Augean Plc Annual Report 2012

Plain-text annual report

Delivering our strategy for growth Augean PLC Annual Report 2012 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. In this report Review of the year Corporate governance Financial statements Group highlights 01 Board of directors 32 Independent auditor’s report What we do Our strategy 02 Corporate governance 06 Directors’ report Chairman’s statement 08 Directors’ remuneration report Business review Augean Land Resources Augean Waste Network Augean Oil & Gas Services Augean North Sea Services Financial review Principal risks Corporate social responsibility 10 18 19 20 21 23 26 28 Consolidated statement of comprehensive income Statements of financial position 34 36 40 Statements of cash flow Statements of changes in shareholders’ equity Notes to the financial statements Guidance for shareholders Notice of annual general meeting 43 45 46 47 48 49 89 90 Advisers and company information 92 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 Group highlights Financial highlights — Revenue including Landﬁll Tax: increase of 13% to £42.4m (2011: £37.5m) — Revenue excluding Landﬁll Tax: increase of 18% to £36.8m (2011: £31.3m) — Adjusted EBITDA2 increased to £6.6m (2011: £6.1m) — Adjusted proﬁt before tax £2.6m (2011: £1.1m) — Proﬁt before tax £2.8m (2011: £1.4m) — Earnings per share 1.97p (2011: 1.59p) — Free cash ﬂow £0.6m (2011: £(0.5)m) after £3.6m of capital expenditure — Net debt increase to £6.1m following acquisitions (2011: £4.0m) — Recommendation of payment of a maiden dividend of 0.25p per share Operational highlights — Group increases sales revenues across all divisions compared to previous year — Improved operating margins on key activities — Initial disposal of multiple waste streams from radioactive decommissioning — 2,107 tonnes disposed in 2012, at an average price of £271/tonne — Slower than expected release of Low Level Waste (LLW) from the nuclear estate — Entry into the emerging markets of naturally occurring radioactive material (NORM) — Planning extensions secured at ENRMF and Thornhaugh sites — ANSS operated successfully in the North Sea market throughout the second half of 2012 — New high temperature incinerator (HTI) integrated within Waste Network division — New industrial cleaning services provided through Oil & Gas Services division — Several medium term contracts secured with large customers across all divisions Strategic developments — Move into delivery phase across key strategic markets — Continued focus on radioactive decommissioning markets to drive proﬁt growth — Planning permission sought to extend the size and life of the ENRMF site to 2026 — Offshore waste management offering growing through Augean North Sea Services — Minerals extraction underway at Cooks Hole, providing royalty stream — Energy production available as electricity, heating steam and fuel oils — Appointment of Dr Stewart Davies as new CEO from August 2013 We have evolved A joint venture agreement with Scomi Oiltools has given us a controlling stake in a new division: Augean North Sea Services. Read about our operating divisions on page 21 p21 Revenue1 £42.4m +13% (2011: £37.5m) Adjusted EBITDA2 £6.6m +8% (2011: £6.1m) Earnings per share 1.97p +24% (2011: 1.59p) Proﬁt before tax £2.8m +100% (2011: £1.4m) Net debt £6.1m +53% (2011: £4.0m) 1 Including Landﬁll Tax. 2 Excluding exceptional items. www.augeanplc.com Augean PLC Annual Report 2012 01 What we do Focusing on difﬁcult to handle, specialist waste streams, using a nationwide network. Our waste management solutions Our integrated waste management system helps to protect our environment and provides the best solutions for our customers. Logistics and transfer Waste treatment Through our own ﬂeet of vehicles and waste containers 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 enable 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. Many hazardous wastes require treatment prior to ﬁnal disposal. This may be through physical, biological, chemical or thermal methods. In some cases wastes can be reused, recycled or recovered for generation of energy. Augean provides a broad range of waste treatment solutions to our customers, allowing the majority of waste we handle to be dealt with through our own facilities. 02 Augean PLC Annual Report 2012 www.augeanplc.com We have a dedicated network of permitted hazardous waste sites across the UK, providing customers with access to a range of waste management services. 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 Secure disposal High temperature incineration is an effective route for the complete destruction of dangerous chemicals and by-products. Landﬁll remains an appropriate disposal solution for a range of hazardous and non-hazardous wastes, either before or after treatment has occurred. Highly engineered hazardous and non-hazardous landﬁll capacity allows disposal of soils, building rubble, asbestos, incinerator ashes and treated materials. www.augeanplc.com Augean PLC Annual Report 2012 l s t a t e m e n t s Permitted hazardous waste sites We’re committed to being a responsible company. We value a positive relationship with local communities and recognise the importance of corporate responsibility. Learn more in our CSR section on pages 28–31 p28–31 03 What we do continued Delivering environmentally sound management of hazardous waste. We align our activities with the legislative environment, supporting the waste hierarchy. Waste hierarchy Prevention Minimisation Reuse Recycling Energy recovery Disposal Established in 2011 Established in 2011 Waste type − Landfill gas – Soils/rubble – Asbestos – Radioactives – APCR (ash) Waste type − Chemical by-products from industrials – Clinicals and pharmaceuticals Most favoured option Hierarchy activity Hierarchy activity Markets Remediation companies Construction companies Markets General industrial Waste companies Incinerators Clinical and pharmaceutical Site licence companies (SLCs) Least favoured option The waste hierarchy sets out six steps for dealing with waste, in descending order of environmental preference. As a leading hazardous waste specialist, Augean is uniquely placed to provide its clients with a broad range of disposal services that are sustainable and conform to all relevant legislation. This supports policy objectives to deliver environmentally sound management of hazardous waste. Locations ENRMF Thornhaugh Port Clarence Laboratory services Cooks Hole Locations Worcester Hinckley Rochdale Cannock Group transport East Kent HTI 04 Augean PLC Annual Report 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 Landﬁll disposal to engineered facilities remains the best overall environmental outcome for a range of hazardous wastes, particularly following treatment and/or volume reduction. Market overview We operate within a competitive market. Our strategy and business model take into consideration the need to respond actively to trends and ﬂuctuations in the markets and legislation. Market trends and opportunities Limited growth in the hazardous waste market Land remediation suffering from construction downturn Emergence of new radioactive decommissioning markets Development of new energy from waste plants provides APCR treatment market Growth in the North Sea oil and gas markets How we’re responding Developing our national network and capabilities Diversifying our business through targeted investments Providing appropriate facilities at ENRMF Investing in new treatment solutions Investing in new ventures such as ANSS Established in 2011 Acquired in 2012 Waste type − Oil-contaminated liquids and solids – Effluents – Chemicals Waste type − Drill cuttings – Slops – NORM – Chemicals Hierarchy activity Hierarchy activity Markets Decommissioning Refineries Specialist industrial Oil treatment Markets Northern and southern North Sea Norwegian and Dutch territories Locations Locations Port Clarence Waste Recovery Park Aberdeen Avonmouth Paisley Industrial services Lerwick www.augeanplc.com Augean PLC Annual Report 2012 05 Our strategy Our priority continues to be the creation of long term shareholder value. The core strategy of the Group remains unchanged, with focus 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. Our strategic priorities The Group has three core priorities: to enhance returns for shareholders by enhancing the return on capital employed; to set and deliver high standards of environmental compliance; and to ensure all activities promote high standards of safety. 1 2 3 Enhance return for shareholders Deliver high standards of environmental compliance Operate safely and develop our safety culture 06 Augean PLC Annual Report 2012 www.augeanplc.com Key performance indicators These priorities can be expressed through three core KPIs which are regularly reviewed by the Board and management. 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 Earnings per share (p) 1.97p 2011: 1.59p Environment Agency compliance scores B 2011: B Near misses reported 2,305 2011: 1,067 12 11 10 12 11 10 12 11 1.97 1.59 i F n a n c a i 0.42 l s t a t e m e n t s B B B 2,305 1,067 10 344 www.augeanplc.com Augean PLC Annual Report 2012 07 Chairman’s statement “ I am pleased to report another year of solid progress.” 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 £36.8m (2011: £31.3m). Operating cash ﬂows of £5.8m (2011: £4.7m) supported continued capital investment and the acquisition of a majority stake in Augean North Sea Services. Jim Meredith Non-executive Chairman In my ﬁrst statement as Chairman of Augean PLC I am pleased to report another year of solid progress for the Group despite the challenges we face in the UK economy. Since joining the Group in 2010 I have focused my attention on the returns available to our shareholders from the established hazardous waste management infrastructure of the business as well as the strategic developments which will allow us to deliver future growth. The action taken over the past year has developed both of these areas, improving year on year performance and providing a platform for more success during 2013. I took the chair at Augean after our Annual General Meeting (AGM) in June and as such for half of the year the Group continued to be ably chaired by Roger McDowell. Roger remains a key member of our PLC Board and I would like to place on record my thanks to him and the other members of the Board for their insight, experience and guidance, which has been invaluable over the past nine months. In 2012 the Group delivered growth, increased earnings per share and improved the return on capital employed. I believe that we took a large step forward during the year towards our goal of a business which provides sustainable long term returns for our shareholders. Net revenue excluding Landﬁll Tax for the year increased to £36.8m (2011: £31.3m). Operating proﬁt before exceptional costs was broadly in line with our expectations at £3.3m (2011: £1.6m) and the total proﬁt attributable to our shareholders was £2.0m (2011: £1.6m). Operating cash ﬂows of £5.8m (2011: £4.7m) supported continued capital investment and the acquisition of a majority stake in Augean North Sea Services, which I believe will be a vehicle for future growth. We have worked hard during the year to position the Group as a key supplier of disposal services within the decommissioning supply chain and we expect this to deliver improved results from now on. However, the nuclear decommissioning sector is understandably cautious about the pace of change and the Board recognises the need to encourage an increased pace of material release for appropriate disposal, which to date has been frustratingly slow. I am pleased to report improvements in health and safety and compliance performance during the year. The Board remains very vigilant in these priority areas and we have recently resolved to further increase the level of scrutiny of Health and Safety (H&S) through the establishment of a new H&S committee, chaired by a Non-executive Director and reporting directly to the Board. This committee will provide an independent challenge to Directors and suggest areas for improvement. 08 Augean PLC Annual Report 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 In 2012 the Group delivered growth, increased earnings per share and improved the return on capital employed. Throughout 2012 the Board and I have been mindful of both the need for strong corporate governance and also the need to manage and mitigate risks. The economic environment in the UK is challenging, although not without opportunities for businesses like Augean, and recognising this fact the Audit Committee reviewed the risk management framework of the Group at its meetings in March and November. These reviews led to recommendations for certain additions to the framework. In addition, to ensure that governance was entirely appropriate for an AIM listed group, the Board has maintained regular dialogue with investors and sought input from our Nomad on speciﬁc matters. Each of the Board’s standing committees (Audit, Remuneration, Nominations) were very active during the year, particularly following the resignation of the Chief Executive and the search for his replacement. Paul Blackler will leave the Group at the end of March 2013 and I would like to thank him for his contribution over the past ﬁve years. We have now appointed Dr Stewart Davies as Chief Executive Ofﬁcer (CEO) and I look forward to working with him when he joins the Group over the summer. In the meantime I will provide close support to our Finance Director, Richard Allen, as he assumes the role of Interim CEO. In all other respects it is very much ‘business as usual’ as we focus our teams on delivering enhanced targets in 2013. The Board remains focused on delivering the improvements to performance which will lead to enhanced returns for all our shareholders and the payment of the Group’s maiden dividend during this year will be another step on this journey. In 2013 we expect further improvements to revenues and earnings and also a reduction to net debt as the Group continues to generate positive cash ﬂows. Jim Meredith Non-executive Chairman 26 March 2013 www.augeanplc.com Augean PLC Annual Report 2012 09 Business review “ The Group delivered improvements to revenues and earnings during 2012.” In summary Through its three divisions and the North Sea Services subsidiary the Group is now more clearly focused on its key markets and better positioned to provide appropriate waste management solutions. The Group was able to generate free cash ﬂow during the year, which was subsequently reinvested into new business opportunities. The strategic developments ﬁrst identiﬁed during 2010 were largely implemented during the year and this has created a business with the capability to sustain improvements to shareholder returns into the medium term. Introduction The Group delivered improvements to revenues and earnings during 2012, building upon the divisional reorganisation implemented at the start of the year. Through its three divisions and the North Sea Services subsidiary the Group is now more clearly focused on its key markets and better positioned to provide appropriate waste management solutions to a broad range of customers in sectors including land remediation, construction, manufacturing, decommissioning, pharmaceuticals, oil and gas and energy generation. Earnings per share in 2012 increased to 1.97p, a 24% growth over 2011, and this has paved the way for payment of a maiden dividend during 2013, enabled as a result of the capital reduction approved by the High Court on 4 July 2012. The Land Resources division delivered revenue growth from its core remediation markets and improvements to operating margins, which were enhanced by the returns available from the newly developed markets in Low Level Waste (LLW), Very Low Level Waste (VLLW) and naturally occurring radioactive materials (NORM). The trend of previous years continued with greater use of the remediation centres at Port Clarence and East Northants Resource Management Facility (ENRMF) and the volume of incinerator ash treated and disposed grew 24% from the previous year. The Oil & Gas Services division delivered growth in like for like revenues over 2011, following a review of activities at each of its sites and a focus on margin-enhancing work. Following the divisional restructuring this division operates the majority of the Group’s treatment assets and therefore carries a signiﬁcant depreciation charge. However, improvements in performance over the year delivered a positive EBITDA result and positive cash generation. The Waste Network division consolidated its position within the hazardous waste transfer market and expanded its operations with the addition of a high temperature incinerator at a new site in East Kent. This new asset allowed the existing network to be leveraged in bidding for new direct contracts with a broader range of customers and the division as a whole delivered revenue growth of 2%. The Group invested £3.05m during the year to purchase 70% of the equity in the newly formed Augean North Sea Services. This entity provides a vehicle for the Group to provide a range of waste management solutions to customers in the North Sea oil and gas sector. Early results have been encouraging, with positive EBITDA and breakeven proﬁt before tax delivered in the ﬁrst six months of trading. 10 Augean PLC Annual Report 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 Capital investment Maintenance Planning Development 36% 23% 41% Despite the relatively high capital needs of the business, particularly at landﬁll sites, the Group was able to generate free cash ﬂow during the year, which was subsequently reinvested into new business opportunities. To support working capital and investment needs the £10m banking facility with HSBC remained in place throughout the year and still has a further two years before maturity. The Group continues to beneﬁt from the valuable contribution made by its employees, all of whom contributed to the improvements in performance during the year. To ensure that the Group had sufﬁcient resources to deliver its key targets there was an increase to the number of staff employed by the core businesses, with an average of 215 staff (2011: 206) over the period. The number of staff in the extended group increased by a further 52 with the acquisition of Augean North Sea Services and this rose to 59 by the end of the year. During 2012 the Board has remained focused on delivering improvements to proﬁtability and returns on capital employed. The strategic developments ﬁrst identiﬁed during 2010 were largely implemented during the year and this has created a business with the capability to sustain improvements to shareholder returns into the medium term. The hazardous waste market The hazardous waste markets remain highly segmented with numerous opportunities for specialist niche operators. Data published by the Environment Agency during 2012 on the production of hazardous waste indicated the total volumes disposed to hazardous landﬁll remained stable during 2011 (the most recent data available) (source: Environment Agency; www.environmentagency.gov.uk). Augean’s Land Resources division continued to enjoy a strong position within this market, with an estimated market share of 40% in 2011 and further volume growth during 2012. The market’s legislative environment is underpinned by the implementation of the Waste Framework Directive and the development of the UK’s Hazardous Waste National Policy Statement (NPS), both of which are expected to reinforce the trend towards more sustainable methods of managing waste and the development of treatment, recycling and recovery facilities as the key focus of future waste management activities. The waste hierarchy provides a framework for waste management and there is a clear drive from the major companies in the sector, including Augean, to support this trend and move the UK’s waste management infrastructure towards more sustainable solutions. www.augeanplc.com Augean PLC Annual Report 2012 11 Business review continued Find more online Access our website and ﬁnd additional content: www.augeanplc.com As part of our commitment to implement the elements of the waste hierarchy relevant to the hazardous sector the Group continues to take a strong role in the development of regulation and policy for hazardous waste. The hazardous waste market continued As part of our commitment to implement the elements of the waste hierarchy relevant to the hazardous sector 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 and modernisation of the sector, seeking to establish a positive regulatory and policy framework for the business. In previous years representatives from the Group took a high proﬁle role in the development of the NPS, directly engaging with government departments and giving evidence at the Parliamentary Select Committee inquiry. During 2012 we continued to monitor the progress of this important policy statement, promoting the development of UK infrastructure. The Group’s business model, developed over the last ﬁve years, is strongly aligned with the NPS and the associated guidance. We have already developed several technologies which promote the waste hierarchy, including the establishment of ash stabilisation facilities, oil recovery by thermal desorption, energy from waste incineration and soil treatment and recycling centres (remediation centres). Augean is currently working with the Environmental Services Association (ESA), Department for Environment, Food and Rural Affairs (DEFRA) and the Environment Agency (EA) to ensure ongoing application of the waste hierarchy and the raising of standards to support sustainable investments. The ﬁnal publication of the NPS in 2013 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. As set out above, in the medium term the hazardous waste market is expected to continue to evolve as new treatment technologies are developed. The publication of the NPS has set the legislative direction of travel in the UK and future signiﬁcant legislative developments are not expected in the near term. In our view the economic case for substantial development expenditure in the current economic environment may not be sufﬁciently compelling to justify signiﬁcant technological developments across the market in the medium term and this may provide a barrier to new market entrants. However, a stable macro-environment for the development of appropriate hazardous waste management solutions does exist in the UK, especially if backed by appropriate enforcement of the legislation, and the Group will continue to explore how these solutions can best be delivered in ways that enhance shareholder returns. 12 12 Augean PLC Annual Report 2012 Augean PLC Annual Report 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 “ The Group has continued to deliver the strategy through the completion of major projects.” Strategy The core strategy of the Group remains unchanged, with focus 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 in new waste management infrastructure and assets is based on strict criteria around the expected returns on capital invested, whilst recognising that ongoing capital investment is required to maintain existing facilities at the required capacities and standards. In last year’s Annual Report we set out the key opportunities for 2012, many of which were entering the delivery phase, and over the course of the year the Group has continued to deliver the strategy through the completion of major projects. We expect that each of these opportunities will promote full utilisation of the Group’s assets and deliver longer term returns above its cost of capital. Low Level Waste (LLW) We reported in the Interim Report 2012 that the planning permission required to allow the Group to accept LLW at East Northants Resource Management Facility (ENRMF) had been secured. On 23 July 2012 the Group received notiﬁcation that the application for permission to appeal to the Supreme Court against the decision by the Secretary of State to allow disposal of LLW had been refused. This concluded the legal process and conﬁrmed that the original planning permission to dispose of LLW was lawful. The planning permission at ENRMF allows the Group to dispose LLW and VLLW. Whereas LLW has radioactivity levels of up to 200 bq/g, activity of VLLW is typically less than 20 bq/g. The lower activity levels mean that VLLW attracts a lower price on disposal, in the same way that certain hazardous waste streams are also priced below more difﬁcult to handle items. During the ﬁrst half of the year the Group secured two contracts for the disposal of LLW and VLLW, through the national framework managed by Low Level Waste Repository Limited (LLWR). Consignments were received from one of these contracts, with Research Site Restoration Limited (RSRL) from their Harwell facility through the second half of the year. The Group also completed numerous bids through the framework for VLLW and LLW from a number of site licensed companies (SLCs) which operate under the guidance of the UK’s Nuclear Decommissioning Authority (NDA). The bidding process is designed to comply with EU procurement law and each bid is subject to a technical and price assessment by LLWR. The majority of these bids are expected to be awarded during 2013 and will form the core of the Group’s LLW forecast for the year. www.augeanplc.com Augean PLC Annual Report 2012 Augean PLC Annual Report 2012 13 13 Business review continued “ The Board believes ANSS represents an excellent growth opportunity for the Group.” The Board remains conﬁdent that disposal of irradiated waste streams has enhanced the value of the Group. Strategy continued Low Level Waste (LLW) continued While the national framework and bidding process is now active, the pace at which waste volumes were released during 2012 was slower than originally anticipated. There has also been a change in the mix of waste disposed by the Group at ENRMF, with the lower value VLLW dominating early consignments. As a result the average price of all irradiated waste disposed of during 2012 was £271/tonne. The change in the waste mix, and also the lack of volumes from one of the two original contracts, led to 2,107 tonnes of waste being disposed in the year, generating £0.6m of sales revenues. As previously reported numerous enquiries have also been received from new customers for smaller volumes of LLW, VLLW and also for disposal of NORM. Augean has entered a partnership agreement with Scotoil Limited in Aberdeen, to provide treatment and disposal solutions for customers wishing to dispose of NORM generated from North Sea oil and gas activities. Early signs are that this partnership will deliver revenues up to £0.5m per annum as the volume of NORM released increases. Despite the delays and mix challenges experienced during 2012 the Board remains conﬁdent that the infrastructure investment made to allow disposal of irradiated waste streams has enhanced the value of the Group. With the scaling up of decommissioning activities, the value of this activity is expected to be material to the Group and underpin proﬁtability, cash ﬂows and return on invested capital. Offshore During the year the Group completed another stage of its strategic development with the addition of a new business to provide waste management services to North Sea oil and gas operators. As previously reported, on 29 May 2012 we announced the creation of a new company, Augean North Sea Services Limited (ANSS). Augean purchased 70% of the equity in the newly formed company from Scomi Oiltools (Europe) Limited (Scomi) on 30 May 2012 two days after it commenced trading, paying £2.05m for the shareholding and also providing a loan of £1.0m to ANSS, which allowed Scomi to repay existing debt. The loan is secured against the property assets owned by the venture in Aberdeen and is repayable over an eight year period. The newly formed company built upon the existing relationship between Augean and Scomi for the treatment of drill cuttings from offshore oil and gas exploration, using Augean’s thermal treatment and disposal facilities at Port Clarence, Middlesbrough, and Scomi’s offshore waste management resources, based in Aberdeen. By combining these activities through ANSS, the business has the capability to source, contain, treat, recycle and ultimately dispose of offshore wastes for its customers through an integrated waste management supply chain. 14 Augean PLC Annual Report 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 ANSS has the capability to source, contain, treat, recycle and ultimately dispose of offshore wastes. The new business operated successfully in the North Sea market throughout the second half of 2012, providing services to previous Scomi customers and new customers won over the past six months. Drilling waste management on the offshore platforms, supported by onshore treatment of drill cuttings at Port Clarence, continues to be a key activity for the Group and during the last quarter of 2012 new contracts were secured for drilling wastes. The business also increased its services to platform supply vessels docking at Pocra Quay, Aberdeen, utilising specialist industrial cleaning equipment to remove contaminated slops from their storage tanks and treat these in the tank farm facility located at the quayside. In addition, local sales teams have begun to bid for and secure onshore hazardous waste management contracts, supported by Augean’s facilities at Paisley and Port Clarence. This is another important element of the growth plan for the business. To support its expanding activities ANSS purchased an additional site at Tullos in Aberdeen, with this transaction completing during January 2013. The site, at Greenbank Industrial Estate, will be operated on a long term lease from Aberdeen City Council, using assets purchased from Veolia Environmental Services Limited. The total costs of the transaction were £0.2m, paid for from existing working capital. During 2013 this site will be fully integrated into the local activities and wider Group, providing the ﬂexibility to offer an expanded range of services to local customers. The Board believes ANSS represents an excellent growth opportunity for the Group. In 2013 we expect EBITDA of at least £0.7m, with the business well placed to take advantage of current oil and gas market activities and also make preparations to participate in the emerging offshore decommissioning market. Energy 2012 saw further progress in the Group’s efforts to develop its capabilities in the production of energy and fuels. During the year electricity continued to be generated from our two landﬁll gas generation plants at Mark’s Quarry and Port Clarence. At the new East Kent facility the incinerator produced steam which was exported to the surrounding Discovery Park site for use in heating (this activity also ensures that the wastes incinerated at East Kent are being treated in a recycling process). Within the Oil & Gas Services division work continues to recover oil for use as fuel, with the indirect thermal desorption plant at Port Clarence Waste Recovery Park delivering quality recovered oil from North Sea drilling wastes. Minerals Mineral extraction, in the form of limestone and sand, began in June at the Group’s site at Cooks Hole, Northamptonshire. The permitted extraction of these minerals is being carried out though a third party, providing a royalty income for the Group of at least £0.2m per annum. This value may increase as extraction volumes rise. www.augeanplc.com Augean PLC Annual Report 2012 15 Business review continued “ During the ﬁrst quarter of 2013 management has taken steps to improve utilisation of its sites.” To support the drive for a change in the customer proﬁle of the division, the opportunity to include high temperature incineration in the division’s portfolio of services was signiﬁcant. Development activities Waste Network division developments The formation of the Waste Network division in early 2012 focused the Group’s sales and transfer capabilities into an entity expected to drive sales growth and address the proﬁtability challenges in this area of the business. The strategy for the Waste Network includes progressively moving sales activity and revenues towards larger customers, with whom longer term contracts can be signed, creating greater levels of certainty around waste volumes, site utilisation and gross margins. To support the drive for a change in the customer proﬁle of the division, the opportunity to include high temperature incineration in the division’s portfolio of services was signiﬁcant. We were therefore delighted to sign agreements on 16 April 2012 with Pﬁzer Limited to manage and operate a commercial high temperature incinerator (HTI) at the Discovery Park in Sandwich, Kent. These agreements have since been novated to Discovery Park Limited and the site is operating under the name of East Kent Waste Recovery Facility (EKWRF). EKWRF was integrated into the Group over the second half of the year, operating under a separate environmental permit issued by the Environment Agency. The HTI has the capacity to process up to 10,000 tonnes per annum of waste and also beneﬁts from its ability to recover energy in the form of steam, making the facility the only commercial HTI in the UK with this capability. Integration into the Waste Network division, aligning the assets with the Group’s existing national network of waste transfer stations and providing the sales and support infrastructure to market the new services, has supported recent revenue growth, leveraging our position in key strategic markets, namely pharmaceutical, clinical and secure destruction. Contracts for waste management including the secure destruction of certain materials are now being offered to develop the customer base of the site and the wider division. With the HTI now fully operational EKWRF is expected to deliver an EBITDA contribution of £0.3m during 2013, rising to £0.5m thereafter. EKWRF is a key part of the strategy for the Waste Network division, but other changes were also made during the latter part of the year to address proﬁtability challenges. The sales and support infrastructure of the division was refocused and the central customer services facility at Cannock was closed. Key roles were transferred to those operating sites requiring commercial support, providing local expertise and short lines for decision-making. As part of this process a smaller bid management team was established, to focus on winning the larger contracts which are essential to the division’s future success. During the ﬁrst quarter of 2013 management has also taken steps to reduce the operating costs of the division and improve utilisation of its sites. As a result we announced the closure of the Worcester site in January, with existing customers being transferred to the larger site at Cannock. Cannock is the largest transfer 16 Augean PLC Annual Report 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 During 2012 planning and permitting activities focused on securing extensions to the operational life of two landﬁll sites at ENRMF and Thornhaugh and also an extension to the size and life of ENRMF. station facility within the Group and has the capacity to absorb the Worcester volumes. This change resulted in a small number of redundancies. The Worcester site has been retained by the Group and discussions are ongoing with interested third parties who may lease the site during 2013. There are no current plans to sell the site. The reduction of costs at Worcester is expected to contribute an additional £0.4m to the division’s operating proﬁt during 2013. Planning and permitting The securing of planning permission and maintenance of appropriate environmental permits at the Group’s sites is an essential part of the ongoing operations and future development of the Group. During 2012 planning and permitting activities focused on securing extensions to the operational life of two landﬁll sites at ENRMF and Thornhaugh and also an extension to the size and life of ENRMF. Planning permission for the disposal of non-hazardous waste at the Thornhaugh landﬁll site was scheduled to expire in December 2013. An application was submitted to Peterborough City Council during the year to request an extension to the operational life of the site until December 2029. The application was supported by the local planning ofﬁcers and during the hearing Augean received positive support for its plans. The application was heard on 6 November 2012 and received the unanimous support of the Council’s planning committee, conﬁrming extension of the site’s operating life to 31 December 2029. At ENRMF two applications were submitted to extend the life of the site beyond the previous expiry in August 2013. A local application was made to Northamptonshire County Council (NCC) to provide a time extension for the site to remain operational until December 2016, allowing the existing void capacity to be ﬁlled and the currently active areas to then be fully restored. This application was approved by the Development Control Committee of NCC on 18 September 2012. A second application was also submitted during 2012 to the Planning Inspectorate to propose an extension of the capacity and operating life of ENRMF, through the development of land to the west of the existing landﬁll within the boundary of the entire site. The application anticipates that this development would extend operations at the site to December 2026, including hazardous and low level waste, allowing the Group to increase the capacity of the site by up to 1.2m cubic metres of landﬁll void and extend the land remediation activities at the remediation centre. The Planning Inspectorate acts on behalf of the Secretary of State for Communities, examining planning applications for projects of national signiﬁcance. The examination process includes public meetings, evidence from interested parties and site visits. The inspector concluded these stages by January 2013 and must submit his report to the Secretary of State by 22 April 2013, followed by a decision from the Secretary of State within three months. No signiﬁcant new challenges emerged during the examination and we remain conﬁdent of a positive outcome. www.augeanplc.com Augean PLC Annual Report 2012 17 Business review continued Augean Land Resources Divisional review Revenue share 43% Revenue* £15.7m * Net of Landﬁll Tax and inter-segment sales. Total landﬁll volumes of waste disposed decreased by 5.9% during the year to 320,392 tonnes (2011: 340,383 tonnes). The trend towards greater pre-treatment of waste before disposal, utilising the treatment facilities at our remediation centres at ENRMF and Port Clarence, led to remediation volumes growing by 5.4% when compared with 2011. The volumes of traditional hazardous waste disposed directly to landﬁll decreased 12.1% year on year at 98,787 tonnes (2011: 112,355 tonnes) with prices of £46.40 per tonne (2011: £40.50 per tonne). Despite disposing of lower volumes to landﬁll, overall proﬁt for Land Resources was £6.7m compared to £4.9m for 2011. This was driven by improvements in margin as a result of lower operating costs. As explained in the LLW section on page 13, volumes of LLW received during the year were slightly ahead of the forecast at 2,107 tonnes, but the mix of wastes was skewed towards the lower value VLLW, leading to revenues of £0.6m, rather than the anticipated £1.0m. This result has not undermined our belief in the value of this activity, but the experience has made forecasting LLW revenues more challenging than originally expected. Mineral extraction at Cooks Hole and energy generation from landﬁll gas contributed a further £0.2m to operating proﬁt. To ensure that the Land Resources division can continue to deliver environmentally sound recycling and disposal solutions for its customers the division broadened its range of waste treatment options during the year with the commissioning of a stabilisation plant at the Port Clarence site and the construction of a bio-remediation facility at ENRMF. Further developments are underway at Port Clarence with a tank farm for liquid wastes scheduled for completion in May 2013 and at ENRMF through upgrades to the processing plant at the Remediation Centre. 18 Augean PLC Annual Report 2012 www.augeanplc.com Augean Waste Network 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 The Waste Network division saw a £0.2m increase in sales revenues from the equivalent period in 2011. This growth was reduced by the transfer of ash treatment activity out of the division’s sites and into the Land Resources division (representing an annual impact of £0.4m). However, underlying sales revenues grew by 10% and the division delivered total revenues in 2012 of £6.6m despite operating in a ﬂat and highly competitive market. As a result of the introduction of East Kent and a focus on minimising disposal costs of waste to external parties, the division was able to deliver year on year improvements to gross margins. In this regard the focus on contracted waste streams began to deliver some beneﬁts. Over the year gross margins improved by 4% to 41% when compared against 2011 (37%). Despite the above improvements, there is still progress to be made before the division reaches the critical sales threshold to allow operating and overhead costs to be covered. The plans for further growth are outlined in the Development activities section of this report on page 16. This resulted in an operating loss of £2.0m. This includes absorbing £0.1m of costs for the set up and initial operation of the new EKWRF and further investment in the transfer stations. The equivalent result for 2011 was a loss of £1.1m. Given the developments described elsewhere in this report the Board expects a material improvement to Waste Network performance during 2013. Divisional review Revenue share 18% Revenue* £6.6m * Net of Landﬁll Tax and inter-segment sales. www.augeanplc.com Augean PLC Annual Report 2012 19 Business review continued Augean Oil & Gas Services Divisional review Revenue share 30% Revenue* £11.1m * Net of Landﬁll Tax and inter-segment sales. Sales revenues in the Oil & Gas Services division increased by 8% to £11.1m. As reported in the Interim Report 2012 activities at the Avonmouth site focused on the utilisation of available assets to generate higher gross margins, which led to delivery of a 7% improvement to margins when compared to 2011. The changes were supported by an external review of activities and the development of a site plan to improve waste treatment performance. At the Port Clarence Waste Recovery Park (PCWRP) a number of investment projects took place to improve the throughput and oil recovery capabilities of the Indirect Thermal Desorption (ITD) plant. The unique status of this plant as the only one of its kind operating in the UK forms an essential part of the Group’s development of offshore waste services, supporting ANSS by focusing its activities largely on the treatment of drill cuttings from North Sea oil and gas exploration. Sales revenues at the site are derived largely from North Sea activities, with revenue increasing by £0.5m from the previous year to £3.0m. This integration between ANSS and the Oil & Gas Services division is also evident at the Paisley site, which began to support ANSS by providing waste treatment and transfer capability during the second half of the year. In its other activities the site underwent a similar customer and margin review to that at Avonmouth and this led to a signiﬁcant improvement in year on year gross margins to 54%. The division leveraged its expertise in oil-contaminated wastes and hazardous chemicals to develop its new industrial cleaning services capability during the year, winning a signiﬁcant contract at a former aluminium production facility. The division delivered an operating loss in the year of (before exceptional costs) of £1.2m, but this masked an improvement in performance which delivered positive cash generation of £0.2m, after taking account of capital investments. 20 Augean PLC Annual Report 2012 www.augeanplc.com Augean North Sea Services 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 Augean North Sea Services is the newest business division in Augean PLC. It was formed in May 2012, when Augean acquired the controlling stake in Augean North Sea Services Limited (ANSS), purchasing 70% of its share capital from Scomi Oiltools (Europe) Limited. ANSS provides a comprehensive waste disposal route for all North Sea oil and gas industry operators, specialising in management of drill cuttings and associated waste streams. It will complement Augean’s core waste disposal business and develop the utilisation of the Group’s asset base. During the seven month period ending 31 December 2012, ANSS contributed revenue of £3.4m to the Group’s results. The business is working with the Oil & Gas Services division to offer an integrated treatment and transfer service for North Sea waste streams, delivering £47,000 of operating proﬁt in its initial seven months of operation to 31 December 2012. Since the ﬁnancial year end, the business has purchased an additional site at Tullos in Aberdeen to support its expansion. This will be operated on a long term lease. During 2013, this site will be fully integrated into the Group, allowing the business to offer an increased range of services to our customers. Further details are provided in the Strategy section of this business review. Divisional review Revenue share 9% Revenue* £3.4m * Net of Landﬁll Tax and inter-segment sales. www.augeanplc.com Augean PLC Annual Report 2012 21 Business review continued “ Operating proﬁt before exceptional items increased to £3.3m (2011: £1.6m) and proﬁt before tax and exceptional items to £2.6m (2011: £1.1m).” The results for the year show growth in revenues, retained proﬁt, earnings per share and adjusted EBITDA. Performance The results for the year show growth in revenues, retained proﬁt, earnings per share and adjusted EBITDA (excluding the impact of exceptional items). This performance was driven largely by growth in the Land Resources division, improvements within the Oil & Gas Services division and stable performance from the Waste Network division. ANSS contributed £3.4m to revenues and £0.3m to EBITDA, delivering a breakeven proﬁt before tax. Key Performance Indicators (KPIs) The Board and local management teams regularly review the performance of the Group as a whole and the individual divisions. Management uses a balanced scorecard of KPIs to monitor progress towards delivery of the Group’s principal targets. 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 and the number of accidents incurred). For ANSS local management has adopted a similar balanced scorecard approach, which includes KPIs of particular relevance to the oil and gas industry. These KPIs include FPAL scores, which are based on customer feedback and used to rate performance in service delivery. In 2012 ANSS received 14 scores, at an average of 8.7 (maximum of 10.0). Health and safety performance was also very positive throughout the period, with zero accidents and zero lost time incidents. KPI Net revenues(1) Volumes to landﬁll Utilisation of site capacity(2) EA compliance scores(3) Near misses reported(4) Land Oil & Gas Waste Resources Services Network division division division £15.7m £11.1m £6.6m 320,392 n/a C 815 n/a 52% B 874 n/a 51% B 359 (1) Revenues net of Landﬁll Tax and inter-segment sales. (2) Deﬁned as the total actual throughput of waste at the site in the year compared with the theoretical maximum throughput. (3) Deﬁned as the average of Environment Agency audit scores notiﬁed during the year on a scale from A to E. (4) Shows the total number of incidents recorded which could have resulted in an accident or injury or damage to property. 22 Augean PLC Annual Report 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 Revenue1 £42.4m +13% (2011: £37.5m) Adjusted EBITDA2 £6.6m +8% (2011: £6.1m) Proﬁt before tax £2.8m +100% (2011: £1.4m) 1 Including Landﬁll Tax. 2 Excluding exceptional items. Financial review Trading Net revenue excluding Landﬁll Tax for the year ended 31 December 2012 increased by 18% to £36.8m (2011: £31.3m). With the inclusion of Landﬁll Tax charged to customers, on which the Group makes no margin, of £5.7m (2011: £6.2m), total Group revenue rose by 13% to £42.4m (2011: £37.5m). Operating proﬁt and exceptional items Operating proﬁt before exceptional items increased to £3.3m (2011: £1.6m) and proﬁt before tax and exceptional items to £2.6m (2011: £1.1m), slightly behind the Board’s expectation of £2.7m. This improvement reﬂected consistent trading performance across the year. Total exceptional items increased proﬁt before tax by £0.2m (2011: £0.3m). Exceptional items included a gain on bargain purchase associated with the deferred tax assets arising from the Augean North Sea Services acquisition of £0.5m (2011: £nil), restructuring charges of £0.1m (2011: £0.3m) and legal and professional fees relating to the acquisition of Augean North Sea Services of £0.2m (2011: £nil). The net beneﬁt of £0.2m (2011: £0.3m) derived from the exceptional items increased proﬁt before tax to £2.8m (2011: £1.4m). Finance costs Total ﬁnance charges reﬂected the payment of interest on bank debt and ﬁnance leases, totalling £0.6m (2011: £0.6m). This also included a £0.1m (2011: £0.1m) unwinding of discounts on provisions. Jointly controlled entity The Group’s Terramundo joint venture with DEC NV continued to be on hold during 2012. There was no trading during the year and as a result Terramundo delivered a small loss of £0.03m (2011: £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. www.augeanplc.com Augean PLC Annual Report 2012 23 Business review continued “ The total proﬁt attributable to equity shareholders increased by £0.4m from the previous year to £2.0m (2011: £1.6m), beneﬁting from improved year on year trading.” The Board has recommended a maiden dividend of 0.25p per share. Financial review continued Corporation tax The Group paid tax of £0.7m during the year, £0.5m in respect of 2011 liabilities and £0.2m in respect of 2012 liabilities. A deferred tax asset of £1.2m (2011: £0.9m) 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 £0.2m (2011: £0.5m). There was a corporation tax charge of £0.8m in the income statement (2011: credit of £0.2m). Proﬁt for the year The total proﬁt attributable to equity shareholders increased by £0.4m from the previous year to £2.0m (2011: £1.6m), beneﬁting from improved year on year trading. Dividend At the AGM on 8 June 2012 shareholders approved the capital reduction of Augean PLC (the Company). Subsequent hearings in the High Court on 18 and 27 June 2012 led to the capital reduction being conﬁrmed on 4 July 2012. To effect the reduction the share premium account of the Company (valued at £114.9m) was cancelled, creating a special proﬁt reserve in the Company and Group statements of ﬁnancial position (page 46). Having created the necessary conditions the Board has developed a dividend policy for the Company and considered payment of a ﬁnal dividend in respect of 2012. The Board has recommended a maiden dividend of 0.25p per share, payable on or after 15 June 2013 subject to shareholder approval at the AGM. Earnings per share Basic earnings per share (EPS) adjusted to exclude the impact of exceptional costs were 1.72p (2011: 1.26p) and unadjusted EPS were 1.97p (2011: 1.59p). The number of shares in issue at 31 December 2012 was unchanged from 31 December 2011, at 99.7m. There were 32,823 dilutive outstanding share options at the year end (2011: nil). Adjusted diluted EPS was 1.72p and unadjusted diluted EPS was 1.97p. 24 Augean PLC Annual Report 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 Earnings per share 1.97p +24% (2011: 1.59p) Net debt £6.1m +53% (2011: £4.0m) Cash ﬂow The Group delivered earnings before interest, tax, depreciation and amortisation (EBITDA) of £6.3m (2011: £6.5m) and net cash generated from operations of £5.8m (2011: £4.7m). Net cash used in investing activities increased to £5.7m (2011: £4.2m), which reﬂects the purchase of Augean North Sea Services as well as the high temperature incinerator at East Kent and investments in property, plant and equipment in planning and development of certain sites. Net debt increased to £6.1m (2011: £4.0m) as a result of the reﬁnancing and as a result gearing (net debt/shareholders’ equity) was increased to 13% (2011: 9%). The capital investment made by the Group (excluding acquisition activities) is shown in the table below. This is split between maintenance investment, focused on upgrading existing facilities, development investment on new activities and planning investment to secure permissions to operate. Impairment review Under IFRS, an annual impairment review must be performed for each cash-generating unit (CGU) to which signiﬁcant goodwill is allocated 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. See note 10 of the ﬁnancial statements for further detail of the reviews performed. 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 2012, the undrawn loan facilities available to the Group were £4.3m. Capital investment by division in 2012 Maintenance Development Planning Total Land Resources division £’000 Oil & Gas Services division £’000 Waste Network division £’000 North Sea Services division £’000 17 1,451 507 1,975 619 — — 619 123 — 257 380 — 112 — 112 Central £’000 646 — 121 767 www.augeanplc.com Augean PLC Annual Report 2012 Total Group £’000 1,405 1,563 885 3,853 25 Business review continued 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 and increasingly aspects of the oil and gas industry can have a material impact on activities. The Group uses a range of resources to manage and mitigate its risks, including the adoption of a broad range of internal controls, the use of risk registers and regular reporting, monitoring and feedback. Risk description Mitigation 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 potential and current impact on the Group’s operations. In addition, the Group maintains a presence on a number of industry groups to inﬂuence the shaping of policy and liaises regularly with relevant regulators and legislative bodies. 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. Health and safety 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 application of the waste hierarchy to the Group’s activities, with its focus on reducing the volume of waste disposed to landﬁll, could be perceived as a threat to the business in the long term. The Group is mitigating this threat by developing treatment solutions for customers which utilise landﬁll when this is the most appropriate commercial and environmental solution, but provide alternative approaches whenever they are suitable. The Group mitigates this risk through the employment of technical experts, by working to well established policies and procedures described in its Integrated Management System, 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. As a result, health and safety is the ﬁrst priority for all Directors, managers and employees across the Group. Investments in relevant assets and resources are made on an ongoing basis to ensure that the highest health and safety standards are applied. Health and safety performance is constantly monitored and reviewed, with the lessons learnt from incidents fed back to local teams to avoid repeat situations. 26 Augean PLC Annual Report 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 The Group relies on economic activity in the UK, which in turn leads to production of the hazardous wastes which form the basis of its sales revenues. Risk description Mitigation 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. Economic growth The Group relies on economic activity in the UK, which in turn leads to production of the hazardous wastes which form the basis of its sales revenues. The UK is experiencing a well documented extended period of limited economic growth, with a corresponding impact on output from sectors including construction and manufacturing. This downturn has the potential to restrict the quantum of hazardous wastes available to the Group and therefore its revenues. 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. 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 2014 may encourage some customers to divert volumes away from our sites. The full rate of landﬁll tax will rise to £72/tonne on 1 April 2013 and will reach £80/tonne on 1 April 2014. European and national legislation encourages zero landﬁll solutions for a range of waste streams, although for some hazardous wastes disposal in properly engineered and permitted landﬁlls continues to be the most appropriate waste management solution. Once landﬁll tax reaches £80/tonne the direction of tax policy is not yet clear, although consultations are currently underway between government and industry groups. 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. These macro-economic conditions are mitigated in part by following a strategy of developing niche markets requiring specialist waste management capabilities, which have high barriers to entry, and also through continuing to identify and invest in the techniques, assets and resources to provide a broad range of services to customers, diversifying the revenue base of 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. To mitigate the risk that the Group will suffer a decline of landﬁll volumes as environmental taxes rise the Group has developed a range of waste treatment solutions for customers and also broadened its capabilities to include disposal of a range of low level irradiated wastes at its landﬁll sites. www.augeanplc.com Augean PLC Annual Report 2012 27 Business review continued The health and safety of our employees and compliance with regulations are two of the top three business priorities. Corporate social responsibility 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. 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 regulations are two of the top three business priorities (proﬁt performance being the third). Augean is committed to conducting its business operations in an open and 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, to continually improve assets and processes to ensure the safety and welfare of our employees and to act as a good neighbour, minimising the impact of our operations on the wider community. 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 this Annual Report. Augean’s core business values Transparency We are open and transparent in all that we do. Integrity We are trustworthy and honest in all that we say and do and take responsibility for our own actions. Social and community responsibility We recognise that our actions have a material impact on the communities in which we operate and take that responsibility extremely seriously. Environmental responsibility We respect the environment and invest time and resource in protecting it. Technical excellence We employ skilled staff and use up-to-date techniques and equipment. Professionalism We are reliable and consistent and deliver excellent service. Respect We are friendly and courteous to colleagues, clients and suppliers. Passion We are proud of our company and dedicated to its purpose. We are enthusiastic, enjoy challenges and are eager for success. 28 Augean PLC Annual Report 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 The environment All operating sites and activities are strictly regulated by environmental authorities through a range of regulations set out in the permits for each site. 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 Group 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. Activities are delivered subject to well developed environmental controls and compliance systems (as deﬁned in the Integrated Management System), involving suitably qualiﬁed people in the management of all aspects of its operations. Environmental reporting is prepared and monitored within the Group and supplemented by information from regulators. This includes the Environment Agency’s own review of companies operating in the waste sector which are subject to their account management regime, of which Augean is one. The information available for 2012 indicates that the Group’s operations do not result in a signiﬁcant impact on the local environment and general environmental performance has improved signiﬁcantly over the past ﬁve years. Employees The Group’s employees are vital to its success and during the year made a signiﬁcant contribution to the performance improvements outlined in this report. In recognition of their commitment and effort the Board approved a 2.5% pay award for all management and staff from 1 January 2013. This represents an increase from the 2% award made in 2012 and recognises the progress that the Group has made over the past year. www.augeanplc.com Augean PLC Annual Report 2012 29 Business review continued Read our dedicated CSR report A comprehensive review of our progress towards corporate responsibility can be found at www.augeanplc.com/CSR The business works closely with the regulators to ensure that Augean is a leader in compliance in the sector. The environment, employees and the community continued Employees continued Training and development activity during the year built on the progress made during 2011 and led to an investment of approximately £0.2m in training to ensure all employees had the knowledge, qualiﬁcations and skills to operate safely and compliantly within the waste management sector. The Group’s training manager developed a competency framework for each role and this is now used in the recruitment of new employees and also as the basis of a rolling training programme. Training in the priority area of health and safety was supported by every employee undergoing the British Safety Council’s level 1 course in health and safety at work during the year and the development of online tools to allow ongoing H&S training into 2013. 30 Augean PLC Annual Report 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 A total of £298,000 was contributed through the Landﬁll Tax Credit Scheme during the year. Reporting of near miss incidents continued to be a key part of the health and safety programme, leading to a year on year increase in near miss reports. Over 2,200 near misses were reported during 2012 (approaching the target of one per employee per month) and at the same time there was a 25% reduction in the number of accidents causing injury or damage to property. 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. The establishment of new businesses, changes in the waste streams managed and the seeking of planning permission to extend the life of certain sites during the year led to a high level of interaction with local communities in some areas. As in previous years the Group undertook an extensive programme of consultation in these localities to ensure that its plans were well known and understood. This included attending parish council meetings and hosting open days at sites, in addition to the more formal submissions to planning authorities. The Group continued to contribute to the communities around its landﬁll sites through the Landﬁll Tax Credit Scheme. A total of £298,000 was contributed through this scheme during the year, providing funds for community projects including a sports centre and a wildlife reserve. Charitable donations made during the year included ongoing support for the Underground Youth Club at Kings Cliffe, the Cannock Chase Community Centre, local sports teams and the John Clare Cottage project near to Peterborough. Outlook While the general economic outlook for the wider hazardous waste sector remains subdued the Board believes that the Group is well placed to beneﬁt from the signiﬁcant investment it has undertaken over the past 24 months to deliver continued growth during the year. While traditional hazardous landﬁll volumes are not expected to grow during 2013, this will be offset by contributions from recently delivered strategic opportunities. Management remains focused on improving the performance of the Oil & Gas Services and Waste Network divisions and alongside the investments made these are expected to deliver continued growth to revenues, earnings per share and cash ﬂow in this year and beyond. www.augeanplc.com Augean PLC Annual Report 2012 31 Board of directors Andrew Bryce Non-executive Director and Chairman of the Nominations Committee, 65 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. Jim Meredith Chairman and Non-executive Director, 52 Richard Allen Interim Chief Executive Ofﬁcer and Group Finance Director, 42 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 ten years with the Nestlé SA group and before leaving was ﬁnance director at Nestlé Ireland, based in Dublin. Jim is currently chief executive ofﬁcer 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 Terra Firma 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 and became Chairman on 8 June 2012. 32 Augean PLC Annual Report 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 Rory Macnamara Non-executive Director and Chairman of the Audit Committee, 58 Roger McDowell Non-executive Director and Chairman of the Remuneration 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 then became a managing director at Lehman Brothers. He is chairman of Dunedin Income Growth Investment Trust PLC and Essenden PLC and currently holds a number of directorships including Mears Group PLC and Dragon Ukrainian Properties & Development PLC. He was appointed to the Board of Augean in November 2006. 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 PLC and chairman of Alkane Energy PLC and is also a non-executive director of IS Solutions PLC and Swallowﬁeld PLC. He joined the Board of Augean in 2004 and was Chairman from 23 March 2010 until 8 June 2012. Paul Blackler Executive Director, 43 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. As previously reported, Paul Blackler will resign from the Board of Directors on 28 March 2013. A replacement Chief Executive, Dr Stewart Davies, will join the Group with effect from August 2013. Richard Allen is acting as Interim Chief Executive Ofﬁcer during the intervening period. Further detail is included in the Directors’ Report. www.augeanplc.com Augean PLC Annual Report 2012 33 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) or the updated 2012 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, an Executive Director and an Interim Chief Executive Ofﬁcer/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 Interim Chief Executive/ Group 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 inductions 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 are required to retire from ofﬁce at each Annual General Meeting (AGM) and may stand for reappointment 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 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 authorising Directors’ 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 three times 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 external 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. Activities during 2012 included a review of remuneration for a new Chief Executive and a review of a new LTIP for the Group. 34 Augean PLC Annual Report 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 Board committees continued Nominations Committee The Nominations 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. Activities during 2012 focused on recruitment of a new Chief Executive. 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; ISO 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 principal risks faced by the Group can be found on pages 26 and 27 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. During 2012 this included discussions with major shareholders around the appointment of a new Chief Executive. 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 Augean PLC Annual Report 2012 35 Directors’ report AGM At the AGM on 6 June 2013, Andrew Bryce will retire by rotation in accordance with the Articles of Association. Being eligible, he will offer himself for re-election as Non-executive Director. 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 2012. 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 58 days’ purchases (2011: 34 days’). The Company adopts the same policy and its trade creditors at the year end date represented 60 days’ purchases (2011: 36 days’). 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 8 to 31 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 £2.0m (2011: £1.6m) on turnover of £42.4m (2011: £37.5m). The Board has approved the payment of a maiden dividend following the reduction of share premium account and delivery of distributable reserves during 2012. Future dividend payments will be proposed by the Board following future full year results, taking into consideration the investment needs of the business and need to provide consistent returns to investors. The Directors have recommended a dividend for the year of 0.25p per ordinary share, to be paid on or after 12 June 2013 for shareholders on the register at 6 June 2013 (2011: £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 Corporate Social Responsibility Report. 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 25 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 roles. 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. 36 Augean PLC Annual Report 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 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 10 to 31. 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 25 to the ﬁnancial statements, on pages 80 to 87. Employees continued 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. Charitable and political donations During the year the Group contributed £298,000 (2011: £367,000) of its landﬁll tax liability to Entrust registered environmental bodies as permitted by government regulations. It also made other charitable donations amounting to £15,000 (2011: £10,000). No political donations were made during the year (2011: £nil). Directors The composition of the Board of Directors is shown on pages 32 and 33. Details of the Directors’ interests and remuneration are given in the Directors’ Remuneration Report on pages 40 to 42. As previously reported, in September 2012 Paul Blackler, announced his intention to leave the Group. Dr Stewart Davies has been appointed as Chief Executive with effect from August 2013. From February 2013, Paul Blackler handed over all day to day control of commercial and operational matters to Richard Allen, who assumed the role of Interim Chief Executive Ofﬁcer until Dr Stewart Davies joins the Group. The Board has taken steps to strengthen the Group’s ﬁnance team during the interim period to ensure adequate resources are in place to enable Richard to focus on his interim role. Substantial shareholdings The Company had been notiﬁed of the following interests of more than 3% in its shares as at 28 February 2013: Ingot Capital Management One51 Henderson Global Investors Aviva Investors Harwood Capital Octopus Investments Unicorn Asset Management www.augeanplc.com Augean PLC Annual Report 2012 Number of shares 19,764,442 17,610,200 9,412,134 7,151,179 6,700,000 5,523,653 3,573,431 Fund manager % 19.82 17.66 9.44 7.17 6.72 5.54 3.58 37 Directors’ report continued Going concern continued As highlighted in note 25 the Group met its short term working capital requirements during 2012 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 three 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, for the life of the facility and in the future. 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. 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. Impairment reviews have been performed for each of the Group’s cash-generating units, the details of which are disclosed in note 10 to the ﬁnancial statements. In addition the tangible asset base of the Group has been reviewed for impairment. The results of these reviews indicate that forecast cash ﬂows of the Group demonstrate its ability to continue operating for the foreseeable future. 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. Directors’ responsibilities statement 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 and Group 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. 38 Augean PLC Annual Report 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 With the Group in a transitional phase the incumbent partner’s experience and understanding of the business is essential to ensure that appropriate estimates and judgements are made in the preparation of the ﬁnancial statements, enabling him to challenge management robustly from a position of knowledge. As a result, the Board and Audit Committee believe that a rotation should not be made during the current ﬁnancial year and the Company has agreed to extend the term of the lead audit partner for one year, in accordance with ES3. Auditor 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 AGM. By order of the Board Richard Allen Interim Chief Executive Ofﬁcer and Group Finance Director 26 March 2013 l s t a t e m e n t s Directors’ responsibilities statement continued 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. Insofar 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. Audit partner rotation The external auditor is required to rotate the lead partner responsible for the Group audit every ﬁve years in accordance with Ethical Standard 3 (ES3) (Long Association with the Audit Engagement) issued by the Auditing Practices Board. However in certain circumstances it is permissible to extend that time. The current lead partner, Andrew Wood, has been responsible for the audit for ﬁve years but the Board believes that this is not a suitable time to change to a new audit partner. The Group is currently in a period of signiﬁcant change, following a corporate and divisional reorganisation, the acquisition of a new business, the addition of several new operations and revenue streams and a capital reduction, all within the past twelve months. www.augeanplc.com Augean PLC Annual Report 2012 39 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. During 2012 Executive Directors’ salaries were increased by 2%, in line with all employees of the Group. (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 2012. (iii) Pension provision and other beneﬁts Pension provision is made at a rate of 10% of basic salary for Executive Directors and 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 annual award 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 20 to the ﬁnancial statements. One LTIP award was made in 2012, the details of which are disclosed in note 20. The scheme was based on performance criteria which were not met during the year and as a consequence this award lapsed at the end of the year. The Remuneration Committee reviewed the LTIP scheme during the year and concluded that it remained a suitable mechanism to incentivise future performance. The Committee resolved to consider making new awards to the Executive Directors during 2013. (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 incentivise future performance. No awards were made to the Executive Directors during 2012, as shown in the Directors’ share plans section of this report. Service contracts Executive Directors have rolling service contracts with notice periods of not more than twelve months. 40 Augean PLC Annual Report 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 Directors’ interests The beneﬁcial, family and contingent interests of the Directors in the share capital of the Company were as follows: At 31 December 2012 Paul Blackler Richard Allen Roger McDowell Andrew Bryce Jim Meredith Rory Macnamara At 31 December 2011 Paul Blackler Richard Allen Roger McDowell Andrew Bryce Jim Meredith Rory Macnamara 691,342 11,419 200,000 15,224 Beneﬁcial shares Number Beneﬁcial shares Number Share options Number 33,000 1,076,385 10,000 603,448 LTIP Number Total shares Number — 1,076,385 — 613,448 — 691,342 — 11,419 — 200,000 — 15,224 — — — — Share options Number LTIP Number Total shares Number 33,000 1,076,385 10,000 603,448 691,342 11,419 200,000 15,224 — — — — — 1,076,385 — 613,448 — 691,342 — 11,419 — 200,000 — 15,224 Directors’ emoluments The emoluments of the Directors were as follows: Paul Blackler Richard Allen Roger McDowell Andrew Bryce Jim Meredith Rory Macnamara 2012 Basic fee/salary £’000 2012 Bonus £’000 2012 Pension contributions £’000 2012 Other emoluments £’000 184 137 37 28 35 32 453 — — — — — — — 18 20 — — — — 38 13 12 — 4 — — 29 2012 Total £’000 215 169 37 32 35 32 2011 Total £’000 261 166 43 43 24 26 520 563 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. www.augeanplc.com Augean PLC Annual Report 2012 41 Directors’ remuneration report continued Directors’ share plans LTIP Paul Blackler Richard Allen Share option schemes Paul Blackler Award date Earliest vesting date 11.06.2012 11.06.2015 11.06.2012 11.06.2015 Award date Earliest vesting date Market price at award date 34.88p 34.88p Market price at award date Number of shares 2011 Granted in year Lapsed in year — 525,000 525,000 — 409,000 409,000 — 934,000 934,000 Number of shares 2011 Granted in year Lapsed in year Number of shares 2012 — — — Number of shares 2012 21.12.2009 21.12.2012 39.50p 455,695 18.05.2011 18.05.2014 29.00p 620,690 Richard Allen 18.05.2011 18.05.2014 29.00p 603,448 1,679,833 — — — — — 455,695 — 620,690 — 603,448 — 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 2012 was 31.25p. The range of the share price during the year was 27.00p to 41.50p. On behalf of the Remuneration Committee Roger McDowell Chairman of the Remuneration Committee 26 March 2013 42 Augean PLC Annual Report 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 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 2012 which comprise the consolidated statement of comprehensive income, the Group and parent company statements of ﬁnancial position, the Group and parent company statements of cash ﬂow, 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 pages 38 and 39, 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 2012 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 2012 43 Independent auditor’s report continued to the members of Augean PLC 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 26 March 2013 44 Augean PLC Annual Report 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 Total 2011 £’000 37,459 (35,483) 1,976 (571) — (16) 1,389 193 Consolidated statement of comprehensive income for the year ended 31 December 2012 Before exceptional items 2012 £’000 Exceptional items 2012 £’000 Note Before exceptional items 2011 £’000 Exceptional items 2011 £’000 Total 2012 £’000 Revenue Operating expenses Operating proﬁt Net ﬁnance charges Gain on bargain purchase Share of loss of jointly controlled entity Proﬁt before tax Tax Proﬁt for the year and total comprehensive income Proﬁt attributable to: Equity shareholders of Augean PLC Non-controlling interest Earnings per share Basic and diluted 3 4 24 9 6 3 42,421 (39,163) 3,258 (639) — (16) 2,603 (872) — 42,421 37,459 (370) (370) — 528 — 158 91 (39,533) (35,814) 2,888 (639) 528 (16) 2,761 (781) 1,645 (571) — (16) 1,058 193 — 331 331 — — — 331 — 1,731 249 1,980 1,251 331 1,582 1,717 14 249 — 1,966 14 1,251 — 331 — 1,582 — 8 1.72p 0.25p 1.97p 1.26p 0.33p 1.59p i F n a n c a i The notes on pages 49 to 88 form an integral part of these ﬁnancial statements. l s t a t e m e n t s www.augeanplc.com Augean PLC Annual Report 2012 45 Statements of ﬁnancial position at 31 December 2012 Non-current assets Goodwill Other intangible assets Investments in subsidiaries Investment in jointly controlled entity Property, plant and equipment Deferred tax asset Current assets Inventories Trade and other receivables Current tax asset Cash and cash equivalents Non-current assets classiﬁed as held for sale Current liabilities Trade and other payables Current tax liabilities Financial liabilities Net current liabilities Non-current liabilities Financial liabilities Provisions Net assets Shareholders’ equity Share capital Share premium account Special proﬁt reserve Retained earnings Equity attributable to owners of Augean PLC Non-controlling interest Total equity Note 2012 £’000 2011 £’000 21,705 21,705 Group Company 2012 £’000 — 109 2011 £’000 — 45 57,631 55,581 502 817 41 492 767 50 49 — 16 35,415 854 58,039 59,100 56,935 123 — 8 39,561 1,231 62,628 218 8,868 — 5 9,091 — 9,091 217 7,660 — 4 7,881 200 8,081 — 916 209 — 1,125 — 1,125 (8,279) (8,079) (9,438) (197) (837) (9,313) (222) (5,283) (7,045) (12,328) (538) (1,332) (9,949) (1,868) (2,640) (6,668) (9,308) — (3,260) (12,698) (11,573) — (5,175) 50,078 46,863 42,352 (5,175) (2,244) 9,970 9,970 9,970 9,970 — 114,960 — 114,960 32,076 — 32,076 — 6,913 (78,067) 306 (82,954) 48,959 46,863 42,352 41,976 1,119 — — — 50,078 46,863 42,352 41,976 — 376 — — 376 — 376 (9,019) (201) (3,871) (13,091) (12,715) — (2,244) 41,976 10 11 12 9 13 6 14 13 15 16 16 17 18 19 19 19 The notes on pages 49 to 88 form an integral part of these ﬁnancial statements. The ﬁnancial statements were approved by the Board on 26 March 2013 and signed on its behalf by: Richard Allen Interim Chief Executive Ofﬁcer and Group Finance Director Augean PLC Registered number: 5199719 46 Augean PLC Annual Report 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 Statements of cash ﬂow for the year ended 31 December 2012 Operating activities Cash generated from operations Finance charges 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 of cash and cash equivalents acquired) Net cash used in investing activities Financing activities Repayments of borrowings Drawdown of loan facilities Repayments of obligations under ﬁnance leases Net cash generated from/(used in) ﬁnancing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Group Company Note 2012 £’000 2011 £’000 2012 £’000 2011 £’000 22 5,818 (479) (744) 4,595 4,713 (469) (123) 4,121 — 19 (3,585) (4,186) 24 16 16 16 (114) (2,043) (5,742) (1,447) 2,931 (336) 1,148 1 4 5 (32) — (4,199) 336 — (414) (78) (156) 160 4 962 (590) (406) (34) — (141) (102) (2,043) (2,286) (611) 2,931 — 2,320 — — — 1,292 (565) — 727 — (50) (32) — (82) (801) — — (801) (156) 156 — www.augeanplc.com Augean PLC Annual Report 2012 47 Statements of changes in shareholders’ equity for the year ended 31 December 2012 Group At 1 January 2011 Total comprehensive income for the year Retained proﬁt Total comprehensive income for the year Transactions with owners of the Company Share-based payments (note 20) Total transactions with the owners of the Company Share capital £’000 Share premium account £’000 Special proﬁt reserve £’000 Retained earnings £’000 Shareholders’ equity £’000 Non- controlling interest £’000 Total equity £’000 9,970 114,960 — (79,733) 45,197 — 45,197 — — — — — — — — — — — — 1,582 1,582 1,582 1,582 84 84 84 84 — — — — 1,582 1,582 84 84 At 1 January 2012 9,970 114,960 — (78,067) 46,863 — 46,863 Total comprehensive income for the year Retained proﬁt Total comprehensive income for the year Transactions with owners of the Company Acquisition of subsidiary (note 24) — — — — — — — — — 1,966 1,966 — Capital reduction (note 19) — (114,960) 32,076 82,884 Share-based payments (note 20) — — — 130 Total transactions with the owners of the Company — (114,960) 32,076 83,014 At 31 December 2012 9,970 — 32,076 6,913 48,959 1,966 1,966 14 14 1,980 1,980 — — 130 130 1,105 1,105 — — — 130 1,105 1,119 1,235 50,078 Company At 1 January 2011 Total comprehensive income for the year Retained proﬁt Total comprehensive income for the year Transactions with owners of the Company Share-based payments (note 20) Total transactions with the owners of the Company Total comprehensive income for the year Retained proﬁt Total comprehensive income for the year Transactions with owners of the Company Capital reduction (note 19) Share-based payments (note 20) Total transactions with the owners of the Company At 31 December 2012 Share capital £’000 Share premium account £’000 Special proﬁt reserve £’000 Retained earnings £’000 Shareholders’ equity £’000 9,970 114,960 — (83,387) 41,543 — — — — — — — — — — — — — — — — — — — 349 349 84 84 349 349 84 84 (82,954) 41,976 246 246 130 83,014 246 246 — 130 130 306 42,352 — (114,960) 32,076 82,884 — — — (114,960) 9,970 — — 32,076 32,076 At 1 January 2012 9,970 114,960 48 Augean PLC Annual Report 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 Notes to the ﬁnancial statements for the year ended 31 December 2012 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. The consideration is calculated as the sum of fair value of assets transferred and liabilities incurred. 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. When the excess is negative, a bargain purchase gain is recognised immediately in proﬁt or loss. www.augeanplc.com Augean PLC Annual Report 2012 49 Notes to the ﬁnancial statements continued Notes to the ﬁnancial statements for the year ended 31 December 2012 for the year ended 31 December 2012 1 Accounting policies continued (a) Basis of accounting continued (iii) Business combinations continued 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. Acquisitions of non-controlling interests are accounted for as transactions with owners in their capacity as owners and therefore no goodwill is recognised as a result. Adjustments to non-controlling interests arising from transactions that do not involve the loss of control are based on a proportionate amount of the net assets of the subsidiary. (iv) Going concern The Directors have, at the time of approving the ﬁnancial statements, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the ﬁnancial statements. Further detail is contained in the Business Review on pages 37 to 39. (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. Income which is earned from royalties on mineral extraction is recognised on a straight-line basis to the statement of comprehensive income at the point of extraction when the royalty becomes due. (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. This is charged to the proﬁt and loss account over the asset’s 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 to the proﬁt and loss account 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. 50 Augean PLC Annual Report 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 1 Accounting policies continued (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. Interests in joint ventures are held at the carrying amount of the investment accounted for under the equity method, together with any long interests that in substance form part of the net investment in the joint venture, for example, an item for which settlement is neither planned nor likely to occur in the foreseeable future. The Group’s share of losses in a joint venture is matched against the investment until the investment is reduced to zero. Additional losses are provided for and a liability recognised only to the extent that the investor has incurred a legal or constructive obligation. (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 Plant and machinery – – 50 years 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. www.augeanplc.com Augean PLC Annual Report 2012 51 Notes to the ﬁnancial statements continued for the year ended 31 December 2012 1 Accounting policies continued (g) Property, plant and equipment continued 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. (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) Leases Leases are classiﬁed as ﬁnance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classiﬁed as operating leases. Rental income from operating leases is recognised on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised on a straight-line basis over the lease term. (j) 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. (k) 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. 52 Augean PLC Annual Report 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 1 Accounting policies continued (k) Tax continued 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. (l) 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. (m) 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. (n) 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 proﬁt or loss. 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. (o) 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. www.augeanplc.com Augean PLC Annual Report 2012 53 Notes to the ﬁnancial statements continued for the year ended 31 December 2012 1 Accounting policies continued (p) 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. 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 25. (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 22. (q) Equity Equity comprises share capital, share premium, special proﬁt reserve 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. Special proﬁt reserve represents the residual value of the cancellation of the share premium account over and above the total retained losses for the Company. This was created on 4 July 2012 when the capital reduction was approved. For details of the transaction see note 19. Retained proﬁt and (losses) represent retained proﬁt and (losses) and equity-settled share-based payment employee remuneration. 54 Augean PLC Annual Report 2012 www.augeanplc.com 1 Accounting policies continued (r) 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 £39,561,000 (note 13) and goodwill with a carrying value of £21,705,000 (note 10). These assets are reviewed annually for impairment as described on pages 66 to 68 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 10. 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 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. l s t a t e m e n t s See note 17 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 17 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 17 for further details of calculation methodology, assumptions used and potential sensitivities to these calculations. Income taxes At 31 December 2012, the net liability for current income tax is £197,000 (2011: £538,000). A deferred tax asset of £1,231,000 (2011: £854,000) 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 2012 55 Notes to the ﬁnancial statements continued for the year ended 31 December 2012 1 Accounting policies continued (s) 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 2012: — Amendments to IFRS 7 ‘Financial Instruments: Disclosures’ — Amendments to IAS 12 ‘Deferred Tax: Recovery of Underlying Assets’ — Amendments to IAS 1 ‘Severe Hyperinﬂation and Removal of Fixed Dates for First-time Adopters’ At the date of authorisation of these ﬁnancial statements, the following standards and interpretations which have not been applied in these ﬁnancial statements were in issue but not yet effective: — Amendments to IAS 1 ‘Presentation of Items of Other Comprehensive Income’ (effective 1 July 2012) — Amendments to IAS 19 ‘Employee Beneﬁts’ (effective 1 January 2013) — Amendments to IAS 32 ‘Offsetting Financial Assets and Financial Liabilities’ (effective 1 January 2014) — IAS 27 ‘Separate Financial Statements’ (effective 1 January 2013) — IAS 28 ‘Investments in Associates and Joint Ventures’ (effective 1 January 2013) — Amendments to IFRS 1 ‘Government Loans’ (effective 1 January 2013) — Amendments to IFRS 7 ‘Financial Instruments: Disclosures — Offsetting Financial Assets and Financial Liabilities’ — IFRS 9 ‘Financial Instruments’ (effective 1 January 2015) — Amendments to IFRS 10, IFRS 12 and IAS 27 ‘Investment Entities’ (effective 1 January 2014) — IFRS 10 ‘Consolidated Financial Statements’ (effective 1 January 2013) — IFRS 11 ‘Joint Arrangements’ (effective 1 January 2013) — IFRS 12 ‘Disclosure of Interests in Other Entities’ (effective 1 January 2013) — IFRS 13 ‘Fair Value Measurements’ (effective 1 January 2013) — IFRIC 20 ‘Stripping Costs in the Production Phase of a Surface Mine’ (effective 1 January 2013) — Annual Improvements 2009–2011 Cycle (effective 1 January 2013) — Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance (effective 1 January 2013) 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. 56 Augean PLC Annual Report 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 2 Operating segments The Group has four 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 Ofﬁcer (CEO) (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: — Land Resources 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 in Teesside, providing waste remediation and disposal services to its customers. The division includes a site at Cooks Hole in Northamptonshire where minerals are extracted and also generates energy from closed landﬁll cells. — Waste Network division: Augean operates waste transfer sites across the UK, transporting, recovering, recycling and disposing of hazardous wastes on behalf of its customers. — Oil & Gas Services division: Augean operates three waste treatment sites across the UK, with activities focused on the management of oil-contaminated waste. The division also provides specialist industrial cleaning services. — Augean North Sea Services Limited: Through a 70%/30% owned subsidiary company with Scomi Oiltools (Europe) Limited Augean provides waste management and waste processing services to offshore oil and gas operators in the North Sea. 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 CEO. 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 sectors. The 2011 operating segmental analysis has been restated based on the segments above. Central costs for the proper governance and resources required to operate the plc Board and listing have been separately reported as these are no longer allocated to individual divisions. www.augeanplc.com Augean PLC Annual Report 2012 57 Notes to the ﬁnancial statements continued for the year ended 31 December 2012 2 Operating segments continued Information about reportable segments Assets Segment assets Unallocated segment assets Investment in jointly controlled entity 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 Group total liabilities Assets Segment assets Unallocated segment assets Investment in jointly controlled entity 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 Group total liabilities Land Resources division £’000 Waste Network division £’000 2012 Oil & Gas Services division £’000 North Sea Services subsidiary £’000 Group £’000 44,552 6,973 15,609 3,341 70,475 8 — 1,231 5 71,719 (9,935) (1,457) (3,038) (895) (15,325) Land Resources division £’000 Waste Network division £’000 2011 Oil & Gas Services division £’000 North Sea Services subsidiary £’000 (6,120) (196) (21,641) Group £’000 40,686 8,861 16,303 — 65,850 16 200 50 4 66,120 (12,369) (1,531) (2,912) — (16,812) (2,244) (201) (19,257) 58 Augean PLC Annual Report 2012 www.augeanplc.com 2 Operating segments continued Information about reportable segments continued Land Resources division £’000 Waste Network division £’000 2012 Oil & Gas Services division £’000 North Sea Services subsidiary £’000 10,433 1,251 — 129 4,002 571 — — — 16,386 5,661 22,047 — — — — 1,136 12,389 — — — — — — 1,964 1,272 140 — — — — — — — — — — — 6,180 7,316 — 12,389 3,376 39,467 — — 5,661 7,316 12,389 3,376 45,128 (656) (732) (1,309) (10) (2,707) 21,391 6,584 11,080 3,366 42,421 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 10,433 1,251 13,525 129 4,002 571 1,964 1,272 6,320 i F n a n c a i l s t a t e m e n t s 47 (161) (114) 3,683 (370) 3,313 (639) (425) 528 (16) 2,761 (781) 1,980 1,966 14 Revenue Hazardous landﬁll activities Non-hazardous landﬁll activities Waste treatment activities Energy generation APCR management Low Level Waste management Processing of offshore waste Rental of offshore equipment and personnel Waste transfer activities Total revenue net of landﬁll tax Landﬁll tax Total revenue including inter-segment sales Inter-segment sales Revenue Result Exceptional items Operating proﬁt/(loss) Finance charges Central costs Gain on bargain purchase Share of loss of jointly controlled entity Proﬁt before tax Tax Proﬁt after tax Attributable to: Equity shareholders of the parent company Non-controlling interest Other information Capital expenditure Depreciation and amortisation Operating proﬁt/(loss) before exceptional items 6,705 (1,834) (1,235) (40) (131) (38) 6,665 (1,965) (1,273) 2,742 (1,864) 380 (245) 619 112 3,853 (1,011) (181) (3,301) www.augeanplc.com Augean PLC Annual Report 2012 59 Notes to the ﬁnancial statements continued for the year ended 31 December 2012 2 Operating segments continued Information about reportable segments continued Land Resources division £’000 Waste Network division £’000 Revenue Hazardous landﬁll activities Non-hazardous landﬁll activities Waste treatment activities Energy generation APCR management Low Level Waste management Processing of offshore waste Rental of offshore equipment and personnel Waste transfer activities Total revenue net of landﬁll tax Landﬁll tax Total revenue including inter-segment sales Inter-segment sales Revenue Result Operating proﬁt/(loss) before exceptional items Exceptional items Operating proﬁt/(loss) Finance charges Central costs Share of loss of jointly controlled entity Proﬁt before tax Tax Proﬁt after tax Attributable to: Equity shareholders of the parent company Non-controlling interest Other information Capital expenditure Depreciation and amortisation 2011 Oil & Gas Services division £’000 — — 10,271 — — — — — — 10,271 — 11,175 1,564 — 170 1,846 — — — — 14,755 6,172 20,927 — — — — 416 — — — 6,009 6,425 — 6,425 10,271 (164) — — 20,763 6,425 10,271 4,146 713 4,859 (984) (132) (1,116) (1,138) (250) (1,388) North Sea Services subsidiary £’000 — — — — — — — — — — — — — — — — — Group £’000 11,175 1,564 10,271 170 2,262 — — — 6,009 31,451 6,172 37,623 (164) 37,459 2,024 331 2,355 (571) (379) (16) 1,389 193 1,582 1,582 — 4,988 (4,411) 3,901 (2,722) 145 (650) 942 (1,039) — — All activities above are continuing and arise solely within the United Kingdom. Inter-segment trading is undertaken on normal commercial terms. 60 Augean PLC Annual Report 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 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 on sale of property, plant and equipment Exceptional items: – unjust enrichment provision release (see note 17) – restructuring charges – legal and professional due diligence charges 2012 £’000 58 5 10 10 83 40 2011 £’000 56 3 18 28 105 32 3,267 303 4,088 291 277 356 — — 122 248 115 359 188 (740) 254 155 Following the incident at the Cannock site in November 2010, the Group received £1.6m in 2011 from its insurers as full and ﬁnal settlement of the cost of the clean up, asset replacement and refurbishment and any other required expenditure. The mixing plant from Cannock has been relocated to the Port Clarence site and is now fully operational. No further amounts have been received in 2012. 4 Net ﬁnance charges Interest payable Interest and charges payable on bank loans 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 www.augeanplc.com Augean PLC Annual Report 2012 2012 £’000 2011 £’000 519 30 100 649 (10) (10) 639 429 56 96 581 (10) (10) 571 61 Notes to the ﬁnancial statements continued for the year ended 31 December 2012 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 2012 Number 2011 Number 33 184 51 268 2012 £’000 7,967 881 366 31 139 36 206 2011 £’000 6,283 612 258 9,214 7,153 Details of other statutory Directors’ remuneration disclosures, as required by the AIM Rules, are given in the Directors’ Remuneration Report on pages 40 to 42 under Directors’ emoluments and Directors’ share plans. The Directors have identiﬁed thirteen (2011: eleven) key management personnel. The total key management personnel compensation, 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 (charge)/credit on the result for the year 2012 £’000 1,249 88 1,337 2012 £’000 (445) 42 (403) (292) (86) (378) (781) 2011 £‘000 866 75 941 2011 £’000 (538) (119) (657) 135 715 850 193 62 Augean PLC Annual Report 2012 www.augeanplc.com 6 Tax continued Tax reconciliation Proﬁt before tax Tax at theoretical rate Effects of: – expenses not deductible for tax purposes – income not taxable – adjustment relating to prior year re deferred tax – change in tax rate – adjustments in respect of prior periods Tax charge/(credit) on results 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 2012 2011 £’000 2,761 676 % — 24.5% £’000 1,389 361 142 (128) 86 47 (42) 781 5% (4%) 3% 2% (2%) 28% 25 — (715) 17 119 (193) % — 26% 2% — (51%) 1% 8% (14%) i F n a n c a i l s t a t e m e n t s During the year the corporation tax rate reduced from 26% to 24% with effect from 1 April 2012. The theoretical tax rate for the ﬁnancial year ended 31 December 2012 has been calculated at 24.5% with the impact of the ﬁrst quarter of the year at 26% being reﬂected in the change in tax rate of £46,000 (2011: £17,000) shown above. Deferred tax Deferred tax asset Deferred tax liability 2012 £’000 1,615 (384) 1,231 2011 £’000 1,286 (432) 854 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 13, 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 Acquisition of subsidiary (Charged)/credited to the income statement during the year Adjustment in respect of prior periods At end of the year 2012 £’000 854 755 (292) (86) 1,231 2011 £’000 4 — 135 715 854 www.augeanplc.com Augean PLC Annual Report 2012 63 Notes to the ﬁnancial statements continued for the year ended 31 December 2012 6 Tax continued Deferred tax continued The reduction in the main rate of corporation tax from 26% to 24% effective from 1 April 2012 was substantively enacted on 26 March 2012. Since that date legislation has been enacted and that has conﬁrmed the rate of 24% from 1 April 2012 and further reduced the tax rate to 23% as of 1 April 2013. Accordingly, deferred tax balances have been revalued to the lower rate of 23% in these accounts to the extent that timing differences are expected to reverse after this date. Further reductions to the main rate of corporation tax are proposed, which are expected to reduce the rate by 1% per annum to 21% by 1 April 2014. However, these changes had not been substantively enacted at the balance sheet date and, therefore, are not included in these ﬁnancial statements. The proposed reductions to the main rate of corporation tax by 2% per year to 21% by 1 April 2014 are expected to be enacted separately each year. If the deferred tax assets and liabilities of the Group were all to reverse after 2014, the effect of the changes from 23% to 21% would be to reduce further the net deferred tax asset by £107,000. To the extent that the deferred tax reverses more quickly than this, the impact on the net deferred tax liability will be reduced. 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 2012 £’000 — 41 41 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 Dividends Proposed ﬁnal dividend for the year ended 31 December 2012 of 0.25p per share (2011: nil p per share) Total 2012 £’000 250 250 2011 £’000 — 43 43 2011 £’000 — — At the forthcoming AGM, the Board will recommend that to shareholders a resolution is passed to approve payment of a dividend for the year ended 31 December 2012. This has not been included as a liability in these ﬁnancial statements. 8 Earnings per share The calculation of basic earnings per share at 31 December 2012 was based on the proﬁt attributable to ordinary shareholders of £1,966,000 (2011: £1,582,000) and a weighted average number of ordinary shares outstanding of 99,699,414 (2011: 99,699,414), calculated as follows: 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 2012 £’000 1,966 (249) 1,717 2011 £’000 1,582 (331) 1,251 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. 64 Augean PLC Annual Report 2012 www.augeanplc.com 8 Earnings per share continued 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 Diluted Adjusted earnings per share Basic Diluted 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 2012 Number 2011 Number 99,699,414 99,699,414 32,823 — 99,732,237 99,699,414 1.97p 1.97p 1.72p 1.72p 1.59p 1.59p 1.26p 1.26p 9 Investment in jointly controlled entity Terramundo Limited (Terramundo) is a 50:50 jointly controlled entity between Augean PLC and DEC NV. Terramundo operates a ground remediation facility which uses various proven techniques to clean contaminated soils of both organic and inorganic contamination 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 2012 was £100 (2011: £100). During the period ended 31 December 2012 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 2012 £’000 — (33) (33) (16) i F n a n c a i l s t a t e m e n t s 2011 £’000 — (32) (32) (16) At 31 December 2012 the jointly controlled entity held net liabilities of £988,000 (2011: £952,000), of which the Group’s 50% share was £494,000 (2011: £476,000). 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 The overall position in respect of the jointly controlled entity is as below: Investment in the long term future of the venture Share of net liabilities of the jointly controlled entity Investment in jointly controlled entity www.augeanplc.com Augean PLC Annual Report 2012 2012 £’000 2 17 — (1,007) (988) Group Company 2012 £’000 502 (494) 8 2011 £’000 492 (476) 16 2012 £’000 502 — 502 2011 £’000 10 22 — (984) (952) 2011 £’000 492 — 492 65 Notes to the ﬁnancial statements continued for the year ended 31 December 2012 10 Goodwill Cost At 1 January 2011 At 1 January 2012 At 31 December 2012 Provision for impairment At 1 January 2011 At 1 January 2012 At 31 December 2012 Net book value At 31 December 2012 At 1 January 2012 At 1 January 2011 £’000 103,768 103,768 103,768 (82,063) (82,063) (82,063) 21,705 21,705 21,705 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 three of the Group’s four cash-generating units (CGUs) 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. No goodwill arose as a result of the acquisition of North Sea Services (see note 24). Following the divisional restructure described in note 2, the goodwill allocated to the Treatment division was reallocated based on the values attributable to the original businesses acquired and which division these businesses became part of. This resulted in a reallocation of £2.1m to the Waste Network division and £7.2m to the Oil & Gas Services division. The allocation of goodwill by CGU is as follows: Land Resources division (2011: Landﬁll division) Waste Network division Oil & Gas Services division Treatment division (2011) Total 2012 £’000 2011 £’000 12,420 12,420 2,103 7,182 — 21,705 — — 9,285 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, was transferred to the Land Resources division in 2011. 66 Augean PLC Annual Report 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 10 Goodwill continued 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 Land Resources, Waste Networks and Oil & Gas Services divisions. The key assumptions for the Land Resources division’s cash ﬂows are: — based on approved budgets and plans for 2013 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 one to ﬁve, where it will become ﬁxed as management focuses on 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 with headroom of £12.8m (2011: £4.1m); and — sensitivity analysis has been performed over the key assumptions which indicate the following impact, meaning reduction or increase in headroom: Discount rate Gross margin Revenue growth rate Sensitivity 1% 1% 1% Impact in 2012 £4.2m £1.2m £7.1m Impact in 2011 £3.4m £1.0m £8.0m The key assumptions for the Waste Network division’s cash ﬂows are: — based on approved budgets and plans for 2013; — revenue growth over the period to 2015 is expected to achieve 3% per annum, consistent with the current underlying growth rate of the division. This reﬂects the impact of improvements to pricing and increasing volumes through the transfer stations as well as increases in volumes through the new incinerator at East Kent. Revenue growth of 2% per annum from 2016 is expected; — a 1% compound growth in gross margin per annum is assumed from years one to ﬁve. This represents the improved waste acceptance procedures which focusing on higher margin waste, improved treatment techniques and the impact of the introduction of the incinerator waste. 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 £6.9m (2011: n/a); and — sensitivity analysis has been performed over the key assumptions which indicate the following impact, meaning reduction or increase in headroom: Discount rate Gross margin Revenue growth rate www.augeanplc.com Augean PLC Annual Report 2012 Sensitivity 1% 1% 1% Impact in 2012 £1.7m £1.6m £4.9m Impact in 2011 — — — 67 Notes to the ﬁnancial statements continued for the year ended 31 December 2012 10 Goodwill continued The key assumptions for the Oil & Gas Services division’s cash ﬂows are: — based on approved budgets and plans for 2013; — revenue growth over the period to 2015 is expected to achieve 3% per annum, consistent with the current underlying growth rate of the division. This reﬂects the impact of improvements to pricing and increasing volumes through the ITD as well as increases in volumes from trading in conjunction with the North Sea Services division. Revenue growth of 2% per annum from 2016 is expected; — a 1% compound growth in gross margin per annum is assumed from years one to ﬁve. This represents the improved waste acceptance procedures which focusing on higher margin waste and improved treatment techniques. 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 £6.6m (2011: n/a); and — sensitivity analysis has been performed over the key assumptions which indicate the following impact, meaning reduction or increase in headroom: Discount rate Gross margin Revenue growth rate Sensitivity 1% 1% 1% Impact in 2012 £2.6m £2.4m £6.0m Impact in 2011 — — — The cash ﬂows for all CGUs have been discounted using a pre-tax discount rate of 11.0% (2011: 11.0%), which reﬂects management’s best estimate of the current market’s assessment of the weighted average cost of capital and the business, operational and ﬁnancial risks speciﬁc to the CGUs. 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. 68 Augean PLC Annual Report 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 11 Other intangible assets Cost At 1 January 2011 Additions At 1 January 2012 Additions At 31 December 2012 Amortisation At 1 January 2011 Charge for the year At 1 January 2012 Charge for the year At 31 December 2012 Net book value At 31 December 2012 At 31 December 2011 At 1 January 2011 12 Investments in subsidiaries Cost At 1 January 2011 At 1 January 2012 Additions At 31 December 2012 Provision for impairment At 1 January 2011 At 1 January 2012 At 31 December 2012 Net book value At 31 December 2012 At 1 January 2012 At 1 January 2011 Customer contracts £’000 Group Computer software £’000 374 — 374 — 374 374 — 374 — 374 — — — 318 32 350 114 464 269 32 301 40 341 123 49 49 Total £’000 692 32 724 114 838 643 32 675 40 715 123 49 49 Company Computer software £’000 275 32 307 102 409 230 32 262 38 300 109 45 45 £’000 130,031 130,031 2,050 132,081 (74,450) (74,450) (74,450) 57,631 55,581 55,581 www.augeanplc.com Augean PLC Annual Report 2012 69 Notes to the ﬁnancial statements continued for the year ended 31 December 2012 12 Investments in subsidiaries continued The principal trading subsidiary companies of the Group are as follows: Name of company Augean Treatment Limited Augean North Limited Augean South Limited Augean North Sea Services Limited Country of registration or incorporation Proportion held % England and Wales England and Wales England and Wales England and Wales 100 100 100 70 Nature of business Waste treatment Landﬁll operations Landﬁll operations Waste treatment 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 9). The full list of subsidiaries will be shown in the next annual return. All other subsidiaries are dormant. 13 Property, plant and equipment Group Cost At 1 January 2011 Additions Disposals At 1 January 2012 Additions Acquisition of subsidiary At 31 December 2012 Accumulated depreciation At 1 January 2011 Charge for year Disposals At 1 January 2012 Charge for year At 31 December 2012 Net book value At 31 December 2012 At 1 January 2012 At 1 January 2011 Freehold land and buildings £’000 Leasehold land and buildings £’000 Engineered cells £’000 Plant and machinery £’000 Total £’000 34,929 1,223 — 36,152 1,053 2,000 39,205 7,831 991 — 8,822 372 9,194 30,011 27,330 27,098 — — — — — 948 948 — — — — 31 31 917 — — 7,359 2,339 — 13,373 1,394 55,661 4,956 (708) (708) 9,698 14,059 59,909 377 — 2,321 708 3,751 3,656 10,075 17,088 67,316 6,774 1,484 — 8,258 930 9,188 887 1,440 585 5,811 1,904 (301) 7,414 1,928 9,342 7,746 6,645 7,562 20,416 4,379 (301) 24,494 3,261 27,755 39,561 35,415 35,245 70 Augean PLC Annual Report 2012 www.augeanplc.com 13 Property, plant and equipment continued Group continued Additions of £1.1m (2011: £1.2m) to freehold land and buildings during the year include £0.7m (2011: £0.2m) 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. There were no outstanding contractual commitments for acquisitions of property, plant or equipment at 31 December 2012 (2011: £nil). Plant and machinery includes assets held under ﬁnance lease agreements with a carrying value at 31 December 2012 of £1,062,000 (2011: £1,357,000). 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 2012 £’000 1,722 (660) 1,062 2011 £’000 2,001 (644) 1,357 During 2011 the Group reclassiﬁed surplus plant and machinery at the Cannock site, with a net book value of £204,000 as assets held for sale, with a market value of £200,000. The asset is now being utilised within the Port Clarence Landﬁll site and is no longer held for sale. This asset has therefore been transferred back to property, plant and equipment and depreciation has been charged from the point of transfer. 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 Company Cost At 1 January 2011 Additions At 1 January 2012 Additions At 31 December 2012 Accumulated depreciation At 1 January 2011 Charge for year At 1 January 2012 Charge for year At 31 December 2012 Net book value At 31 December 2012 At 1 January 2012 At 1 January 2011 www.augeanplc.com Augean PLC Annual Report 2012 Freehold land and buildings £’000 Plant and machinery £’000 778 — 778 — 778 71 13 84 13 97 681 694 707 343 50 393 134 527 268 52 320 71 391 136 73 75 l s t a t e m e n t s Total £’000 1,121 50 1,171 134 1,305 339 65 404 84 488 817 767 782 71 Notes to the ﬁnancial statements continued for the year ended 31 December 2012 14 Trade and other receivables Current assets Trade receivables Other receivables Prepayments and accrued income Group Company 2012 £’000 7,179 — 1,689 8,868 2011 £’000 7,069 — 591 7,660 2012 £’000 — — 916 916 2011 £’000 — — 376 376 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 £75,000 (2011: £124,000) has been recorded accordingly; see note 25. 15 Trade and other payables Current Trade payables Amounts due to subsidiary undertakings Other taxes and social security Accruals and deferred revenue Group Company 2012 £’000 3,207 — 1,769 3,303 8,279 2011 £’000 2,652 — 896 4,531 8,079 2012 £’000 13 2011 £’000 269 8,862 8,226 223 340 76 448 9,438 9,019 All amounts are anticipated to be payable in the short term. The carrying values are considered to be a reasonable approximation of fair value. 72 Augean PLC Annual Report 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 16 Financial liabilities This note provides information about the Group’s and Company’s interest bearing borrowings which are carried at amortised cost. Group Company 2012 £’000 2011 £’000 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 2012 £’000 549 288 837 5,175 108 5,283 549 5,175 396 6,120 837 108 5,175 6,120 288 108 — 396 2011 £’000 996 336 3,260 — 1,332 3,260 2,244 396 2,640 996 2,244 732 3,972 1,332 287 2,353 3,972 336 287 109 732 5,175 — 5,175 3,260 5,175 — 8,435 3,260 — 5,175 8,435 — — — — 3,871 — 3,871 2,244 — 2,244 3,871 2,244 — 6,115 3,871 — 2,244 6,115 — — — — The obligations under ﬁnance leases and hire purchase contracts are secured against the speciﬁc assets ﬁnanced with a carrying amount of £1,062,000 (2011: £1,357,000). The bank overdraft, bank loan and guarantees are secured by way of a ﬁrst legal charge over certain freehold properties, debentures, 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 25. www.augeanplc.com Augean PLC Annual Report 2012 73 Notes to the ﬁnancial statements continued for the year ended 31 December 2012 17 Provisions 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 1 January 2012 Charged to proﬁt or loss during the year – unwinding of discount – other Utilised during the year Additional capping provision At 31 December 2012 Restoration and after-care costs of landﬁll sites £’000 2,349 96 92 — — — 2,537 100 66 (11) — Group Capping provision £’000 3,489 Other provisions £’000 1,899 — — — — 566 4,055 — — — 222 — — (200) (1,623) — 76 — — — — 76 2,692 4,277 Total £’000 7,737 96 92 (200) (1,623) 566 6,668 100 66 (11) 222 7,045 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 management’s 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 £222,000 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 2013. During 2011, other provisions included amounts for the disposal of stocks of disused tyres which were incorporated in the engineering of new landﬁll cells at the 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. There were also releases 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 2011, it was established that the provisions were no longer needed and were therefore released. 74 Augean PLC Annual Report 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 2012 £’000 2011 £’000 10,300 10,300 9,970 9,970 Retained earnings £’000 Total £’000 (78,067) 36,893 1,966 130 1,966 130 — Group Special proﬁt reserve £’000 — — — Share premium £’000 114,960 — — (114,960) 32,076 82,884 — 32,076 6,913 38,989 Company Special proﬁt reserve £’000 — — — Share premium £’000 114,960 — — Retained earnings £’000 Total £’000 (82,954) 32,006 246 130 246 130 — i F n a n c a i l s t a t e m e n t s (114,960) 32,076 82,884 — 32,076 306 32,382 18 Share capital Authorised – 103,000,000 (2011: 103,000,000) shares of 10p Allotted, called up and fully paid – 99,699,414 (2011: 99,699,414) shares of 10p 19 Reserves At 1 January 2012 Total comprehensive income for the year Share-based payments (note 20) Capital reduction At 31 December 2012 At 1 January 2012 Total comprehensive income for the year Share-based payments (note 20) Capital reduction At 31 December 2012 At the AGM on 8 June 2012, the shareholders approved the capital reduction of Augean PLC (the Company). Subsequent hearings in the High Court on 18 and 27 June 2012 led to the capital reduction being conﬁrmed on 4 July 2012. To effect this reduction, the share premium account of the Company was cancelled creating a special proﬁt reserve in the Company and Group balance sheets. This reduction was transferred to retained earnings to the extent to which it cancelled existing losses. The remaining share premium was transferred to special proﬁt reserve. In addition, proﬁts of the Company which were realised prior to 4 July 2012 were transferred to the special proﬁt reserve. www.augeanplc.com Augean PLC Annual Report 2012 75 Notes to the ﬁnancial statements continued for the year ended 31 December 2012 20 Share-based payments At 31 December 2012 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 Exercise price At 1 January 2012 180.0p 700,000 39.5p 1,810,122 29.0p 1,496,552 4,006,674 Granted Exercised Lapsed At 31 December 2012 — — — — — — — — — 700,000 — 1,810,122 — 1,496,552 — 4,006,674 Augean LTIP 11 June 2012 – 11 June 2015 10.0p Weighted average exercise price Of which exercisable Weighted average exercise price — 1,534,000 — 1,534,000 — (1,534,000) — (1,534,000) — — 4,006,674 1,534,000 — (1,534,000) 4,006,674 60.1p 10.0p — 10.0p 60.1p 700,000 108.0p 2,510,122 49.3p Share option scheme (equity settled) On 21 May 2011 the Group established a share option programme entitled the 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: 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 2009 share options 20 May 2011 21 December 2009 May 2014– May 2021 28.9p 29.0p 1,496,552 35% 4 years 2.3% 0.0% £0.09 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 2012, the weighted average remaining contractual life is 6.66 years (2011: 6.92 years). 76 Augean PLC Annual Report 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 20 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. For the 2012 award which vests on 11 June 2015, participants would receive 100% of the award if the Group’s normalised pre-tax earnings for the year ending 31 December 2012 were greater than £2.9m. No award would vest unless the Group’s normalised pre-tax earnings for the year ending 31 December 2012 were greater than £2.9m. 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. The performance conditions for the 2009 award, due to vest on 21 December 2012, were not met and have now lapsed. In addition, the performance conditions for the 2012 award 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 £130,000 (2011: £84,000) related to equity-settled share-based payment transactions. No options under either the share option or LTIP schemes were exercised during the year. The 2012 share options vested during the year and are now exercisable. 21 Operating lease commitments The Group has commitments to make minimum lease payments under non-cancellable operating leases as follows: 2012 £’000 2011 £’000 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 2012 263 245 508 430 1,722 1,553 3,705 352 351 703 115 252 71 438 77 Notes to the ﬁnancial statements continued for the year ended 31 December 2012 22 Reconciliation of operating proﬁt to net cash generated from operating activities Group Company Operating proﬁt Amortisation of intangible assets Depreciation After-care provisions Earnings before interest, tax, depreciation and amortisation (EBITDA) Loss on sale of property, plant and equipment Share-based payments (Increase) in inventories (Increase)/decrease in trade and other receivables Decrease/(increase) in net payables from subsidiary undertakings (Decrease)/increase in trade and other payables (Decrease) in provisions Cash generated from operations Interest paid Tax paid Net cash generated from/(used in) operating activities 23 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 2012 £’000 2,888 40 3,261 66 6,255 — 130 (1) (565) — (1) — 5,818 (479) (744) 4,595 2011 £’000 1,976 32 4,379 92 6,479 188 84 (101) (752) — 438 (1,623) 4,713 (469) (123) 4,121 2012 £’000 900 38 84 — 2011 £’000 1,071 32 65 — 1,022 1,168 — 130 — (550) 635 (275) — 962 (590) (406) (34) — 84 — 60 (151) 131 — 1,292 (565) — 727 31 December 2011 £’000 4 (996) (2,244) (732) (3,968) Cash ﬂow £’000 1 447 31 December 2012 £’000 5 (549) (2,931) (5,175) 335 (397) (2,148) (6,116) 24 Business combinations On 30 May 2012 Augean PLC acquired the controlling stake in Augean North Sea Services Limited (ANSS), purchasing 70% of its share capital from Scomi Oiltools (Europe) Limited. The business was already operating as part of Scomi Oiltools (Europe) Limited (Scomi). The trade and assets of the business were transferred to a newly incorporated company of which Augean subsequently purchased 70% of the share capital. As a result, purchase accounting has been adopted. The purchase transaction builds upon relationships already existing between Augean and Scomi; however, the transaction did not settle any existing contractual relationships between Augean and Scomi. ANSS provides a comprehensive waste disposal route for all North Sea oil and gas industry operators, specialising in management of drill cuttings and associated waste streams. It is anticipated that the acquisition will complement Augean’s core waste disposal business and develop the utilisation of the Group’s asset base. The total consideration for the acquisition was £2,050,000, settled in cash. 78 Augean PLC Annual Report 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 24 Business combinations continued During the seven month period ended 31 December 2012 ANSS contributed revenue of £3,366,000 and operating proﬁt of £47,000 to the Group’s results. Management estimates that if the acquisition had occurred on the 1 January 2012, then consolidated revenue would have been £5,525,000 and the consolidated operating proﬁt for the period would have been £154,000. In determining these amounts, management has assumed that the provisional fair value adjustments that arose on the date of acquisition would have been the same if the acquisition had occurred on 1 January 2012. The fair values assumed at 30 June 2012 were provisional subject to information to be provided relating to available capital allowances of the asset base of ANSS. Since the acquisition, circumstances relating to the capital allowances have been ﬁnalised resulting in the recognition of a deferred tax asset of £755,000. This has resulted in the fair value of the assets being higher than on the original calculation of goodwill at 31 May 2012. This has resulted in a gain on bargain purchase of £528,000 which has been recognised in full in the statement of comprehensive income for the year ended 31 December 2012. Identiﬁed assets acquired and liabilities assumed The following table summarises the recognised amounts of assets acquired and liabilities assumed at the acquisition date. Assets and liabilities acquired as a result of the acquisition of ANSS Property, plant and equipment Deferred tax asset Trade receivables Trade payables Loans and borrowings Total net assets The following fair values have been determined: Property, plant and equipment Freehold land and building – Woodside Road, Aberdeen Plant and equipment Leasehold buildings – Pocra Quay, Aberdeen Total property plant and equipment Goodwill and intangible assets No goodwill has been recognised on the following basis: Total consideration transferred Non-controlling interest, based on the proportionate interest in the recognised amounts of the asset and liabilities of ANSS Fair value of identiﬁable assets acquired and liabilities assumed Gain on bargain purchase Fair value £’000 3,656 754 660 (387) (1,000) 3,683 Fair value £’000 2,000 708 948 3,656 £’000 (2,050) (1,105) 3,683 528 No intangible assets were acquired by the Group at the acquisition date. Total consideration net of cash and cash equivalents acquired was £2,043,000. Acquisition related costs The Group incurred acquisition related costs totalling £315,000 in 2011 and 2012 in legal fees and due diligence costs. These costs were recognised within exceptional items in the Group’s consolidated statement of comprehensive income at 31 December 2011 and 31 December 2012. www.augeanplc.com Augean PLC Annual Report 2012 79 Notes to the ﬁnancial statements continued for the year ended 31 December 2012 25 Financial instruments The ﬁnancial assets of the Group and Company are categorised as follows: As at 31 December 2012 Goodwill Other intangible assets Investments in subsidiaries Investment in jointly controlled entity Property, plant and equipment Deferred tax asset Inventories Trade and other receivables Current tax asset Cash and cash equivalents As at 31 December 2011 Goodwill Other intangible assets Investments in subsidiaries Investment in jointly controlled entity Property, plant and equipment Deferred tax asset Inventories Trade and other receivables Assets held for resale Cash and cash equivalents Loans and receivables £’000 — — — — — — — 7,254 — 5 Group Non- ﬁnancial assets £’000 21,705 123 — 8 Total £’000 21,705 123 — 8 39,561 39,561 1,231 218 1,614 — — 1,231 218 8,868 — 5 7,259 64,460 71,719 Loans and receivables £’000 — — — — — — — — — — — Loans and receivables £’000 Group Non- ﬁnancial assets £’000 Loans and receivables £’000 Total £’000 — — — — — — — 7,069 — 4 21,705 21,705 49 — 16 49 — 16 35,415 35,415 854 217 591 200 — 854 217 7,660 200 4 7,073 59,047 66,120 — — — — — — — — — — — Company Non- ﬁnancial assets £’000 — 109 Total £’000 — 109 57,631 57,631 502 817 41 — 916 209 — 502 817 41 — 916 209 — 60,225 60,225 Company Non- ﬁnancial assets £’000 — 45 Total £’000 — 45 55,581 55,581 492 767 50 — 376 — — 492 767 50 — 376 — — 57,311 57,311 80 Augean PLC Annual Report 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 Balance sheet total £’000 9,438 — 3,260 5,175 — 25 Financial instruments continued The ﬁnancial liabilities of the Group and Company are categorised as follows: As at 31 December 2012 Financial liabilities at amortised cost £’000 Group Liabilities not within scope of IAS 39 £’000 Balance sheet total £’000 Financial liabilities at amortised cost £’000 Company Liabilities not within scope of IAS 39 £’000 Trade and other payables – current 6,510 1,769 8,279 9,215 223 Current tax liabilities Financial liabilities – current Financial liabilities – non-current Provisions As at 31 December 2011 — 549 5,175 — 12,234 Financial liabilities at amortised cost £’000 197 288 108 7,045 9,407 Group Liabilities not within scope of IAS 39 £’000 Trade and other payables – current 6,253 1,826 Current tax liabilities Financial liabilities – current Financial liabilities – non-current Provisions — 996 2,244 — 9,493 538 336 396 6,668 9,764 197 837 5,283 7,045 — 3,260 5,175 — — — — — 21,641 17,650 223 17,873 Financial liabilities at amortised cost £’000 8,943 — 3,871 2,244 — Company Liabilities not within scope of IAS 39 £’000 76 201 — — — Balance sheet total £’000 8,079 538 1,332 2,640 6,668 Balance sheet total £’000 9,019 201 3,871 2,244 — 19,257 15,058 277 15,335 i F n a n c a i l s t a t e m e n t s The Group and Company’s ﬁnancial liabilities have contractual maturities (including interest payments where applicable) which are summarised overleaf. As these amounts are the contractual undiscounted amounts they do not agree to the amounts shown in the balance sheet for ﬁnancial liabilities. www.augeanplc.com Augean PLC Annual Report 2012 81 Notes to the ﬁnancial statements continued for the year ended 31 December 2012 25 Financial instruments continued Group As at 31 December 2012 Trade and other payables – current Financial liabilities – current Financial liabilities – non-current Total As at 31 December 2011 Trade and other payables – current Financial liabilities – current Financial liabilities – non-current Total Company As at 31 December 2012 Trade and other payables – current Financial liabilities – current Financial liabilities – non-current As at 31 December 2011 Trade and other payables – current Financial liabilities – current Financial liabilities – non-current Amounts due in less than one year £’000 8,279 837 214 9,330 Amounts due in less than one year £’000 6,253 1,353 — 7,606 Amounts due in less than one year £’000 9,438 3,260 214 12,912 Amounts due in less than one year £’000 8,943 3,871 — 12,814 Amounts due in second to ﬁfth year £’000 — — 5,606 5,606 Amounts due in second to ﬁfth year £’000 — — 2,719 2,719 Amounts due in second to ﬁfth year £’000 — — 5,606 5,606 Amounts due in second to ﬁfth year £’000 — — 2,311 2,311 Total ﬁnancial liabilities £’000 8,279 837 5,820 14,936 Total ﬁnancial liabilities £’000 6,253 1,353 2,719 10,325 Total ﬁnancial liabilities £’000 9,438 3,260 5,820 18,518 Total ﬁnancial liabilities £’000 8,943 3,871 2,311 15,125 82 Augean PLC Annual Report 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 25 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 2012 the Group carried debt of £6.3m (2011: £4.0m) and short term ﬂexibility is achieved through bank facilities comprising 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 2012 £’000 5 8,868 8,873 2011 £’000 4 8,152 8,156 2012 £’000 — 916 916 2011 £’000 — 868 868 www.augeanplc.com Augean PLC Annual Report 2012 83 Notes to the ﬁnancial statements continued for the year ended 31 December 2012 25 Financial instruments continued Financial risk management objectives and policies continued Credit risk continued At 31 December 2012 £4.3m (2011: £3.7m) of the Group’s trade receivables were past due. A provision of £0.1m (2011: £0.1m) is held to mitigate the exposure to potential bad and doubtful debts. 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 14) 2012 £’000 3,733 532 4,265 2,989 7,254 (75) 7,179 2011 £’000 3,562 175 3,737 3,456 7,193 (124) 7,069 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 2011 Amounts utilised Amounts provided Bad debt provision as at 31 December 2012 £’000 124 (124) 75 75 84 Augean PLC Annual Report 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 25 Financial instruments continued Financial risk management objectives and policies continued 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 2012 was: Group Bank loans Finance leases At 31 December 2012 At 31 December 2011 Company Bank loans Finance leases At 31 December 2012 At 31 December 2011 Fixed rate £’000 — — — 33 Fixed rate £’000 — — — — Floating rate £’000 5,175 397 5,572 2,943 Floating rate £’000 5,175 — 5,175 2,244 Total £’000 5,175 397 5,572 2,976 Total £’000 5,175 — 5,175 2,244 The interest rate on the ﬂoating rate borrowings was 2.7% (2011: 2.5%) above LIBOR. In March 2012 the Group renegotiated its overdraft and loan facilities with HSBC until 2 March 2015 which 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 £25,000 (2011: £11,000). The hire purchase agreements of the Group under a ﬂoating rate contract have a weighted average interest rate of 2.4% (2011: 3.1%) and a weighted average duration of four (2011: ﬁve) years. The Group no longer has any hire purchase agreements under a ﬁxed rate contract. At 31 December 2011, the hire purchase agreements of the Group under a ﬁxed rate contract had a weighted average interest rate of 6.8% and a weighted average duration of two years. The maturity proﬁle of the Group’s ﬁnancial liabilities is shown in note 16. 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 throughout 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. www.augeanplc.com Augean PLC Annual Report 2012 85 Notes to the ﬁnancial statements continued for the year ended 31 December 2012 25 Financial instruments continued Financial risk management objectives and policies continued 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 18 16 2012 £’000 9,970 (6,121) 2011 £’000 9,970 (3,972) 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 (as shown in the statement of changes in shareholders’ equity), bank debt and ﬁnance leases (note 23) 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 was £549,000 (2011: £996,000). The capital structure of the Group has been altered by way of a capital reduction; see note 19 to the ﬁnancial statements. The capital reduction has reduced retained losses in the Group by eliminating the share premium account. This has allowed the Group to be in a position to propose a dividend from distributable reserves (note 7). The Group considers that the current capital structure 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 £4.7m of headroom at 31 December 2012 (2011: £6.7m). 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 total net debt costs Net debt to equity (%) Free cash ﬂow (£’000) 2012 Actual 1.0 4.5 12.5% 2012 Target <2.5 >2.5 1% 674 3,251 2011 Actual 0.6 3.5 8.5% (479) The level of free cash ﬂow for 2012 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 and investment in the incinerator at East Kent and in the acquisition of Augean North Sea Services. 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. 86 Augean PLC Annual Report 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 25 Financial instruments continued Financial risk management objectives and policies continued Capital management policies and procedures continued 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 22) Purchase of property, plant and equipment Repayments of obligations under ﬁnance leases Free cash ﬂow 2012 £’000 4,595 2011 £’000 4,121 (3,585) (4,186) (336) 674 (414) (479) 26 Retirement beneﬁt obligations The Group operates deﬁned contribution retirement beneﬁt schemes for all qualifying employees. The assets of the schemes are held separately from those of the Group in funds under the control of trustees. Where there are employees who leave the schemes prior to vesting fully in the contributions, the contributions payable by the Group are reduced by the amount of forfeited contributions. The total cost charged to income of £280,000 (2011: £218,000) represents contributions payable to these schemes by the Group at rates speciﬁed in the rules of the schemes. As at 31 December 2012, contributions of £30,000 (2011: £3,000) due in respect of the current reporting period had not been paid over to the schemes. 27 Contingent liabilities and cross guarantees In accordance with environmental 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 £7.3m (2011: £7.4m). Future site restoration costs for each landﬁll site have been provided as disclosed in note 18. 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 ongoing 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. 28 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 Group Transactions with Terramundo Limited: – revenue – costs 2012 £’000 2011 £’000 — — — — www.augeanplc.com Augean PLC Annual Report 2012 87 Notes to the ﬁnancial statements continued for the year ended 31 December 2012 28 Related party disclosures continued Transactions and balances with jointly controlled entity continued Amounts owed by Terramundo Limited: – more than one year 2012 £’000 502 502 2011 £’000 492 492 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 twelve 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. Further details regarding Terramundo Limited are disclosed in note 9. 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 2012 £’000 — 502 502 2011 £’000 — 492 492 Transactions and balances with subsidiary undertakings Included within current trade and other payables (note 15) are amounts owed to subsidiary undertakings of £8.9m (2011: £8.2m), including a loan to Augean North Sea Services of £1.0m (2011: £nil). Interest received on the loan in 2012 was £10,000 (2011: £nil). All other transactions with Augean North Sea Services are disclosed in note 24. The movement in the Company’s balances with its subsidiaries reﬂects the Group’s banking facilities and arrangements operating during the year. 29 Post-balance sheet events There has been one signiﬁcant event which has occurred post year end, as follows: Acquisition of waste transfer site at Tullos, Aberdeen On 31 January 2013, Augean North Sea Services acquired the long term lease for a waste transfer site at Tullos, Aberdeen, from Veolia ES (UK) Limited. The acquisition also includes a number of assets on the site. 88 Augean PLC Annual Report 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 Guidance for shareholders We are pleased to be writing to you with details of our 2013 Annual General Meeting (the AGM) which we are holding at the ofﬁces of FTI Consulting, Holborn Gate, 26 Southampton Buildings, London WC2A 1PB on Thursday 6 June 2013 at 10.00am. The formal notice of Annual General Meeting is set out on pages 90 to 91 of this document. In addition to the routine business of the AGM, there are two 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 5 December 2014 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 5 December 2014 or the conclusion of the Company’s next annual general meeting, whichever is earlier. Action to be taken by shareholders Whether or not you intend to be present at the AGM you are requested to complete and submit a proxy appointment in accordance with the notes to the Notice of AGM set out on page 91. 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 Tuesday 4 June 2013. 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 2012 89 Notice of annual general meeting NOTICE IS HEREBY GIVEN that the 2013 Annual General Meeting of Augean plc (the “Company”) will be held at the ofﬁces of FTI Consulting, Holborn Gate, 26 Southampton Buildings, London WC2A 1PB on Thursday 6 June 2013 at 10.00am for the purpose of considering and, if thought ﬁt, passing the resolutions set out below. Resolution 7 will be proposed as a special resolution. All other resolutions will be proposed as ordinary resolutions. 1. THAT the reports of the Directors and the auditors and the audited ﬁnancial statements for the year ended 31 December 2012 be received. 2. THAT Andrew Bryce be re-elected as a Director of the Company. 3. 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. 4. THAT the directors be authorised to determine the auditors’ remuneration. 5. THAT a dividend of 0.25 pence per share be declared. 6. 7. 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 5 December 2014 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. THAT, subject to the passing of resolution 6, the power to allot equity securities as if s561(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 5 December 2014 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. By order of the Board Richard Allen, ACMA Company Secretary 26 March 2013 Registered Ofﬁce 4 Rudgate Court Walton Near Wetherby West Yorkshire LS23 7BF 90 Augean PLC Annual Report 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 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 6.00p.m. on Tuesday 4 June 2013 (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 Tuesday 4 June 2013. 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. (c) 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 of 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 10.00a.m. on Tuesday 4 June 2013. (d) 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 Computershare Investor Services plc as the issuer’s agent (ID Reference: 3RA50) by 10.00a.m. on Tuesday 4 June 2013. 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. (e) 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. Any such representative should bring to the meeting written evidence of his appointment, such as a certiﬁed copy of a Board resolution of, or a letter from, the corporation concerned conﬁrming the appointment. (f) 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. (g) As at 25 March 2013 (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 25 March 2013 are 99,699,414. www.augeanplc.com Augean PLC Annual Report 2012 91 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 N+1 Singer Capital Markets One Bartholomew Lane London EC2N 2AX 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 92 Augean PLC Annual Report 2012 www.augeanplc.com 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 2

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