 Notes to the financial statements for the year ended 31 December 2011 22 Business combinations The 2009 financial statements included an estimate for deferred consideration relating the acquisition of Astec Chemical Waste Services Limited of £204,000. The deferred consideration was based on specific targets set within the sale and purchase agreement for the year ended 31 December 2009. These targets were met and the final consideration was paid in January 2010. There were no new business combinations during the year. 23 Financial instruments The financial assets of the group and company are categorised as follows: Loans and receivables £’000 — — — — — — 7,561 — 4 Group Non- financial assets £’000 21,705 49 — 35,415 854 217 591 200 — Total £’000 21,705 49 — 35,415 854 217 8,152 200 4 7,565 59,031 66,596 Loans and receivables £’000 Company Non- financial assets £’000 — 45 55,581 767 50 — 376 — — — — — — — — 492 — — 492 Total £’000 — 45 55,581 767 50 — 868 — — 56,819 57,311 Loans and receivables £’000 — — — — — — 6,713 160 6,873 Group Non- financial assets £’000 21,705 49 — 35,245 4 116 687 — 57,806 Loans and receivables £’000 — — — — — — 482 156 638 Total £’000 21,705 49 — 35,245 4 116 7,400 160 64,679 Company Non- financial assets £’000 — 45 55,581 782 — — 446 — 56,854 Total £’000 — 45 55,581 782 — — 928 156 57,492 As at 31 December 2011 Goodwill Other intangible assets Investments Property, plant and equipment Deferred tax asset Inventories Trade and other receivables Assets held for resale Cash and cash equivalents As at 31 December 2010 Goodwill Other intangible assets Investments Property, plant and equipment Deferred tax asset Inventories Trade and other receivables Cash and cash equivalents www.augeanplc.com Augean PLC Annual Report 2011 65 23 Financial instruments continued The financial liabilities of the group and company are categorised as follows: As at 31 December 2011 Trade and other payables – current Current tax liabilities Financial liabilities – current Financial liabilities – non-current Provisions Share of losses of jointly controlled entity As at 31 December 2010 Trade and other payables – current Current tax liabilities Financial liabilities – current Financial liabilities – non-current Provisions Share of losses of jointly controlled entity Financial liabilities at amortised cost £’000 Group Liabilities not within scope of IAS 39 £’000 Financial liabilities at amortised cost £’000 Company Liabilities not within scope of IAS 39 £’000 Balance sheet total £’000 8,079 538 1,332 2,640 6,668 476 1,826 538 336 396 6,668 476 Group Liabilities not within scope of IAS 39 £’000 1,770 4 414 732 7,737 460 Balance sheet total £’000 7,231 4 436 3,614 7,737 460 6,253 — 996 2,244 — — 9,493 Financial liabilities at amortised cost £’000 5,461 — 22 2,882 — — 8,365 8,943 — 3,871 2,244 — — 8,848 — 4,034 2,882 — — 11,117 19,482 15,764 10,240 19,733 15,058 Financial liabilities at amortised cost £’000 Company Liabilities not within scope of IAS 39 £’000 i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e Balance sheet total £’000 9,019 201 3,871 2,244 — — 15,335 Balance sheet total £’000 9,033 — 4,034 2,882 — — 15,949 76 201 — — — — 277 185 — — — — — 185 The group and company’s financial liabilities have contractual maturities (including interest payments where applicable) which are summarised below. As these amounts are the contractual undiscounted amounts they do not agree to the amounts shown in the balance sheet for financial liabilities. i F n a n c a i l s t a t e m e n t s www.augeanplc.com 66 Augean PLC Annual Report 2011 Notes to the financial statements for the year ended 31 December 2011 23 Financial instruments continued Group Amounts due in less than one year £’000 Amounts due in second to fifth year £’000 6,253 1,353 — 7,606 — — 2,719 2,719 Amounts due in less than one year £’000 Amounts due in second to fifth year £’000 5,461 477 — 5,938 — — 3,849 3,849 Amounts due in less than one year £’000 Amounts due in second to fifth year £’000 8,943 3,871 — 12,814 Amounts due in less than one year £’000 8,848 4,034 — 12,882 — — 2,311 2,311 Amounts due in second to fifth year £’000 — — 3,076 3,076 Total financial liabilities £’000 6,253 1,353 2,719 10,325 Total financial liabilities £’000 5,461 477 3,849 9,787 Total financial liabilities £’000 8,943 3,871 2,311 15,125 Total financial liabilities £’000 8,848 4,034 3,076 15,958 As at 31 December 2011 Trade and other payables – current Financial liabilities – current Financial liabilities – non-current Total As at 31 December 2010 Trade and other payables – current Financial liabilities – current Financial liabilities – non-current Company As at 31 December 2011 Trade and other payables – current Financial liabilities – current Financial liabilities – non-current As at 31 December 2010 Trade and other payables – current Financial liabilities – current Financial liabilities – non-current www.augeanplc.com Augean PLC Annual Report 2011 67 23 Financial instruments continued Financial risk management objectives and policies Overview The group has exposure to the following risks arising from financial instruments: – – – liquidity risk; credit risk; and interest rate risk. As the group’s transactions take place solely in sterling there is no direct foreign currency risk. The management of the group’s financial risks and the related objectives and policies are the responsibility of the executive directors. The directors regularly review the group’s financial risk management policies and procedures to ensure that they appropriately reflect the changing nature of the market and business. The group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. The group has maintained its policy that no trading in financial instruments shall be undertaken. The group’s principal financial instruments during the period comprised bank loans, cash and cash equivalents and finance leases. The main purpose of these financial instruments is to finance the group’s operations. The group’s other financial instruments include short term receivables and payables which arise directly from its operations. There was no material difference between the fair value of the financial assets and financial liabilities and their book value. Liquidity risk Liquidity risk is the risk that the group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The group seeks to maintain a balance between continuity of funding and flexibility. The objective is to maintain sufficient resources to meet the group’s funding needs for the foreseeable future. At 31 December 2011 the group carried relatively low levels of debt at £3,968,000 (2010: £3,890,000) and short term flexibility is achieved through bank facilities comprising of a £10m revolving credit and overdraft facility. The revolving credit and overdraft facility has recently been renegotiated with HSBC Bank PLC, which has ensured committed facilities until 2 March 2015, at a floating interest rate of 2.7% above LIBOR. Credit risk Credit risk is the risk of financial loss to the group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the group’s receivables from customers. The group has a robust customer credit policy in place and the exposure to credit risk is monitored on a daily basis. The group’s standard credit terms are 30 days from date of invoice. Invoices greater than 30 days old are assessed as overdue. The maximum exposure to credit risk is the carrying value of each financial asset included on the statement of financial position as summarised below: Cash and cash equivalents Trade and other receivables Group Company 2011 £’000 4 8,152 8,156 2010 £’000 160 7,400 7,560 2011 £’000 — 868 868 2010 £’000 156 928 1,084 At 31 December 2011 £3.7m, (2010: £3.4m) of the group’s trade receivables were past due. A provision of £0.1m (2010: £0.3m) is held to mitigate the exposure to potential bad and doubtful debts. www.augeanplc.com i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s 68 Augean PLC Annual Report 2011 Notes to the financial statements for the year ended 31 December 2011 23 Financial instruments continued Financial risk management objectives and policies continued Overview continued Credit risk continued The ageing of the group’s trade receivables past their due date but not impaired is as follows: Greater than one but not more than four months old More than four months old Total past due trade receivables Trade receivables not yet past due – less than one month old Total gross trade receivables Bad debt provision Total net trade receivables (note 13) 2011 £’000 3,562 175 3,737 3,457 7,194 (124) 7,069 2010 £’000 3,213 224 3,437 2,785 6,222 (329) 5,893 The group’s management considers that all the above financial assets that are not impaired or past due for each of the reporting dates under review are of good quality. The company has no trade receivables. The movement on the bad debt provision in the period is analysed below. The group provides for bad debts on a specific basis with reference to the age profile of the trade receivables held at the year end. Bad debt provision as at 31 December 2010 Amounts utilised Amounts provided Bad debt provision as at 31 December 2011 £’000 329 (329) 124 124 Interest rate risk The group finances its operations through a mixture of free cash flow, overdraft facilities, bank borrowings and hire purchase leasing. Due to the relatively low level of the group’s borrowings no interest rate swaps or other forms of interest risk management has been undertaken. The group regularly reviews its exposure to fluctuations in underlying interest rates and will take appropriate action if required to minimise any impact on the performance and financial position of the group. The interest rate profile of the group and company’s financial liabilities at 31 December 2011 was: Interest free £’000 — — — — Fixed rate £’000 — 33 33 144 Floating rate £’000 2,244 699 2,943 3,884 Total £’000 2,244 732 2,976 4,028 Group Bank loans Finance leases At 31 December 2011 At 31 December 2010 www.augeanplc.com Augean PLC Annual Report 2011 69 23 Financial instruments continued Financial risk management objectives and policies continued Overview continued Interest rate risk continued Company Bank loans Finance leases At 31 December 2011 At 31 December 2010 Interest free £’000 — — — — Fixed rate £’000 — — — — Floating rate £’000 2,244 — 2,244 2,282 Total £’000 2,244 — 2,244 2,282 The interest rate on the floating rate borrowings was 2.5% (2010: 2.5%) above LIBOR. In March 2012 the group has renegotiated its overdraft and loan facilities with HSBC until 2 March 2015 which will now attract an interest rate of 2.7% above LIBOR. A change in interest rate of 0.5% affects the annual interest cost for both the group and company by approximately £11,000 (2010: £14,000). The hire purchase agreements of the group under a fixed rate contract have a weighted average interest rate of 6.8% (2010: 6.6%) and a weighted average duration of two years (2010: 2 years). The hire purchase agreements of the group under a floating rate contract have a weighted average interest rate of 3.1% and a weighted average duration of five years. The maturity profile of the group’s financial liabilities is shown in note 15. The Board recognises that there is continuing debate as to how to deal with the European sovereign debt and banking crisis and this is borne in mind through out all key strategic decision making processes. The board feels that the current risk management policies described above continue to be appropriate but that they will be regularly assessed to ensure this remains the case. Capital management policies and procedures The group defines the capital that it manages as the group’s share capital and financial liabilities, as shown in the table below: Share capital Financial liabilities Note 17 15 2011 £’000 9,970 (3,972) 2010 £’000 9,970 (4,050) The group’s capital management objectives which have remained unchanged during the year are: – – to ensure the group’s ability to continue as a going concern; and to provide a strong financial base to deliver growth and adequate return to shareholders. The group’s primary sources of capital are equity (statement of changes in shareholders’ equity), bank debt and finance leases (note 21) secured against certain assets. By pricing products and services commensurately with the level of risk and focusing on the effective collection of cash from customers the group aims to maximise revenues and operating cash flows. Cash flow is further controlled by ongoing justification, monitoring and reporting of capital investment expenditures and regular monitoring and reporting of operating costs. Working capital fluctuations are managed through employing the overdraft facility available, which at the year end £996,000 (2010: £22,000). www.augeanplc.com i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s 70 Augean PLC Annual Report 2011 Notes to the financial statements for the year ended 31 December 2011 23 Financial instruments continued Financial risk management objectives and policies continued Overview continued Capital management policies and procedures continued The group maintains the current capital structure as it considers that this will provide sufficient flexibility to ensure that appropriate investment can be made, if required, to implement and achieve the longer term growth strategy of the group. The primary source of funding would be achieved through drawing on the recently renewed loan facility, which has £6.7m of headroom at 31 December 2011 (2010: £6.0m). Management sets targets against the following measures and monitors the group’s performance against each throughout the year: – – – bank facility covenants, which include Net debt to EBITDA and EBIT to net debt costs; net debt to equity ratio; and free cash flow generated. The performance against each of these capital measures is shown in the table below: Net debt to EBITDA EBIT to net debt costs Net debt to equity (%) Free cash flow (£’000s) 2011 Actual 0.6 8.7 8.5% (479) 2011 Target <2.5 >2.0 — — 2010 Actual 0.7 4.1 8.6% 1,834 The level of free cash flow for 2011 reflects a number of one off investments in the business which were required during the year. These included continued investment at the ENRMF to accept Low Level Waste, necessary cell and capital investment earlier than expected and spend incurred relocating certain treatment assets from the Cannock site to PCWRP. The value of net debt and free cash flow is monitored on a daily basis and balances of finance leases are reviewed monthly as repayments are made and balances reduce. Free cash flow represents net operating cash flows adjusted for capital investment and finance lease repayments. This is reconciled to the statement of cash flows as follows. Net operating cash flow (note 20) Purchase of property, plant and equipment Repayments of obligations under finance leases Free cash flow 2011 £’000 4,121 (4,186) (414) 2010 £’000 5,447 (3,159) (454) (479) 1,834 Free cash flow does not include £0.5m (2010: £nil) of collections expected from customers during December 2011 but not received until January 2012. If these delayed collections were to have been received before the year end the free cash flow for the year would have been £0.0m and net debt £3.4m. www.augeanplc.com Augean PLC Annual Report 2011 71 24 Post year end events There has been one significant event which has occurred post year end, as follows: Renewal of banking facilities The group meets its short term working capital requirements through an overdraft and revolving loan facility with HSBC Bank PLC. The previous facility which was due for renewal on 30 November 2012 was renewed to 2 March 2015. The facility ensures that the group has access to a £1m overdraft and £9m revolving credit facility for 3 years to this date. 25 Contingent liabilities and cross guarantees In accordance with Pollution, Prevention and Control (PPC) permitting, the group has to make such financial provision as is deemed adequate by the Environment Agency to discharge its obligations under the relevant site permits for its landfill sites. Consequently guarantees have been provided in favour of the Environment Agency in respect of the group’s landfill sites. Total guarantees outstanding at the year end were £7.4m (2010: £6.8m). Future site restoration costs for each landfill site have been provided as disclosed in note 16. The group suffered an incident at its Cannock site in November 2010, which resulted in an explosion in one of the on-site treatment processes. The incident is the subject of an on-going investigation by the Health and Safety Executive. At this stage it is still too early to establish the likelihood of any legal action or quantum of any fines which may or may not follow the investigation. 26 Related party disclosures IAS 24 ‘Related Party Transactions’ requires the disclosure of the details of material transactions between reporting entities and related parties. The group has taken advantage of the exemption under IAS 24 not to disclose transactions between subsidiaries which are eliminated on consolidation. Related party transactions of the group which are not eliminated on consolidation and related party transactions of the company are both as follows: Transactions and balances with jointly controlled entity i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e Group Transactions with Terramundo Limited: – revenue – costs Amounts owed by Terramundo Limited: – more than one year 2011 £’000 2010 £’000 — — 2011 £’000 492 492 — — 2010 £’000 482 482 In 2010, the balance owed by Terramundo Limited to Augean was reclassified as a non-current asset. This reflects Augean’s investment in the long term future of the venture and the expectation that this balance will be recovered in more than 12 months from the balance sheet date. When Terramundo starts to trade generating profits from which it can repay its liabilities to its parent companies, this classification will be re-assessed. The increase in the balance from 2010 reflects the interest accruing on the loan from Augean. Further details regarding Terramundo Limited are disclosed in note 8. www.augeanplc.com i F n a n c a i l s t a t e m e n t s 72 Augean PLC Annual Report 2011 Notes to the financial statements for the year ended 31 December 2011 26 Related party disclosures continued Transactions and balances with jointly controlled entity continued Related party transactions of the company are noted below: Amounts owed to Terramundo Limited: – less than one year Amounts owed by Terramundo Limited: – more than one year 2011 £’000 2010 £’000 — 492 492 — 482 482 Transactions and balances with subsidiary undertakings Included within current trade and other payables (note 14) are amounts owed to 100% subsidiary undertakings of £8.2m (2010: £8.4m). The movement in the company’s balances with its subsidiaries reflects the group’s banking facilities and arrangements operating during the year. www.augeanplc.com Augean PLC Annual Report 2011 73 Guidance for shareholders We are pleased to be writing to you with details of our 2012 Annual General Meeting (the ‘AGM’) which we are holding at the offices of FTI Consulting, Holborn Gate, 26 Southampton Buildings, London WC2A 1PB on Friday 8 June 2012 at 10.00am. The formal notice of Annual General Meeting is set out on pages 75 to 76 of this document. In addition to the routine business of the AGM, there are three items of special business to be transacted, as summarised and explained below: Authority to allot shares (Resolution 6) Article 4.6(a) of the company’s Articles of Association contains a general authority for the Directors to allot shares in the company for a period (not exceeding five years) (the ‘Section 551 prescribed period’) and up to a maximum aggregate nominal amount (the ‘Section 551 amount’) approved by a special or ordinary resolution of the company. The existing authority to allot shares granted at the company’s last annual general meeting is due to expire at the AGM. Resolution 6, which will be proposed as an ordinary resolution, seeks to renew the allotment authority so that the Section 551 amount shall be £3,323,313.80 (being an amount equal to one third of the issued ordinary share capital of the company at the date of this document) and the Section 551 prescribed period shall be the period from the date Resolution 6 is passed to 7 December 2013 or the conclusion of the company’s next annual general meeting, whichever is earlier. Disapplication of pre-emption rights (Resolution 7) Article 4.6(b) of the company’s Articles of Association empowers the Directors for a period (not exceeding five years) (the ‘Section 561 prescribed period’) to allot shares for cash in connection with a rights issue and also to allot shares in any other circumstances up to a maximum aggregate nominal amount approved by a special resolution of the company (the ‘Section 561 amount’) without having to comply with statutory pre-emption rights. The existing authority to disapply pre-emption rights granted at the company’s last annual general meeting is due to expire at the AGM. Resolution 7, which will be proposed as a special resolution and which will only be effective if Resolution 6 is passed, seeks to renew the disapplication authority so that the Section 561 amount shall be £498,497 (representing approximately 5% of the company’s issued share capital at the date of this document) and the Section 561 prescribed period shall be the period from the date Resolution 7 is passed to 7 December 2013 or the conclusion of the company’s next annual general meeting, whichever is earlier. Cancellation of share premium account (Resolution 8) The company may not pay dividends to its shareholders save out of the balance of its accumulated realised profits less its accumulated realised losses. The company currently has accumulated losses of £82.954m. These losses have largely arisen due to impairment charges following purchases of businesses now operated within the Augean Group. The Group is now profitable but is only making slow progress in eliminating the deficit on the profit and loss account which is a prerequisite to any distributions being made to shareholders. The company currently has a share premium account of £114.960m. It is proposed to cancel the share premium account of the company which will create a reserve sufficient to eliminate its current deficit on its profit and loss account and also to create a positive reserve for the company on that account. The proposed capital reduction requires the approval of shareholders and, under the Companies Act 2006, the subsequent confirmation of the High Court. As a result of the capital reduction, future profits of the company (including any profits of its subsidiaries which are paid up by way of dividend to the company) earned after the date of the capital reduction would then be available for the Directors to use for the purposes of paying future dividends, if appropriate and subject to any undertaking which the company is required to give to the Court regarding the future payment of dividends. The proposed capital reduction will therefore enable the company to be in a position to pay a dividend to its shareholders much sooner than would otherwise be the case. Shareholders should note that there is no immediate proposal to pay a dividend. The Directors will consider what dividend policy to pursue and will make an appropriate announcement in due course. www.augeanplc.com i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s 74 Augean PLC Annual Report 2011 Guidance for shareholders Cancellation of share premium account (Resolution 8) continued The capital reduction will not be complete until confirmation from the Court has been obtained and registered together with a statement of capital by the Registrar of Companies. If the resolution approving the capital reduction is passed by shareholders, it is proposed to commence the process to obtain confirmation of the Court as soon as possible. It is anticipated that the final hearing at which the Court will confirm the proposals will take place on 27 June 2012. An announcement will be made on completion of the capital reduction. The proposed cancellation of the company’s share premium account will not involve any distribution or repayment to shareholders. Further, the proposed cancellation of share premium account will not change the number of ordinary shares in issue or the rights attaching to those shares and the ordinary shares will continue to be traded on AIM, part of the London Stock Exchange. Additionally, the proposals will not affect the future trading prospects of the company and its net assets will not be reduced as a consequence of the reduction. Resolution 8, which will be proposed as a special resolution, seeks to cancel the company’s share premium account of £114.960m. Action to be taken by shareholders Whether or not you intend to be present at the AGM (or any adjournment thereof) you are requested to complete and submit a proxy appointment in accordance with the notes to the Notice of AGM set out on page 75. To be valid, the proxy appointment must be received at the address for delivery specified in the notes by no later than 10.00am on Wednesday 6 June 2012. The completion and return of a proxy appointment form will not preclude you from attending and voting at the meeting, should you so wish. A hard copy proxy appointment form is enclosed for your use. Recommendation The Directors consider that the proposals set out above are in the best interests of the company and its shareholders as a whole. They recommend that you vote in favour of the resolutions set out in the notice of meeting as they intend to do in respect of their own beneficial holdings. www.augeanplc.com Augean PLC Annual Report 2011 75 Notice of annual general meeting NOTICE IS HEREBY GIVEN that the 2012 AGM of Augean PLC (the ‘company’) will be held at the offices of FTI Consulting, Holborn Gate, 26 Southampton Buildings, London WC2A 1PB on Friday 8 June 2012 at 10.00am for the purpose of considering and, if thought fit, passing the resolutions set out below. Resolutions 7 and 8 will be proposed as special resolutions. All other resolutions will be proposed as ordinary resolutions. Ordinary resolutions 1. THAT the reports of the directors and the auditor and the audited financial statements for the year ended 31 December 2011 be received. 2. THAT Roger McDowell be re-elected as a director of the company. 3. THAT Rory Macnamara be re-elected as a director of the company. 4. THAT Grant Thornton UK LLP be re-appointed auditors of the company, to hold office until the next meeting at which accounts are laid before the company. 5. THAT the directors be authorised to determine the auditor’s remuneration. 6. THAT the authority to allot shares and grant rights to subscribe for or to convert any security into shares, conferred on the directors by Article 4.6(a) of the company’s articles of association, be granted for the period commencing on the date of the passing of this resolution and expiring on 7 December 2013 or at the conclusion of the company’s next annual general meeting (whichever is the earlier) and for that period the Section 551 amount is £3,323,313.80. Special resolutions 7. THAT, subject to the passing of resolution 6, the power to allot equity securities as if Section 561(1) of the Companies Act 2006 did not apply to any such allotment conferred on the directors by Article 4.6(b) of the company’s articles of association be granted for the period commencing on the date of the passing of this resolution and expiring on 7 December 2013 or at the conclusion of the company’s next annual general meeting (whichever is the earlier) and for that period the Section 561 amount is £498,497. 8. THAT, subject to the confirmation of the court, the company’s share premium account be cancelled. i R e v e w o f t h e y e a r C o r p o r a t e g o v e r n a n c e By order of the board Richard Allen, ACMA Company secretary 27 March 2012 Registered office: 4 Rudgate Court Walton Near Wetherby West Yorkshire LS23 7BF i F n a n c a i l s t a t e m e n t s www.augeanplc.com 76 Augean PLC Annual Report 2011 Notice of annual general meeting continued Notes: (a) Only those shareholders entered on the relevant register of members (the ‘Register’) for certificated or uncertificated shares of the company (as the case may be) at 6.00pm on Wednesday 6 June 2012 (the ‘Specified Time’) will be entitled to attend and vote at the AGM in respect of the number of shares registered in their name at the time. Changes to entries on the Register after the Specified Time will be disregarded in determining the rights of any person to attend and vote at the AGM. (b) Any member may appoint a proxy to attend, speak and vote on his/her behalf. A member may appoint more than one proxy in relation to the AGM provided that each proxy is appointed to exercise the rights attached to a different share or shares of the member, but must attend the meeting in person. A proxy need not be a member. Completion of a proxy appointment form does not prevent a member from attending and voting in person if he/she is entitled to do so and so wishes. (c) Hard copy appointment of proxies: A hard copy proxy appointment form is enclosed for use at the AGM. To be valid, it must be completed in accordance with the instructions that accompany it and delivered, together with any authority under which it is executed or a copy of the authority certified notarially, by post or (during normal business hours only) by hand to Computershare Investor Services plc, The Pavilions, Bridgwater Road, Bristol BS99 6ZY so as to be received no later than 10.00a.m. on Wednesday 6 June 2012. To appoint more than one proxy you may photocopy the hard copy proxy form. Please indicate the proxy holder’s name and the number of shares in relation to which they are authorised to act as your proxy (which, in aggregate, should not exceed the number of shares held by you). Please also indicate if the proxy instruction is one of multiple instructions being given. All forms must be signed and should be returned together in the same envelope. (d) Electronic appointment of proxies: As an alternative to completing the hard copy proxy form, you can appoint a proxy electronically by going to www.eproxyappointment.com. You will be asked to enter the Control Number, the Shareholder Reference Number and PIN all found on the front sheet your hard copy proxy form. For an electronic proxy appointment to be valid, your electronic message confirming the details of the appointment in accordance the relevant instructions must be transmitted so as to be received by Computershare Investor Services plc no later than 10.00am on Wednesday 6 June 2012. (e) Appointment of proxies through CREST: CREST members who wish to appoint a proxy or proxies by utilising the CREST electronic proxy appointment service may do so for the AGM and any adjournment(s) of it by using the procedures described in the CREST Manual (available from https://www.euroclear.com/site/public/EUI). CREST Personal Members or other CREST sponsored members, and those CREST members who have appointed a voting service provider(s), should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf. In order for a proxy appointment made by means of CREST to be valid, the appropriate CREST message (a ‘CREST Proxy Instruction’) must be properly authenticated in accordance with Euroclear UK & Ireland Limited’s (EUI) specifications and must contain the information required for such instructions, as described in the CREST Manual. The message must be transmitted so as to be received by the issuer’s agent (ID Reference: 3RA50) by 10.00am on Wednesday 6 June 2012. For this purpose, the time of receipt will be taken to be the time (as determined by the timestamp applied to the message by the CREST Applications Host) from which the issuer’s agent is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. CREST members and, where applicable, their CREST sponsors or voting service providers should note that EUI does not make available special procedures in CREST for any particular messages. Normal system timings and limitations will therefore apply in relation to the input of CREST Proxy Instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member or sponsored member or has appointed a voting service provider(s), to procure that his CREST sponsor or voting service provider(s) take(s)) such action as shall be necessary to ensure that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members and, where applicable, their CREST sponsors or voting service providers are referred, in particular, to those sections of the CREST Manual concerning practical limitations of the CREST system and timings. The company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities Regulations 2001. (f) Any corporation which is a member can appoint one or more corporate representatives who may exercise on its behalf all of its powers as a member provided that they do not do so in relation to the same shares. (g) A website giving information regarding the AGM is available from www.augeanplc.com. A member may not use any electronic address provided by the company in this document or with any proxy form or in any website for communicating with the company for any purpose in relation to the AGM other than as expressly stated in it. (h) As at 26 March 2012 (being the last business day prior to the publication of this document) the company’s issued share capital consisted of 99,699,414 ordinary shares of £0.10 each, carrying one vote each. Therefore, the total voting rights in the company as at 26 March 2012 are 99,699,414. www.augeanplc.com Augean PLC Annual Report 2011 IBC Advisers and company information Secretary Richard Allen, ACMA Registered office 4 Rudgate Court Walton Wetherby West Yorkshire LS23 7BF Registered number 5199719 (incorporated and registered in England and Wales) Website www.augeanplc.com Broker and nominated adviser Singer Capital Markets One Hanover Street London W1S 1YZ Auditor Grant Thornton UK LLP No 1 Whitehall Riverside Whitehall Road Leeds LS1 4BN Solicitors Walker Morris Kings Court 12 King Street Leeds LS1 2HL Bankers HSBC Bank PLC City Point 29 King Street Leeds LS1 2HL Registrars Computershare Investor Services plc The Pavilions Bridgwater Road Bristol BS13 8AE www.augeanplc.com A u g e a n P L C A n n u a l R e p o r t 2 0 1 1 Augean PLC 4 Rudgate Court Walton Wetherby West Yorkshire LS23 7BF Tel: 01937 844980 Fax: 01937 844241 www.augeanplc.com contact@augeanplc.com Contacting Augean To find out about how Augean can help your business call us on 01937 844980, fax us on 01937 844241 or email us at contact@augeanplc.com to arrange for a sales adviser to call you. Augean’s commitment to environmental issues is reflected in this annual report, which has been printed on Satimat Green comprising 75% recycled fibre and 25% virgin fibre certified by the FSC® and produced at mills with ISO 14001 environmental management systems. This report was printed by Pureprint Group using their environmental print technology which minimises the impact of printing on the environment. Vegetable based inks have been used and 99% of dry waste is diverted from landfill. Pureprint Group is a CarbonNeutral® company. Both the printer and the paper mill are registered to ISO 14001. A u g e a n P L C A n n u a l R e p o r t 2 0 1 1