Everest Re Group
Annual Report 2008

Plain-text annual report

R.E.A. HOLDINGS PLC - ANNUAL REPORT 2 0 0 8 Secretary and registered office R.E.A. Services Limited First Floor 32-36 Great Portland Street London W1W 8QX Website www.rea.co.uk Registered number 00671099 (England and Wales) Contents Officers and professional advisers Maps showing plantation areas Summary of results Key statistics Chairman’s statement Review of the group Directors Directors’ report Corporate governance Directors’ remuneration report Directors’ responsibilities Directors’ confirmation Auditors’ report (group) Consolidated income statement Consolidated balance sheet Consolidated statement of recognised income and expense Consolidated statement of changes in equity Consolidated cash flow statement Accounting policies (group) Notes to the consolidated financial statements Auditors’ report (company) Company balance sheet Movement in total shareholders’ funds Statement of total recognised gains and losses Accounting policies (company) Notes to the company financial statements Notice of annual general meeting 2 3 4 5 7 14 46 47 53 58 62 63 64 66 67 68 68 69 70 76 98 100 101 101 102 103 109 1 Officers and professional advisers Solicitors Ashurst LLP Broadwalk House 5 Appold Street London EC2A 2HA Auditors Deloitte LLP 2 New Street Square London EC4A 3BZ Registrars and transfer office Capita Registrars Northern House Woodsome Park Fenay Bridge Huddersfield West Yorkshire HD8 0GA Directors R M Robinow J C Oakley D J Blackett J M Green-Armytage J R M Keatley D H R Killick L E C Letts C L Lim Secretary and registered office R.E.A. Services Limited First Floor 32-36 Great Portland Street London W1W 8QX Financial advisers Deloitte LLP 2 New Street Square London EC4A 3BZ Stockbrokers Mirabaud Securities LLP 21 St James’s Square London SW1Y 4JP 2 Maps showing plantation areas 3 Summary of results for the year ended 31 December 2008 Revenue 2008 $’000 2007 $’000 Change % 79,630 57,600 + 38 Earnings before interest, tax, depreciation, amortisation and biological gain* 45,700 43,346 Profit before tax Profit for the year Profit attributable to ordinary shareholders Cash generated by operations+ * see note 5 to consolidated financial statements + see note 35 to consolidated financial statements 36,309 47,010 25,773 31,997 23,833 29,453 + 5 - 23 - 19 - 19 50,896 34,831 + 46 Earnings per ordinary share (diluted) in US cents 71.5 89.6 - 20 Average exchange rates 2008 2007 2006 2005 2004 Indonesian rupiah to US dollar US dollar to pound sterling 9,757 1.84 9,166 2.01 9,129 1.86 9,756 1.82 8,978 1.84 4 Key statistics for the year ended 31 December 2008 Allocated area - Hectares Mature oil palm Immature oil palm (developed in prior years) Immature oil palm (developed in current year) Under preparation for oil palm development Reserve area o Total 2008 2007 2006 2005 2004 16,487 9,032 2,781 – 28,300 86,541 13,080 11,814 1,514 11,500+ 37,908 84,018 114,841 121,926 13,080 13,085 13,142 5,250 6,564 6,500 31,394 34,022 65,416 3,000 2,250 6,000 24,335 41,801 66,136 – 3,000 4,500 20,642 24,793 45,435 +includes 5,000 hectares outstanding from 2007 planting program. o includes conservation areas, roads and other infrastructure, areas available for planting and areas under negotiation. Production - Tonnes Oil palm fresh fruit bunch crop - group 450,906 393,217 332,704 312,676 293,883 Oil palm fresh fruit bunch crop - external 6,460 2,767 1,372 679 – 457,366 395,984 334,076 313,355 293,883 Crude palm oil Palm kernel Total palm products Oil extraction rate Kernel extraction rate Yields - Tonnes per mature hectare Fresh fruit bunches Crude palm oil Palm kernel Total palm products 105,597 20,846 93,229 15,660 126,443 108,889 77,597 12,698 90,295 73,262 12,647 85,909 71,473 12,169 83,642 23.1% 4.6% 23.5% 4.0% 23.2% 3.8% 23.4% 4.0% 24.3% 4.1% 27.3 29.6 25.5 23.8 22.4 6.4 1.3 7.7 7.1 1.2 8.3 5.9 1.0 6.9 5.6 1.0 6.6 5.4 0.9 6.3 5 Crude palm oil monthly average price e n n o t / $ S U 1400 1200 1000 800 600 400 200 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Share performance graph REA Ordinary FT All Share 2004 2005 2006 2007 2008 300 200 100 0 x e d n I 6 Chairman’s statement Presentation of annual report of duty on exports of crude palm oil (“CPO”) from Indonesia applicable during most of 2008 meant that the The group continues to report in accordance with average US dollar price per tonne realised by the group in International Financial Reporting Standards (“IFRS”) and respect of 2008 sales of CPO, adjusted to FOB, to present its consolidated financial statements in US Samarinda, was $664, not a great deal higher than the dollars. The company’s individual financial statements are average price of the preceding year of $624. 2008 presented separately from the consolidated financial revenues did benefit from the higher production achieved statements in sterling and in accordance with UK during the year, but this was significantly offset by a Generally Accepted Accounting Practice. higher cost of sales reflecting inflationary increases in Results many operating input costs. Specifically, prices for diesel and fertiliser moved to new highs while labour costs rose in line with increases in the general cost of living in Profit before tax for 2008, as shown in the accompanying Indonesia. The costs of upkeeping an additional 3,189 consolidated income statement, amounted to $36.3 hectares of plantings that were classified as mature from million against $47.0 million in 2007. The result reflected the start of 2008 also contributed to the higher cost of a negative swing in IFRS fair value adjustments between sales. 2007 and 2008 of $20.5 million with net losses on revaluation of biological assets and agricultural produce During 2008, reductions were announced in future rates inventory of, respectively, $2.7 million and $4.2 million of Indonesian corporation tax. This has permitted a against net gains of $8.0 million and $5.6 million in the reduction in the provision for deferred tax at 31 prior year. Cash generated from operations in 2008 at December 2008 with a consequential credit to income $50.9 million was significantly ahead of the $34.8 million account. Offsetting this, the amount previously provided generated in 2007. for tax has been increased to provide in full for an Indonesian assessment of tax on a group company's The loss on revaluation of biological assets was largely 2006 profits at a higher level than was originally expected the result of the decision taken in October 2008, as although significant elements of the assessment are referred to under "Land allocations and development" disputed and a material recovery of the amounts paid on below, to suspend extension planting. This meant that the account is expected. The net result is still a reduced rate hectarage developed or in course of development at 31 of tax charge in 2008 as compared with 2007. December 2008 was lower than it would otherwise have been and the fair value of the biological assets at that At the after tax level, profit for the year for 2008 was date was correspondingly reduced. There was little $25.8 million against $32.0 million in 2007 while profit change in the volume of the group's agricultural produce attributable to ordinary shareholders was $23.8 million inventory over 2008 but the IFRS requirement to value against $29.5 million. Fully diluted earnings per share this inventory at fair market value meant that the amounted to US 71.5 cents (2007: US 89.6 cents). movement between opening and closing valuations showed a loss reflecting the fall in CPO prices over 2008. Accounting reference date Deliveries made during 2008 against forward sales It was noted in the company's 2007 annual report that the contracted in 2006 and, more materially, the sliding scale directors were contemplating a change in the company's 7 Chairman’s statement continued accounting reference date from 31 December to 28 External purchases of FFB from smallholders in 2008 February. A pre-requisite of such a change was the totalled 6,460 tonnes (2007: 2,767 tonnes). Based on consent of the holders of the 9.5 per cent guaranteed the combination of the group's own FFB production and sterling notes 2015/17 issued by REA Finance B.V. externally purchased FFB, the CPO and palm kernel ("sterling notes") and this was duly obtained in August extraction rates for the year amounted to, respectively, 2008. Subsequent discussions with the group's 23.1 per cent and 4.6 per cent (2007: 23.5 per cent and Indonesian professional advisers have indicated that 4.0 per cent). The decline in the CPO extraction rate is negative Indonesian fiscal consequences would be likely attributed by the directors to a combination of overcast if the company's Indonesian subsidiaries were to change conditions during part of the year (reducing the their reporting periods so that these remained co- photosynthesis upon which oil formation partly depends) terminous with those of the company following a change and pressure on harvesting standards. The group is in the latter’s accounting reference date. Accordingly, the implementing measures designed to reduce harvester directors have decided that the company should retain its turnover and make it easier to recruit additional existing accounting reference date of 31 December. harvesters. The improvement in the palm kernel Operations extraction rate reflected successful modification of the palm kernel extraction process to improve nut cracking efficiency. The crop out-turn for 2008 amounted to 450,906 tonnes of oil palm fresh fruit bunches (“FFB”), 7.1 per cent ahead The capacity of the kernel crushing plant was increased of the budgeted crop of 421,000 tonnes and an increase during 2008 from 100 to 150 tonnes per day to cater for of 14.7 per cent on the FFB crop for 2007 of 393,217 projected crop increases from existing plantings in 2009 tonnes. Yield per hectare for 2008 was 27.3 tonnes and subsequent years. Crude palm kernel oil (“CPKO”) compared with 29.6 tonnes in 2007. The reduction production for 2008 (again based on the combination of reflected the fact that the 3,189 hectares of previously the group's own FFB production and externally purchased immature areas that were brought into harvesting in 2008 FFB) amounted to 8,190 tonnes (2007: 6,414 tonnes). initially yielded 17.6 tonnes per hectare as compared with This reflected a CPKO extraction rate for the year of 39.3 the average yield for fully mature areas of 28.9 tonnes per per cent (2007: 41.0 per cent). hectare. Land allocations and development Rainfall for 2008 averaged 3,504 mm across the group's operations, down on the 4,413 mm of the previous year Continuing efforts to ensure the availability of land for but nevertheless wholly satisfactory for oil palm expansion resulted in the addition to the group during cultivation, particularly as the rainfall was well distributed. 2008 of two further Indonesian companies, PT Kutai During 2008, the capacity of the group's second oil mill (“PBJ”), each holding a substantial land allocation in the (which was brought into production in 2006 with an initial vicinity of the group's existing estates. Each of these capacity of 40 tonnes per hour) was expanded to 60 further Indonesian companies is, or on completion of tonnes per hour. Further expansion to 80 tonnes per hour necessary legal formalities will be, owned as to 95 per Mitra Sejahtera (“KMS”) and PT Putra Bongan Jaya is planned for 2010. cent by group companies and 5 per cent by Indonesian local investors. Following these acquisitions and a recent 8 agreement by the Indonesian authorities to issue a land Following the improvement in CPO prices over 2009 to title certificate in respect of 11,625 hectares held by PBJ, date and the development of a seemingly better tone to the fully titled land areas now held by the group amount the CPO market, the directors have recently decided that to 46,841 hectares. In addition, the group holds land extension planting should be resumed. Given all the allocations over areas totalling 68,000 hectares that are economic uncertainties, a target has not yet been set for not yet fully titled (including, for this purpose, an allocation 2009 development but, when it is, the directors will wish of 20,000 hectares that is in course of renewal following to see this at a level such that the prospective costs of expiry of the original letter of allocation). development can reasonably be expected to leave the group with an appropriate cash reserve against further The not yet fully titled land allocations are at different weakness in CPO prices. stages of titling and the titling process may be expected to result in exclusion of areas the subject of conflicting The group currently holds substantial stocks of seedlings land claims that cannot be resolved and those areas in its nurseries. These were grown from seed in having special environmental value. Moreover, of the anticipation of the planting programmes that were allocated areas in respect of which full titles are previously planned and have now been cancelled. eventually issued, a proportion will have to be set aside for Seedlings not utilised for the group's 2009 development conservation and a further proportion will be required for programme or for smallholder cooperative plantings will roads, buildings and other infrastructural facilities. be pruned and retained for future use. Accordingly, it must be expected that of the not yet fully titled land allocations, the area that eventually becomes Social responsibility available for planting with oil palms will be significantly less than 68,000 hectares. The group continues to place importance on the discharge of its social obligations. Internally, employee The group had hoped that it would be able to develop land welfare and the training and development of employees during 2008 and 2009 at a rate sufficient to enable it to remain a priority. Externally, smallholder plantings and reach a target of 45,000 developed hectares by the end community development projects supported by the group of 2009. With the onset of the international financial and the work of the group’s conservation department are crisis and the accompanying sharp fall in commodity being extended. The group is considering the conversion prices, the directors concluded in October 2008 that of the conservation department into a charitable prudence dictated that the 45,000 hectare target be foundation with a view to providing access to funding abandoned and that, until the world financial outlook from third parties to augment the funding provided by the became clearer, no material new funds should be group so as to permit expansion of conservation activities committed to extension planting. The combination of this beyond the immediate areas of the group’s activities into decision and a continuation into the first half of 2008 of the wider Belayan river basin. the delays experienced in 2007 in making allocated land actually available for development meant that the area The company’s principal operating subsidiary has recently developed in 2008 amounted only to 1,892 hectares been awarded ISO 14001 certification in respect of the against the original target of 6,500 hectares. group’s two oil mills and kernel crushing plant and hopes to receive certification for six estate units in the second half of 2009. The group expects to be in a position to 9 Chairman’s statement continued seek accreditation from the Roundtable for Sustainable completed. Contractors appointed to commence mining Palm Oil in 2010 after the ISO 14001 certification operations on Liburdinding are now on site and it is hoped process has been completed. New initiative that production from this concession will start in the near future. Production from the Muser concession should follow within a few months. A small team of experienced managers has been recruited to oversee the mining Following a decision in late 2007 that the group should operations. explore opportunities in coal mining in East Kalimantan, in the second half of 2008, the group acquired rights in Pending validation of theoretical plans by actual operating respect of two adjoining coal concessions, the first, experience, the directors remain cautious as to the Liburdinding, covering an area of some 1,000 hectares returns achievable from the group's new coal interests, and the second, Muser, some 2,000 hectares. The particularly given that coal prices have fallen significantly concessions are located in the southern part of East over the past six months. Nevertheless, the group's Kalimantan, close to a major established coal mining internal projections continue to indicate that margins operation and within easy reach of existing port facilities achievable even at current coal prices will justify the through which coal can be shipped. investment made which amounted at 31 December 2008 Geological surveys conducted to date suggest that the concessions contain commercial deposits of coal having Finance typical gross calorific values per tonne of between 5,800 to $5.4 million. and 6,200 kcal/kg in the case of Liburdinding and During 2008, a further £28,000,000 nominal of sterling between 7,000 and 7,200 kcal/kg in the case of Muser. notes were created of which £15,000,000 nominal were A preliminary survey by an independent firm of geologists issued for cash at a subscription price of 99.8682 per in Jakarta indicated coal reserves of 14.7 million tonnes cent of par. The effect of this issue was to increase the for Liburdinding and 17.6 million tonnes for Muser. The nominal amount of sterling notes in issue to £37,000,000 group is commissioning a further assessment of reserves and the prospective total size of the eventual sterling note in the two concessions in compliance with the rules of the issue to £50,000,000 although under current market Australasian Joint Ore Reserves Committee. conditions an early issue of the unissued balance of £13,000,000 nominal of sterling notes appears unlikely. After a combination of geoelectric surveys and drilling to delineate and assess the characteristics of the proven Following this latest issue of sterling notes, group deposits on both concessions, detailed mining designs indebtedness at 31 December 2008 amounted to have been completed for Liburdinding and are being $108.3 million, made up of US dollar denominated bank prepared for Muser. The exploration licence held in indebtedness under an Indonesian consortium loan respect of Liburdinding has been converted to an facility of $12.9 million, £37 million nominal of sterling exploitation licence and the conversion of the exploration notes (carrying value: $50.2 million), $15.4 million in licence in respect of Muser is at an advanced stage. respect of the hedge of the principal amount of sterling Necessary work on upgrading roads from the concession notes referred to below, $30 million nominal of 7.5 per areas to the port facility has taken longer than originally cent dollar notes 2012/14 (“dollar notes”) (carrying value: hoped because of heavy rains but has now been $29.6 million) and other short term indebtedness 10 (including obligations under finance leases) of $0.2 Dividends million. Against this indebtedness, at 31 December 2008 the group held cash and cash equivalents of $30.3 The fixed semi-annual dividends on the 9 per cent million. The group has entered into long term sterling US cumulative preference shares that fell due on 30 June dollar debt swaps to hedge against US dollars the sterling and 31 December 2008 were duly paid. Dividends liability for principal and interest payable in respect of the totalling 3p per ordinary share have been paid in respect entire issue of the sterling notes (but, in the case of of 2008 (2007: 2p per ordinary share). These comprised interest, only as respects interest payments falling due up a first interim dividend of 1.5p per ordinary share paid on to 31 December 2015). 26 September 2008 and a second interim dividend in lieu of final of 1.5p per ordinary share paid on 30 January Following recent discussions with the banks providing the 2009. In addition, the company made a capitalisation Indonesian consortium loan facility, it has been agreed issue to ordinary shareholders of 1,302,954 new that the terms of the facility will be reconstituted so as to preference shares on the basis of one new preference provide the group going forward with an $11.75 million share for every 25 ordinary shares held on 24 September term loan repayable over five years and a revolving 2008. working capital facility, renewable annually, of $4.75 million. The group retains ambitious plans for continued extension planting of oil palms. This will require At current CPO prices and with the agreement to substantial investment. Moreover, the uncertainties of the reconstitute the Indonesian consortium loan facility, the current world economic situation and the possibility that group can expect that, excluding expenditure on new CPO prices may fall back from current levels dictate that extension planting, cash flows from operations for 2009 the group should be careful to husband its cash will comfortably exceed the amounts required to fund resources. While this remains the case, the directors will planned capital and development expenditure and debt inevitably feel constrained as to the rate at which they can service. As indicated under "Land allocations and prudently declare, or recommend the payment of, future development" above, the directors have recently decided ordinary dividends. that extension planting should be resumed but on the basis that such resumption will be at a level such that the The directors do appreciate that many shareholders prospective costs of development can reasonably be invest not only for capital growth but also for income and expected to leave the group with an appropriate cash that the payment of dividends is important. The directors reserve against further weakness in CPO prices. have previously stated their intention that any new level of ordinary dividend set in respect of any given year should The group may seek further debt funding to permit the be sustainable in subsequent years and they expect that group to proceed with a higher level of extension planting this will prove the case with the level of total ordinary than the group could otherwise afford. However, the dividend set in respect of 2008. Under normal directors will require that any such additional debt funding circumstances, the directors would hope that the is provided predominantly by way of medium term loans prospective crop increases of coming years will permit a and will limit additional borrowings to levels that the progressive ordinary dividend policy albeit that the rate of directors are confident that the group’s equity base can progression is likely to be steady rather than dramatic. comfortably sustain. 11 Chairman’s statement continued Whilst the directors continue to believe that capitalisation equivalent age achieved similar yields per hectare in issues of new preference shares to ordinary shareholders, 2009 to those of 2008. Crops to end March 2009 were such as were made in both 2007 and 2008, provide a in line with budget. useful mechanism for augmenting returns to ordinary shareholders in periods in which good profits are During 2008, the CPO price, spot CIF Rotterdam, rose achieved but demands on cash resources limit the scope from an opening level of some $950 per tonne to a high for payment of cash dividends, the current state of in early March of just under $1,400. It then declined markets for fixed return securities of smaller listed steadily to $705 per tonne at the end of September, fell companies may make it impractical to make another such sharply during October to a low of $435 per tonne and issue in 2009. Staff then recovered slightly to a closing level at the end of the year of $525 per tonne. The average price for the year was $939 per tonne (2007: $780 per tonne). The early months of 2009 have seen the recovery in prices The directors extend their thanks to all of the group's staff continue and the CPO price, CIF Rotterdam, currently for their continued loyalty and hard work. stands at $780 per tonne. Future direction For the moment, vegetable oil prices appear to have decoupled from the price of petroleum oil and the The directors commented in the company's 2007 annual improving price trend is being driven by good demand for report that if, as they hoped would be the case, the group conventional uses of vegetable oil assisted by restocking was able in future to rely, to a greater extent than hitherto, in the major consuming countries which had reduced on internally generated equity, and if the markets for listed stocks in the immediate aftermath of the international securities in Indonesian and other Eastern financial financial crisis. Industry forecasters are predicting some markets continued to mature, it might be that a slowdown in the rate of growth in CPO supply in 2009 in reconstitution of the group as an entirely South East part reflecting increased replanting of older areas which Asian based entity would better serve investors in the are becoming uneconomic to harvest at current CPO group than continuation of the present group structure. prices and for which the Malaysian government is Given the worldwide economic problems that have currently providing financial incentives. Although reports subsequently surfaced, the directors do not believe that indicate that US soybean plantings for the current season new corporate initiatives are currently appropriate. They will be at a higher level than for the 2008 season, the have therefore deferred any further consideration of increase is projected to be slight. It is likely to be offset possible changes to the corporate structure of the group fully by the effects of drought on South American until the financial environment becomes more stable. soybean crops which are expected to show a decline. Prospects In short, the supply demand balance going forward is moderately encouraging, particularly as slower growth in The FFB crop for 2009 has been budgeted at 486,000 meat demand may adversely impact the economics of tonnes with a normal budgetary assumption of average future soybean plantings given that revenues from rainfall (both as to quantum and distribution). This crop is soybean cultivation depend as much on sales of soya a little below the level that would result if palms of an meal to the animal feed market as they do on sales of the 12 oil component of the soybeans harvested. Within the CPO component of the vegetable oil complex, less readily available credit and reduced revenues are likely to lead to some slowdown in extension planting and, particularly as respects less efficient growers, reduction in fertiliser applications. This should result in some scaling back in the rate of future growth in CPO supply. In the very short term, CPO must expect to lose some market share to soya oil as a recent reduction in Indian import duties applicable to soya oil is likely to encourage some substitution of soya oil for CPO in the Indian market. Looking further forward, while it appears likely that bio- fuels will prove a less significant component of future vegetable oil consumption than was at one time expected, the fundamentals underlying demand for vegetable oils for conventional uses have not changed. World population continues to grow and, in the key markets of India and China, lower prices are likely to stimulate demand which will also continue to increase with economic growth. With the recent decision to resume extension planting, the group will continue to expand its planted hectarage. Moreover the new plantings that have been established in recent years mean that the group can anyway look forward to steadily increasing crops for several years to come. As inflationary pressures on costs subside, margins may reasonably be expected to remain at satisfactory levels. The directors therefore retain their previously expressed confidence in the group's future. RICHARD M ROBINOW Chairman 27 April 2009 13 Review of the group Introduction Overview The directors present to shareholders of R.E.A. Holdings Nature of business and resources plc the review of the group set out below. This review has been prepared solely to provide shareholders as a body The group is principally engaged in the cultivation of oil with information complementing the accompanying palms in the province of East Kalimantan in Indonesia and financial statements in order to facilitate understanding of in the production of crude palm oil (“CPO”) and by- the group’s business and strategic objectives and to products from fruit harvested from its oil palms. A permit assessment of the likelihood of the group realising detailed description of the group's oil palm activities is those objectives. This review should not be relied upon by provided under “Operations” below. any other party or for any other purpose. During 2008, the directors decided to augment the This review contains forward-looking statements which traditional plantation operations of the group by have been included by the directors in good faith based developing a modest coal mining operation also based in on the information available to them up to the time of their East Kalimantan. Details of this diversification are approval of this review. Such statements should be provided under "New initiative" below. treated with caution given the uncertainties inherent in any prognosis regarding the future and the economic and The group and predecessor businesses have been business risks to which the group's operations are involved for over one hundred years in the operation of exposed. agricultural estates growing a variety of crops in developing countries in South East Asia and elsewhere. In preparing this review, the directors have sought to The group today sees itself as marrying developed world follow best practice as recommended by the reporting capital and Indonesian opportunity by offering investors statement on operating and financial reviews published by in, and lenders to, the company the transparency of a UK the Accounting Standards Board but this review may not listed company and then using capital raised through the comply with that statement in all respects. The directors company to develop significant natural resource based have relied mainly on qualitative rather than quantitative operations in Indonesia (principally in agricultural assessments in relation to environmental and social commodities). In this endeavour, the group’s inheritance matters. In the context of the current scale of the group’s from its past represents a significant intangible resource operations, the directors consider qualitative assessment in that it underpins the group’s credibility. This assists an appropriate evaluation of the group’s performance in materially in sourcing capital, in negotiating with the these areas. Indonesian authorities in relation to project development and in recruiting management of a high calibre. This review has been prepared for the group as a whole and therefore gives emphasis to those matters that are Other resources that are important to the group are its significant to the company and its subsidiaries when developed base of operations, bringing with it an taken together. The review is divided into six sections: established management team familiar with Indonesian overview; operations; sustainability; new initiative; regulatory processes and social customs, a trained finances; and risks and uncertainties. workforce and the group’s land bank. 14 Objectives of fixed return permanent preferred capital and debt with a maturity profile appropriate to the group's projected The group’s objective is to provide attractive overall future cash flow. returns to investors in the shares and other securities of the company from the operation and expansion of the Diversification group’s existing business, while honouring the group’s social obligation to facilitate economic progress in the The group recognises that it is principally dependent upon localities of the group's activities and to develop the operations in a single locality producing a single product. group's operations in accordance with best corporate This permits significant economies of scale but brings social responsibility and sustainability standards. with it risks. The directors therefore believe that the Achievement of this objective is dependent upon, among group should be willing to consider possibilities for other things, the group’s ability to generate the operating diversification into areas of activity that complement, and profits that are needed to finance its realisation. can be developed within reasonable proximity of, the existing oil palm operations. However, they do not regard Since CPO is a primary commodity, its price is determined diversification as a strategic imperative and believe that a by world supply and demand. The CPO price may, and decision to diversify should be taken only if a new area of does, fluctuate in ways that are difficult to predict and activity offers the prospect of returns on capital invested which the group cannot control. As its strategy for comparable with, or ideally better than, those achievable increasing profits from its agricultural operations, the from investment of equivalent capital in continued group therefore seeks to increase crops and to minimise expansion of the oil palm operations in the existing unit production costs with the expectation that the lower operational areas. cost producer of CPO is better placed to weather any downturn in price than less efficient competitor producers After reviewing and rejecting in recent years a number of of CPO and other vegetable oils. To this end, the group diversification opportunities, the directors concluded has adopted a two pronged approach. during 2008 that coal mining in East Kalimantan had the potential to meet the directors' minimum criteria for taking First, the group aims to capitalise on its principal the group into another sphere of activity. Accordingly, as resources by developing the group’s land bank as rapidly described under "New initiative" below, an initial as logistical and financial constraints permit with a view to investment has been made in establishing a modest coal utilising the group’s existing management capacity to mining operation. manage a larger business. Secondly, the group strives to manage its established operations as productively as Future direction and succession possible. Ancillary to the first component of this approach, the group seeks to add to its land bank when Since 2004, the area of oil palm under cultivation by the circumstances are conducive to its doing so. group has doubled. The group has also increased its processing capacity and, as described under As an additional financial objective, the group aims to "Sustainability" below, has significantly extended its enhance returns to equity investors in the company by interaction with the local communities. The directors are procuring that a prudent proportion of the group’s funding confident that this major expansion in the scale of the requirements is met with prior charge capital in the form group's activities will produce significant financial benefits 15 Review of the group continued for the group and its shareholders. However, it has also local independent non-executive support that is now meant that the group has had to move from a situation in available, does provide reasonable resilience. Moreover, which a few people could together control all of the an expanding cadre of younger staff has the capacity to group's operations to a more structured environment in provide for management succession in Indonesia by which responsibilities are departmentalised and senior internal promotion. management has had to learn to manage operations through departments rather than by direct involvement in The directors commented in the company's 2007 annual all operational decisions. report that, whilst the model of marrying developed world capital and Indonesian opportunity with the company as a A significant and continuing challenge has been to ensure listed company providing a conduit for UK capital had that, in embedding a more structured environment, the served the group well, it did require the maintenance of a group does not lose the efficiencies of rapid and well UK base involving significant overhead. If, as the directors informed decision making and the benefits of an internal hoped would be the case, the group was able in future to culture of shared ambitions and mutual respect and rely, to a greater extent than hitherto, on internally loyalty that a smaller organisation can engender. Greater generated equity, and if the markets for listed securities in structure inevitably brings with it increased overheads and Indonesian and other Eastern financial markets continued it is clearly important that those overheads increase to mature, it might be that a reconstitution of the group as returns not internal bureaucracy. an entirely South East Asian based entity would better serve investors in the group than continuation of the In enhancing its management capacity, the group has present group structure. Given the worldwide economic focused primarily on the management of its Indonesian problems that have subsequently surfaced, the directors operations since all of the group's operating activities do not believe that new corporate initiatives are currently take place in Indonesia. Work on designing and appropriate and have therefore deferred any further implementing a new departmental structure for the consideration of possible changes to the corporate Indonesian operations has now been completed and the structure of the group until the financial environment additional staff positions created by the new structure becomes more stable. have been filled. Improvements have also been made to communications with local stakeholders to provide for Nevertheless, the directors concern remains as to more regular exchanges of views. In particular, efforts are whether a structure in which an Indonesian business is being made to ensure that management can take owned through a UK listed company, with the UK maximum advantage of the valuable advice and support overheads that this entails, is really the appropriate long that can be provided by local minority investors in group term structure for the group. This will have to be kept companies, the local boards of the company's Indonesian under review. In the meanwhile, the directors intend subsidiaries and the other local advisers that the group simply to maintain the status quo of the group’s London now has in place. base. Both the managing director and the chairman have indicated that they would like to remain in their present The group values its staff and would not wish to lose any roles for several more years and the directors therefore of them but the directors believe that, should losses occur, feel that the issue of London succession can be deferred the increased capacity provided by the group's new until it becomes clearer whether succession is needed. management structure in Indonesia, coupled with the 16 The Indonesian context Evaluation of performance During 2008, the Indonesian domestic economy In seeking to meet its expansion and efficiency objectives, continued its expansion growing by 6.1 per cent. There the group sets operating standards and targets for most has been some slowdown following the international aspects of its activities and regularly monitors financial crisis but the World Bank still projects continuing performance against those standards and targets. In economic growth during 2009 albeit at a lower rate of 3.4 many aspects of the group's activities, there is no single per cent per annum. Until September 2008, the standard or target that, in isolation from other standards Indonesian rupiah remained broadly stable against the US and targets, can be taken as providing an accurate dollar around the levels of the preceding two years within continuing indicator of progress. Rather a collection of a range around Rp9,000 = $1. Subsequent months have measures have to be evaluated and a qualitative seen a decline with the current rate standing at Rp10,650 conclusion reached. = $1. Whilst this decline will obviously impact negatively on inflation, other inflationary pressures within the The directors do, however, rely on regular reporting of Indonesian economy have eased following the recent certain operational progress items that are comparable declines in raw material prices. from one year to the next and may be regarded as key indicators of operating performance. These indicators for The Indonesian political situation remains stable. It must any given period comprise: be expected that in the run up to the presidential election to be held later in 2009 there will be some renewed debate as to the role of foreign investment in the Indonesian economy but Indonesia's continuing need for capital to fund its development appears to be generally recognised. Indonesia is one of the few emerging market countries successfully to have accessed the international bond markets for capital during 2009. The province of East Kalimantan remained stable and prosperous throughout 2008. The province benefits from a large natural resource base, low population and near full employment. In particular, the coal mining industry continues to develop rapidly within East Kalimantan. Although, as noted under “Area of operations” in "Operations" below, the devolution of authority from central government to provincial governments that has resulted from the Indonesian regional autonomy legislation of recent years has brought with it increased bureaucracy in some areas (in particular land titling), it has also brought benefits to outlying provinces such as East Kalimantan in providing increased resources for provincial development. (cid:129) the new extension planting area developed; this is measured as the area in hectares of land cleared and planted out or cleared and prepared for planting out during the applicable period; (cid:129) the crop of fresh fruit bunches ("FFB") harvested; this is measured as the weight in tonnes of FFB delivered to the group's oil mills during the applicable period; and (cid:129) the CPO extraction rate achieved; this is measured as the percentage by weight of CPO extracted from the FFB crop of the applicable period. Of these indicators, the first provides a measure of the group's performance against its expansion objective. The second and third indicators are measures of field and mill efficiency and, as such, provide a basis for assessing the extent to which the group is achieving its objective of maximising output from its operations. Quantifications of the above three indicators for 2008 and comparable quantifications for 2007 (in both cases 17 Review of the group continued as sourced from the group's internal management Operations reports) are provided under “Land development” and “Crops and extraction rates” in “Operations” below Group structure together with targets for 2009. Qualitative comment on the group's social objectives is also provided under All of the group's plantation operations are located in East “Employment and social obligations” in “Operations” below Kalimantan and have been established pursuant to an and under “Sustainability” below. understanding dating from 1991 whereby the East Kalimantan authorities undertook to support the group in Key indicators used by the directors in evaluating the acquiring, for its own account and in co-operation with group's financial performance for any given period local interests, substantial areas of land in East comprise: Kalimantan for planting with oil palms. (cid:129) return on adjusted equity which is measured as profit before tax for the period less amounts attributable to preferred capital expressed as a percentage of average total equity (less preferred capital) for the period; and The oldest planted areas, which represent the core of the group’s operations, are owned through PT REA Kaltim Plantations (“REA Kaltim”) in which a group company holds a 100 per cent economic interest. With the REA Kaltim land areas approaching full utilisation, the (cid:129) net debt to total equity which is measured as company has since 2005 established or acquired several borrowings and other indebtedness (other than intra additional Indonesian subsidiaries, each bringing with it a group indebtedness) less cash and cash equivalents substantial allocation of land in the vicinity of the REA expressed as a percentage of total equity. Kaltim estates. These additional subsidiaries comprise PT Sasana Yudha Bhakti (“SYB”) and PT Kartanegara Because of the group's material dependence on CPO Kumala Sakti (“KKS”), established during 2005 and prices, which have a direct impact on revenues and on 2006, PT Cipta Davia Mandiri (“CDM”) acquired at the periodic revaluations of biological assets, in targeting end of 2007, and PT Kutai Mitra Sejahtera (“KMS”) and return on total equity the directors set a norm that they PT Putra Bongan Jaya (“PBJ”), added during 2008. Each hope will represent an average of the annual returns of these subsidiaries is, or on completion of necessary achieved over a period of seven years. legal formalities will be, owned as to 95 per cent by group companies and 5 per cent by Indonesian local investors. Percentages for the above two indicators for 2008 and comparable figures for 2007 (derived from figures Land areas extracted from the audited consolidated financial statements of the company) are provided under “Group Although the 1991 understanding established a basis for results” and “Financing policies” in “Finances” below, the provision of land for development by or in cooperation together with target percentages. with the group, all applications to develop previously undeveloped land areas have to be agreed by the Indonesian Ministry of Forestry and to go through a titling process. This process begins with the grant of a land allocation. This is followed by environmental and other 18 assessments to delineate those areas within the hectares just listed. Moreover, of the areas in respect of allocation that are suitable for development, settlement of which full hgu titles are issued, a proportion will have to be compensation claims from local communities, other set aside for conservation and a further proportion will be necessary legal procedures that vary from case to case required for roads, buildings and other infrastructural and the issue (often in stages) of development permits facilities. Accordingly, it must be expected that of the and land clearing licences. The process is completed by areas currently allocated or applied for, the land area that a cadastral survey (during which boundary markers are eventually becomes available for planting with oil palms inserted) and the issue of a formal registered land title will be significantly less than 68,000 hectares. certificate (an hak guna usaha or hgu certificate). All of the not yet fully titled land allocations held or applied In the group’s experience, the process, which was never for by the group include some areas that require straightforward, has become more complicated in recent resolution of conflicting claims or some element of years. This has followed the devolution of significant rezoning. A particular problem affecting the 11,000 authority in relation to land matters from the Indonesian hectares held by SYB has been that of overlapping coal central government to Indonesian provincial and district exploration licences (although publicly available authorities which has resulted in an increase in the geological surveys indicate that such coal as the area number of official bodies involved in the titling process. contains is low grade and therefore uneconomic to mine at current coal prices). The position in respect of one The group has for some years held hgu land title such licence was resolved during the year but, certificates in respect of 30,106 hectares held by REA disappointingly, SYB was then told of the existence of Kaltim and 5,110 hectares held by SYB. These titled another overlapping licence, although the directors areas have recently been augmented by 11,625 hectares believe that the position in respect of this second licence held by PBJ in respect of which the Indonesian will also prove capable of resolution. authorities have agreed that an hgu land title certificate can be issued. As a result, the fully titled land areas held In relation to the 20,000 hectares previously allocated to, by the group now amount to 46,841 hectares. and now reapplied for by, KKS, progress on titling remains, as previously reported, subject to the issue of a Land allocations held by the group but not yet fully titled decree by the Ministry of Forestry to allow implementation comprise some 11,000 hectares held by SYB, 20,000 of a new development plan for the Province of East hectares held by CDM and 17,000 hectares held by KMS. Kalimantan. Whilst the directors remain hopeful that this In addition, the group is seeking renewal of a 20,000 decree will ultimately be forthcoming, its timing is hectares land allocation previously given to KKS as uncertain and further delay is quite likely. The issues respects which the original letter of allocation has expired. affecting the land allocations of, respectively, 20,000 These land allocations are at different stages of titling and hectares and 17,000 hectares held by CDM and KMS are the titling process may be expected to result in exclusion less significant and the titling process in respect of these of areas in respect of which conflicting land claims cannot areas is proceeding satisfactorily. be resolved and those areas having special environmental value. Accordingly, the group is likely to be granted full The core operations of REA Kaltim are located some 140 hgu land titles in respect of only a part of the 68,000 kilometres north west of Samarinda, the capital of East 19 Review of the group continued Kalimantan, and lie either side of the Belayan river, a Of this total, mature plantings comprised 16,487 tributary of the Mahakam, one of the major river systems hectares. A further 2,257 hectares planted in 2005 came of South East Asia. The SYB and KKS areas are to maturity at the start of 2009. contiguous with the REA Kaltim areas so that the three areas together form a single site. All of these areas fall The group had hoped that it would be able to develop land within the Kutai Kartanegara district of East Kalimantan. during 2008 and 2009 at a rate sufficient to enable it to The PBJ area lies some 70 kilometres to the south of the reach a target of 45,000 developed hectares by the end REA Kaltim areas in the West Kutai district of East of 2009. With the onset of the international financial Kalimantan while the CDM and KMS areas are located in crisis and the accompanying sharp fall in commodity close proximity of each other in the East Kutai district of prices, the directors concluded in October 2008 that East Kalimantan less than 30 kilometres to the east of the prudence dictated that the 45,000 hectare target be REA Kaltim areas. abandoned and that, until the world financial outlook became clearer, no material new funds should be At present, access to the REA Kaltim, SYB, KKS, CDM committed to extension planting. Consequently, no new and KMS areas can be obtained only by river and by air oil palm areas have been developed in the period from although the completion in 2005 of a road bridge over the October 2008 to date. Mahakam should eventually permit road access as well. The PBJ area is already accessible by road. The CDM and Land allocated to the group only becomes available for KMS areas can be accessed from the REA Kaltim area by development when the titling process has proceeded to a way of abandoned logging roads. point at which the group has been granted development and land clearing licences in respect of the land. During Subject to current financial constraints, the group 2007, delays in releasing allocated land areas for continues to look at acquiring further areas suitable for development forced the group to suspend extension planting with oil palms within the general vicinity of its planting and this situation continued into 2008. Good existing land allocations. In July 2008, the group did progress in resolving titling problems permitted the agree, in principle, to purchase, subject to certain resumption of development around the mid year but conditions, the whole of the issued share capital of PT efforts to recover the backlog of planned new Prasetia Utama, a company holding a full hgu title over development were then forestalled by the decision to stop some 9,000 hectares of land almost contiguous with the development. As a result, the area developed in 2008 11,000 hectares land allocation held by SYB. With the amounted only to 1,892 hectares against the original subsequent international financial crisis, the group has target of 6,500 hectares. not to date proceeded with this purchase. Given the crisis, the directors believe that for the immediate future it As discussed under "Revenues and markets" below, the is likely to be easier to acquire land suitable for oil palm early months of 2009 have seen some recovery in CPO development than has been the case in the recent past. prices. Given this and the development of a seemingly Land development better tone to the CPO market, the directors have recently decided that extension planting should be resumed but, with the continuing economic uncertainties, have not yet Areas planted and in course of development as at 31 set a target for 2009 development. When a target is set, December 2008 amounted in total to 28,300 hectares. the directors will wish to see this at a level such that the 20 prospective costs of development can reasonably be immediate availability of such seedlings will ensure that if, expected to leave the group with an appropriate cash as is intended, extension planting is resumed during reserve against further weakness in CPO prices. 2009, the group will have the necessary planting material immediately available and that the normal lead time Achievement of the development target set for 2009 and required for the development of new areas of one year in of the development targets for future years will continue which to procure seed and to develop seedlings for to be dependent upon land becoming available for planting out will be avoided. The immediate availability of development as needed. Currently, there is sufficient land planting material will also facilitate rapid development of available to the group for immediate planting to meet the the planned smallholder cooperative plantings described group's short term development needs. Efforts are under "Smallholders" below. Seedlings not utilised for the continuing to advance titling of other land allocated to the group's own 2009 development programme or for the group with a view to adding to the immediately available smallholder cooperative plantings will be pruned and hectarage as rapidly as possible. Moreover, the group retained for future use. intends that large annual development programmes should in future be split over two or more separate areas Processing so that, if titling setbacks occur in one area, these can hopefully be compensated for by accelerating The group now operates two oil mills in which the FFB development elsewhere. crops harvested from the mature oil palm areas are processed into CPO and palm kernels. The first mill Although recent years have seen significant inflation in began operating in 1998 with an initial capacity of 30 development costs, inflationary pressures have eased tonnes of FFB per hour. This has since been expanded since the general economic downturn. At current cost to a present capacity of 80 tonnes per hour. The second levels and CPO prices, extension planting in areas mill was brought into production in 2006 with an initial adjacent to the existing developed areas still offers the capacity of 40 tonnes per hour. This was expanded to 60 prospect of attractive returns. Accordingly, it remains the tonnes per hour during 2008 and further expansion to 80 policy of the directors that, subject to financial and tonnes per hour is now planned for 2010. The additional logistical constraints, the group should continue its capacity provided by such expansion should be sufficient expansion and should aim over time to plant with oil palms to process the expected increases in FFB crops over the all suitable undeveloped land available to the group (other next few years. The group previously indicated that it than areas set aside by the group for conservation). Such expected to commence construction of a third oil mill in expansion will, however, involve a series of discrete 2010 but, with extension planting proceeding more slowly annual decisions as to the area to be planted in each than had been hoped, it is now likely that construction will forthcoming year and the rate of planting may be be delayed until 2011. accelerated or scaled back in the light of prevailing circumstances. The group's second oil mill incorporates, within the overall facility, a palm kernel crushing plant in which palm kernels The group currently holds substantial stocks of seedlings can be further processed to extract the crude palm kernel in its nurseries. These were grown from seed in oil (“CPKO”) that the palm kernels contain. The kernel anticipation of the planting programmes that were crushing plant was brought into full scale production at previously planned and have now been cancelled. The the start of 2007 and now processes all kernel output 21 Review of the group continued from both of the group’s oil mills. Capacity was increased Because of the relatively short distance involved, this is during 2008 from 100 to 150 tonnes of kernels per day proving very efficient in minimising transportation costs. to cater for projected crop increases from existing plantings in 2009 and subsequent years. The kernel A trial made in 2005 established that it is both feasible crushing plant is economic to run because it operates on and economic to use the barge fleet to transfer CPO from power generated by the second oil mill from the the Samarinda transhipment terminal to ships anchored combustion of waste products from the CPO and palm offshore outside the port of Samarinda. This potentially kernel extraction processes and such power is surplus to provides access to vessels of much greater tonnage than the power requirement for those processes. Moreover, the vessels that can be loaded within the port of processing kernels into CPKO avoids the material Samarinda (which are effectively limited to 6,000 tonnes) logistical difficulties and cost associated with the and would permit the group to ship palm products to transport and sale of kernels. Europe when differentials between European and South East Asian prices for CPO and CPKO make it worthwhile The group operates its own fleet of barges for transport to do so (although this is not currently the case). of CPO and CPKO. The fleet is used in conjunction with tank storage adjacent to the oil mills and a transhipment During periods of lower rainfall (which normally occur for terminal owned by the group downstream of the port of short periods during the drier months of May to August of Samarinda. The fleet comprises one barge of 3,000 each year), river levels on the upper part of the Belayan tonnes, which the group time charters, and a number of become volatile and palm product outputs at times have smaller barges, each of 2,000 tonnes or less, which are to be transferred by road from the mills to a point some owned by the group. The smaller barges are used for 70 kilometres downstream where year round loading of transporting palm products from the upriver operations to barges of up to 2,000 tonnes is possible. To reduce the the transhipment terminal for collection from that terminal extra cost that this involves, in 2003 the group acquired a by buyers. The 3,000 tonne barge can be used for sea downstream riverside site on which to establish a voyages to Malaysia and other parts of Indonesia. This permanent loading point for use during dry periods. The permits the group to deliver CPO and CPKO to necessary loading facilities will be developed following customers' nominated destinations in Malaysia and completion of a government road that will provide access Indonesia. to the site. Recent progress on the government road has The directors believe that flexibility of delivery options is helpful to the group in its efforts to optimise the net Crops and extraction rates prices, FOB port of Samarinda, that it is able to realise for been slow. its produce. Moreover the group’s ability itself to deliver FFB crops and yields per hectare for the years from 2004 CPO and CPKO allows the group to make sales without to 2008 are shown in the “Key statistics” section of this the collection delays sometimes experienced with FOB annual report. The crop out-turn for 2008 amounted to buyers. Currently, a significant proportion of the group's 450,906 tonnes, 7.1 per cent ahead of the budgeted CPO is sold for delivery to ports in Sabah in East Malaysia. crop of 421,000 tonnes and an increase of 14.7 per cent As a result, the 3,000 tonne barge is employed almost on the FFB crop for 2007 of 393,217 tonnes. Yield per exclusively in sailing between Sabah and Samarinda. hectare for 2008 was 27.3 tonnes compared with 29.6 22 tonnes in 2007. The reduction reflects the fact that extraction rates for the year amounted to, respectively, 3,189 hectares of previously immature areas were 23.1 per cent and 4.6 per cent (2007: 23.5 per cent and brought into harvesting in 2008 and initially yielded 17.6 4.0 per cent). tonnes per hectare as compared with the average yield for fully mature areas of 28.9 tonnes per hectare. The decline in the CPO extraction rate is attributed by the directors to a combination of overcast conditions during Rainfall for 2008 averaged 3,504 mm across the group's part of the year (reducing the photosynthesis upon which operations, down on the 4,413 mm of the previous year oil formation partly depends) and pressure on harvesting but nevertheless wholly satisfactory for oil palm standards. The group is implementing measures designed cultivation, particularly as the rainfall was well distributed. to reduce harvester turnover and make it easier to recruit additional harvesters. It is hoped that these measures will There is a considerable volume of data available on the restore the CPO extraction rate to levels closer to the FFB yields that are achieved from modern hybrid material group's target CPO extraction rate (which is being planted on estates with soil and climatic conditions similar retained) of 24 per cent. to those prevailing on the group's estates. Yields per hectare climb rapidly during the first four years of The improvement in the palm kernel extraction rate production to a peak level that on average is around 24 (which is measured as the percentage by weight of palm tonnes per hectare. Production then remains at or close kernels extracted from the FFB crop for the year) to this peak level for ten years or more, declining gradually reflected successful modification of the palm kernel over the last six to eight years of the oil palm's 25 year extraction process to improve nut cracking efficiency. economic life. The group has achieved yields in excess of The result achieved was comfortably ahead of the target 30 tonnes per hectare from fully mature plantings palm kernel extraction rate of 4.0 per cent set by the indicating that, in years when cropping is not materially group. affected by abnormal weather conditions, an average peak yield across all plantings will materially exceed 24 CPKO production for 2008 (again based on the tonnes per hectare. combination of the group's own FFB production and externally purchased FFB) amounted to 8,190 tonnes The FFB crop for 2009 has been budgeted at 486,000 (2007: 6,414 tonnes). This reflected a CPKO extraction tonnes with a normal budgetary assumption of average rate for the year (being measured as the percentage by rainfall (both as to quantum and distribution). This crop is weight of CPKO extracted from the palm kernels a little below the level that would result if palms of an processed by the palm kernel crushing plant during the equivalent age achieved similar yields per hectare in year) of 39.3 per cent (2007: 41.0 per cent). 2009 to those of 2008. Crops to end March 2009 were Modifications to the kernel crushing plant are currently in line with budget. being made and it is hoped that these will increase the CPKO extraction rates towards the group’s target of 42.0 External purchases of FFB from smallholders in 2008 per cent. totalled 6,460 tonnes (2007: 2,767 tonnes). Based on the combination of the group's own FFB production and externally purchased FFB, the CPO and palm kernel 23 Review of the group continued Revenues and markets adjusted in response to market surpluses or shortfalls within the vegetable oils and fats complex. Around 85 per cent by weight of oil palm product output is represented by CPO and the balance by palm kernels. The directors believe that levels of annual oilseed Accordingly, the group's revenues are critically dependent production will ultimately be driven by fundamental on CPO prices. market factors. It is however possible that normal market mechanisms may, for a time at least, be affected by The outlook for CPO prices must be considered against government intervention. It has long been the case that the background of consumption of vegetable and animal some areas (such as the EU) have provided subsidies to oils and fats. According to Oil World, worldwide encourage the growing of oilseeds and that such consumption of vegetable and animal oils and fats subsidies have distorted the natural economics of increased by 3.9 per cent to 158.1 million tonnes in the producing oilseed crops. More recently there has been year to 30 September 2008. The annual increase of 5.9 action by governments attempting to reduce dependence million tonnes that this represented was only marginally on fossil fuels. This included steps to enforce mandatory below the average annual growth in consumption of some blending of bio-fuel as a fixed minimum percentage of all 7.0 million tonnes in the preceding three year period, fuels and subsidies to support the cultivation of crops despite the historically high prices for oils and fats during capable of being used to produce bio-fuel. Such action the period. increased returns for farmers from growing crops such as corn and meant that land, which, absent government Major uses of vegetable and animal oils and fats have intervention, might have been expected to be used for conventionally been for the production of cooking oil, growing annual oilseed crops has been used for other margarine and soap. Consumption of these basic purposes. With surfacing concerns as to security of commodities correlates with population growth and, in future food supplies and recent declines in the price of less developed areas, with per capita incomes and thus petroleum oil, government policies in relation to bio-fuel economic growth. Vegetable oils can also be used to are now being modified and the distortions that this has provide bio-fuels; bio-diesel use, in particular, has caused are already reducing. accounted for the significantly higher year on year increase in consumption of vegetable oils that has been A graph of CIF Rotterdam spot CPO prices for the last ten seen in each of the last four years. years, as derived from prices published by Oil World, is shown in the “Key statistics” section of this annual report. According to Oil World, CPO production in the year to 30 The monthly average price over the ten years has moved September 2008 totalled 42.4 million tonnes, between a high of $1,249 per tonne and a low of $234 representing some 26.7 per cent of the total world per tonne. The monthly average price over the ten years production of the 17 major vegetable and animal oils and as a whole has been $497 per tonne. fats for the same period of 158.9 million tonnes. The principal competitors of CPO are the oils from the annual During 2008, the CPO price, spot CIF Rotterdam, rose oilseed crops, the most significant of which are soybean, from an opening level of some $950 per tonne to a high oilseed rape and sunflower. As annual crops, the in early March of just under $1,400. It then declined production from these three oilseed crops can be rapidly steadily to $705 per tonne at the end of September, fell 24 sharply during October to a low of $435 per tonne and replanting of older areas which are becoming then recovered slightly to a closing level at the end of the uneconomic to harvest at current CPO prices and for year of $525 per tonne. The average price for the year which the Malaysian government is currently providing was $939 per tonne (2007: $780 per tonne). The early financial incentives. Reports indicate that US farmers are months of 2009 have seen the recovery in prices switching land from corn to soybean so that US soybean continue and the CPO price, CIF Rotterdam, currently plantings for the current season are expected to be at a stands at $780 per tonne. slightly higher level than for the 2008 season. This increase may be fully offset by the effects of drought on The directors have previously recorded their belief that South American soybean crops which are expected to the prices of all commodities are inherently cyclical and show a decline. they have no reason to modify that view. High prices have led to lower prices and the directors are confident that the In short, the supply demand balance for the vegetable oil converse will also be the case. Whilst it appears likely that complex going forward is moderately encouraging, bio-fuels will prove a less significant component of future particularly as slower growth in demand for meat may vegetable oil consumption than was at one time expected, adversely impact the economics of future soybean the fundamentals underlying demand for vegetable oils plantings given that revenues from soybean cultivation for conventional uses have not changed. World depend as much on sales of soya meal to the animal feed population continues to grow and, in the key markets of market as they do on sales of the oil component of the India and China, lower prices are likely to stimulate soybeans harvested. Within the CPO component of the demand which will also continue to increase with complex, less readily available credit and reduced economic growth. Ultimately, lower vegetable oil prices revenues are likely to lead to some slowdown in extension may be expected to lead to reduced plantings of the planting and, particularly as respects less efficient annual oilseed crops of soybean, oilseed rape and growers, reduction in fertiliser applications. This should sunflower, the rate of growth in world vegetable oil result in some scaling back in the rate of future growth in production will then reduce and the supply demand CPO supply. In the very short term, CPO must expect to balance will tighten. lose some market share to soya oil as a recent reduction in Indian import duties applicable to soya oil is likely to For the moment, vegetable oil prices appear to have encourage some substitution of soya oil for CPO in the decoupled from the price of petroleum oil and the modest Indian market. recovery in the vegetable oil complex of recent months is being driven by good demand for conventional uses of Looking further forward, even if conversion of vegetable vegetable oil assisted by restocking in the major oil to bio-fuel does not after all become a growing consuming countries which had reduced stocks in the component of vegetable oil consumption, the ability of the immediate aftermath of the international financial crisis. energy markets rapidly to absorb significant volumes of An effect of this has been a significant reduction in CPO vegetable oil over a short period should limit the negative stocks at origin in Malaysia and Indonesia from the levels price impact of periodic future surpluses in vegetable oil reached in the final quarter of 2008. Industry forecasters supply. If, as seems probable, petroleum oil prices in due are predicting some slowdown in the rate of growth in course return to higher levels, these are again likely to CPO supply in 2009 in part reflecting increased provide a floor for the vegetable oil markets. Within those 25 Review of the group continued markets, CPO should continue to benefit from health 2009 were cancelled prior to commencement of concerns in relation to trans-fatty acids. Such acids are deliveries by mutual agreement with the counterparty formed when vegetable oils are artificially hardened by owing to a problem of certain terms of the contracts hydrogenation. Poly-unsaturated oils, such as soybean conflicting with Indonesian regulations. The forward oil, rape oil and sunflower oil, require hydrogenation sales that were delivered and, more materially, the sliding before they can be used for shortening or other solid fat scale of duty applicable during most of 2008 to exports of applications but CPO does not. CPO from Indonesia together had the effect that the average US dollar price per tonne realised by the group in In 2008, approximately 58 per cent of the group's CPO respect of 2008 sales of CPO, adjusted to FOB, production was sold in the local Indonesian market and Samarinda, was $664, not a great deal higher than the the balance of 42 per cent was exported. FOB prices average price of the preceding year of $624. realised for CPO in the local market during 2008 were for the most part broadly in line with those available in the The group currently has no forward sales of CPO. The export market but, with production volumes increasing Indonesian regulations imposing a sliding scale of export and current trading uncertainties, the group wishes to duty remain in place although the scale itself has been ensure that it can access the larger CPO markets modified so that currently the rate of duty payable rises available internationally when necessary. Export sales from nil per cent on sales at prices of up to the equivalent continued to be concentrated within the South East Asian of $700 per tonne, CIF Rotterdam, to 25 per cent on region. A major component of exports goes to refineries sales at prices above the equivalent of $1,300 per tonne. in East Malaysia owned by one customer (a company of international standing) while local sales are restricted to a Sales of CPKO during 2008 were made entirely in the small number of regional buyers. All sales are made on local Indonesian market and achieved an average contract terms that are comprehensive and standard for premium of some $156 per tonne over the FOB price per each of the markets into which the group sells. The group tonne for CPO (2007: $115). therefore has no need to develop its own policies for product quality and terms of dealing with customers. Cost base As a general rule, all CPO produced by the group is sold The group's revenue costs principally comprise: direct for immediate delivery but on occasions, when market costs of harvesting, processing and despatch; direct costs conditions appear favourable, the group makes forward of upkeep of mature areas; estate and central overheads sales. When making such sales, the group would not in Indonesia; the overheads of the UK head office; and normally commit a volume equivalent to more than 60 per financing costs. Whilst direct costs vary to an extent with cent of its projected CPO production for a forthcoming crops harvested and the area under cultivation, the crop period of twelve months. related component of costs is not a high proportion of the total. Therefore, for any given total area under cultivation, During 2008, the group delivered 12,000 tonnes of CPO costs are for the most part fixed. The directors believe under forward sale contracts dating from 2006 at the that the group's senior management team has the equivalent of a CIF Rotterdam price of $620 per tonne. capacity to manage a larger area than is currently under Other forward sale contracts made in 2007 for the cultivation and do not therefore expect that when eighteen month period from July 2008 to December extension planting is resumed fixed costs will increase proportionately to the area under cultivation. 26 Cost inflation has been a characteristic of the group's workforce and their dependants are housed in group operations in recent years, but cost pressures in 2008 housing in a network of villages across the group estates. were very pronounced. In particular, the cost of diesel continued to increase in line with the price of petroleum The group places considerable emphasis on welfare and oil while salary and wage costs grew significantly and remuneration structures and aims to promote a fertiliser prices rose to new highs. Recent months have productive and stable workforce. All villages are equipped seen some reversals of these trends. Diesel prices have with potable water and electricity and provided with a fallen with petroleum oil prices and there have been range of amenity buildings including mosques, churches, significant reductions in the costs of all fertilisers, shops, schools and creches. A trust funded by the group although the cost of potash has fallen somewhat less operates a network of primary schools across the group's than the costs of fertilisers providing nitrogen and estates and the group provides financial assistance to phosphate. In addition, the weaker Indonesian rupiah, state secondary schools serving the children of the (currently standing at Rp10,650 against the US dollar as group's employees. The group runs its own health service compared with Rp9,419 at 1 January 2008) is helping to with medical facilities in each estate village and a central offset the cost in US dollar terms of Indonesian wage hospital. The clinics and hospital are open not only to the increases and inflation in other rupiah denominated costs. group's employees and their dependents but also to members of the local communities. The group actively With the moderating inflation position and increasing supports measures to control endemic diseases and to production volumes, unit costs remain at levels that permit further the education of its workforce in hygiene and the group, at current CPO prices to achieve margins that, similar health matters. although below the very high margins of the early months of 2008 are still satisfactorily remunerative. Furthermore, The group has health and safety policies that are clearly the temporary scaling back of the extension planting communicated to all employees and are managed programme is providing an opportunity for management through regular meetings of each operating unit attended to reconsider the efficiency of various aspects of the by management and employee representatives. The group's day to day operations. In particular, the group is minutes from all such meetings are reviewed by senior currently reviewing the scope for savings, in FFB management ultimately accountable to the group collection and transport arrangements, from greater managing director and appropriate action is taken to mechanisation, and in road maintenance, from remedy any deficiencies identified. The group promotes a centralising maintenance responsibilities. A significant policy for the creation of equal and ethnically diverse investment is also being made in the development of a employment opportunities and encourages the new management information and accounting data base. establishment of forums in which employees or their It is expected that this will become operational in phases representatives can have free and open dialogue with the during 2010 and be fully operational for 2011. group’s management. Employees Training is an important focus for the group in its efforts to establish best practice in all aspects of the group's With crops continuing to increase, the group is steadily activities. Regular training programmes are run as part of expanding its workforce. At the end of 2008, this the human resource development function. Particular numbered some 6,000. Almost all members of the 27 Review of the group continued emphasis is placed on health and safety and in establishing their own smallholdings of oil palm. The sustainability. model for this support is that each individual smallholder cultivates oil palm on his own two hectare plot with the The group’s continuing expansion brings with it the need group providing technical advice through a management regularly to enlarge the operational management team team dedicated to the smallholder development and a recruitment programme for graduates with programme. Fertilisers and chemicals are supplied by the agricultural qualifications is conducted each year. These group to individual smallholders on deferred terms but on graduates join a twelve month cadet training programme. the basis that when smallholder oil palm plantings reach Those successfully completing this programme, which maturity, all FFB produced will be sold to the group for provides a grounding in all aspects of oil palm estate processing and the group will, on an agreed basis, recover management, are offered positions as assistant from the amounts payable for the FFB, the deferred managers. The recruitment programme for cadets is amounts owed to the group. At 31 December 2008, some sized each year to reflect the future management needs 1,370 hectares of smallholder plantings had been of the group and to allow for staff turnover. established following this model across 12 local villages. Courses constructed and operated out of the group's own Although interest from the local village communities in the training school are targeted primarily at lower and middle cultivation of oil palm as a secure long term livelihood management levels. The group recognises the increases year by year, it has become clear that the importance of developing management skills at all levels logistical constraints of dealing with a large number and the scope of the group’s ongoing training programme individuals, each of whom operates on a relatively small includes the external provision of management area, will inevitably limit the rate at which the group can development courses for the group's senior Indonesian expand the smallholdings that it supports on the model management. just described. Moreover, the ethnic background of the communities living in the vicinity of the group’s operations Action was taken during 2008 to provide remuneration varies materially from village to village, and the lifestyle incentives to employees to discourage them from and culture of some villages are not conducive to switching to other employers. The response to this has development of oil palm by way of small individual been positive and with competition for competent estate holdings. management and experienced workers reducing as plans for new oil palm development are scaled back to reflect The group is committed to a material expansion of the oil current financing realities, the group hopes that it can palm areas cultivated by the local village communities and continue successfully to protect its significant investment is keen to provide mechanisms by which all such in its employees and their skills. Sustainability Smallholder programmes communities can benefit from the economic opportunities afforded by oil palm development. To this end, the group, in addition to its support for the individual smallholder model, will now also support local village cooperatives in developing oil palm on larger areas ranging from 100 to 1,000 hectares or more. Under this new model, the land The group continues to support individuals in the local areas for development will be provided by the communities in areas adjacent to the group's operations cooperatives but the development will be managed by the 28 group for a fee. The costs of development will be borne component of its plantation operations. To this end, the by the cooperatives but with funding from external group has established a separate department to liaise sources provided on terms that FFB produced by the with the local communities and to formulate and manage cooperatives will be sold to the group and that the group the group's community development initiatives. The will ensure that, out of the proceeds of such sale, the department is headquartered in the group's offices in cooperatives will meet their debt service obligations in Samarinda but maintains specialist management teams respect of the external funding. resident on the sites upon which the group operates. These teams are the primary interface between the group To date, the group has developed slightly in excess of 300 and the local communities and, in addition to their general hectares of oil palm for local village cooperatives but it is duty of liaison, have several specific functions. now actively negotiating schemes to increase this hectarage very materially. The areas developed so far When new areas are allocated to the group, the have been funded by the group under compensation community development teams have an important role in agreements reached with villages in connection with the the titling process. They oversee the production by titling of land allocations held by the group. It is intended external consultants of the community needs assessment that the further schemes for cooperative developments that the group now commissions in all new areas prior to now being pursued should be funded with local bank any development of such areas. They explain to the local finance provided pursuant to an Indonesian government communities the implications of oil palm development and scheme designed to encourage the expansion of oil palm seek to identify and meet local concerns so that the free, plantings under village cooperative ownership. prior and informed consent of local people is obtained for Negotiations with the East Kalimantan development bank new developments. for the provision of funding on this basis are currently in hand. The community development teams also engage in regular discussion with government at local and central Whilst the group views its support for smallholder oil palm level in order to identify and develop areas where the local plantings in the local communities adjacent to its communities can obtain government assistance and operations as part of its social obligations to those funding for community development projects. It is hoped communities, the discharge of those obligations will be that, with the group’s help, local communities can be mutually beneficial to the communities and the group. made fully aware of the range of government rural The communities will benefit from the economic assistance programmes available to them and that the development generated as a result of the plantings while group can act as a catalyst in helping local communities the group will benefit from the additional throughput in its to avail themselves of the benefits that such programmes oil mills that will result from the processing of FFB from can bring. the plantings. Community development Finally, each community development team, through its day to day presence on the ground and regular visits to the local communities, encourages the establishment of The group believes that maintenance of good relations small scale self-help projects by individual groups of with, and encouraging the development of, local villagers. The proximity of the sizable workforce resident communities in its areas of operation is an essential on the group’s estates provides a readily accessible local 29 Review of the group continued market for produce arising from such projects and (cid:129) to seek conservation outcomes that accrue long term permits the group, when appropriate, to support projects benefit to local communities. with offtake guarantees. When needed, the group also provides financing assistance. To date the group has been involved with over 50 self-help projects, most of which are continuing. Project activities have included chicken and duck rearing, fish farming and fruit, vegetable and rice cultivation. Conservation From the outset, the group has planned the development of its East Kalimantan operations on the basis of environmental impact assessments and advice provided by independent experts. It continues to do so. Within the areas already developed, over 6,000 hectares have been retained as conservation reserves with the aim of preserving or enhancing landscape level bio-diversity. Areas identified as requiring conservation and set aside as part of the planning process for each new development area will be added to the conservation reserves as the group expands. As with community development, the group has established a separate department under the leadership of an internationally recognised conservation expert to implement the group’s conservation objectives, which are: The conservation department augments its effectiveness through partnerships with local bodies and international non governmental organisations. The department was active during 2008 in identifying and cataloguing flora and fauna within the existing conservation reserves and in advising on the delineation of conservation reserves within the new land areas allocated to the group. In particular the department was able to identify a riverine zone within the CDM areas that is home to two endangered species of crocodile, the Tomistoma schlegelii and Crocodylus siamensis, that it is important to protect. A joint study of aquatic fauna conducted with the Indonesian Institute for Sciences was successful in indentifying three new varieties of previously unknown fish (Leiocassis new sp, Pangio new sp and Rasbora new sp). The directors believe that there is scope to extend the activities of the conservation department beyond the immediate areas of the group's operations into the wider Belayan river basin and that to do so would extend the conservation gains that the department can hope to deliver. To this end the group is currently considering the conversion of the conservation department into a charitable foundation which the group would support but (cid:129) within the group's areas of operations to compile a which would also be in a position to accept donations detailed record of the physical attributes of the from, and work with, third parties. landscape, its bio-diversity resources and the status and value of each to both international and local Sustainable practices communities; to minimise or eliminate adverse impacts from the group’s plantations upon soil, water and biological communities; to achieve bio-diversity conservation through education of local communities, protection and sustainable use; and The group recognises its social obligations in relation to pollution and energy efficiency. The group operates a zero burning policy in relation to land development and, in dry periods, maintains active fire patrols in an effort to limit the risks of accidental fires. Corridors are used to separate all plantings from water courses and the latter are regularly monitored to ensure that they are not contaminated by leaching of fertilisers and chemicals. (cid:129) (cid:129) 30 The group actively promotes integrated pest are carefully reviewed by senior operating management management throughout its operations. Wherever and the group’s managing director and appropriate possible, natural predators are preferred to pesticides for responsive action is taken. pest control. Selective varieties of flowering plants have been planted throughout the group’s estates to promote Accreditation the population of wasps, the natural predators of bagworm and caterpillars. REA Kaltim has recently been awarded ISO 14001 certification in respect of its two mills and kernel crushing All processing waste is recycled. Oil mill effluent is plant and expects to receive certification for its six estate treated in effluent ponds and after treatment is distributed units in the second half of 2009. within the oil palm areas as a substitute for inorganic fertiliser. Empty fruit bunches are similarly distributed. The group is a member of the Roundtable on Sustainable Fibre extracted during the milling of oil palm fruit is used Palm Oil (“RSPO”) which has produced a set of eight to fuel oil mill boilers from which steam is generated. This principles and 39 criteria for the sustainable production of steam is then used to drive steam turbines for generating palm oil. During 2008, work was completed by RSPO on electricity. establishing national interpretations of these principles and criteria for each of the major CPO producer countries The group is giving continuing attention to identifying to ensure consistency with each country’s legal system. ways of reducing its carbon footprint. Measures already Accordingly, individual companies can now obtain RSPO taken include improvements to the distribution of surplus accreditation and the group is working towards doing so. electric power generated in the group's oil mills reducing the need to run diesel generators to supply power to Whilst the directors believe that the group's operational estate villages. The group is currently evaluating a practices already meet the requirements of RSPO, possible project to increase the surplus power available accreditation will require that such operational practices from the milling process by passing mill effluent through are embedded in formal systems and are subject to an anaerobic digestion process, capturing the methane controls that are auditable. The group, with assistance released during digestion and utilising such methane to from external consultants, has been actively engaged in drive gas powered generators. This would not only further formalising such systems and controls and expects to be reduce the group's use of diesel for power generation but in a position to seek RSPO accreditation in 2010, after would also substantially eliminate current methane the current ISO 14001 certification process has been emissions from effluent ponds. The group hopes that the completed. project may be eligible for carbon credits under the Clean Development Mechanism which may make it easier to As a substantial Indonesian plantation operator, REA justify the capital commitment that would be involved. Kaltim is subject to periodic environmental appraisal pursuant to a programme managed by the Ministry of In line with its policy of continuous improvement, the Environment and known as "PROPER". Results of group employs an international firm of consultants to PROPER evaluations are marked by the presentation of perform an annual management performance review coloured flags ranging from black for the poorest covering production and environmental practices and assessment to gold for the best. During 2008, REA social sustainability. Conclusions and recommendations Kaltim was one of only two plantation companies 31 Review of the group continued throughout Indonesia to be presented with a green flag, facilities, coal can be loaded into 5,500 tonne barges for the highest level of flag so far awarded under the transhipment over a short distance to a sea anchorage PROPER programme. capable of accommodating cape size vessels. New initiative The Liburdinding area has Pamaluan coal formations with typical gross calorific values between 5,600 and 6,000 Against the background that it is well established that the kcal/kg and the Muser area has Tanjung coal formations province of East Kalimantan has vast coal deposits and with typical gross calorific values between 6,000 and that certain of the local investors in the group's East 7,000 kcal/kg. Surveys using the 2D resistivity method Kalimantan operations were encouraging the group to have been conducted by an independent firm of consider joining them in developing coal concessions geologists in Jakarta on both Liburdinding and Muser available to such local investors, the directors concluded, areas and these indicate coal reserves of 14.7 million and in late 2007, that the group should explore opportunities 17.6 million tonnes respectively. Drilling work has been in coal mining. Accordingly, in March 2008 the group undertaken to assess further the characteristics of the opened an office in Jakarta to pursue such opportunities coal deposits and these have indicated gross calorific and, the directors having decided that such pursuit should values of between 5,800 and 6,200 kcal/kg in the case be kept quite separate from the group's plantation of the Liburdinding deposits and between 7,000 and operations, recruited a small team of staff to manage the 7,200 kcal/kg in the case of the Muser deposits. The office and evaluate available opportunities. group is commissioning a further assessment of coal reserves in accordance with the rules of the Australasian With the office in place and with a view to obtaining a Joint Ore Reserves Committee. better understanding of the Indonesian coal market and defraying start up overheads, the group then took its first Regulations governing coal mining in Indonesia currently steps into the coal sector by entering into an arrangement restrict the mining activities in which foreign investors for a limited period (now expired) to source coal from may be involved and are complicated by the recent Kalimantan and supply it to a power station in Sumatra. enactment of new mining legislation in respect of which With the experience gained from this initial activity, and implementing regulations have still to be published. with assistance from the group's long standing connections in East Kalimantan, the group then felt more As currently structured, the group's interest in comfortable in progressing from coal trading to direct Liburdinding and Muser will be held through PT KCC investment in open cast coal mining. Mining Services Indonesia ("KCCMSI") an Indonesian foreign investment company of which the establishment This led to the completion by the group in the second half has been approved by the Indonesian investment co- of 2008 of the acquisition of rights in respect of two ordinating board and of which the incorporation is adjoining coal concessions, the first, Liburdinding, currently in process. KCCMSI will be owned as to 95 per covering an area of some 1,000 hectares and the second, cent by the group and 5 per cent by a local investor who, Muser, some 2,000 hectares. The concessions are with members of his family, has already acquired or located in the southern part of East Kalimantan, close to established the two local Indonesian companies (the an existing major coal mining operation and some 40 "licence companies") holding the mining licences in kilometres from existing river port facilities. From these respect of the Liburdinding and Muser concessions. 32 Pursuant to arrangements agreed between the group and granted for Liburdinding and will be processed for Muser the local investor, the group has provided or will provide once the exploitation licence has been granted. loan funding to meet substantially all of the costs of obtaining and developing the concessions upon terms Necessary work on upgrading roads from the concession that all coal produced by the licence companies will be areas to the port facility has been slightly delayed by sold to KCCMSI on a basis that reflects the group's heavy rains but has now been completed and contractors funding commitments, the costs to the licence companies appointed to commence mining operations on of that funding and the group's involvement in the Liburdinding are now on site. It is hoped that production development and operation of the concessions. It has from this concession will start within the second quarter also been agreed that the group will have the right to of 2009 and will be followed within a short period by require the combination of the licence companies and production from Muser. A small team of experienced KCCMSI on appropriate terms should Indonesian managers has been recruited to oversee the mining regulations in future permit this and, further, that all of the operations. existing arrangements between the group and the local investor may be revised on a basis consistent with their The group is giving careful attention to the potential present economic intent should the implementing environmental consequences of the coal operations and regulations in respect of the new mining legislation, when intends that the operations should be conducted in published, make such revision expedient. accordance with international standards of best practice. In particular, the group will seek to establish health and Having acquired its rights in respect of the Liburdinding safety procedures to protect and safeguard the welfare of concession, the group held discussions with two different all persons involved with the mining operations, to engage parties who indicated interest in acquiring the coal from positively with employees, contractors and local that concession upon terms that would have effectively communities, to ensure the proper management of waste relieved the group of any further material capital and to reinstate, in so far as reasonably practicable, land commitment or operating risk in exchange for a cash areas affected by mining to their original condition upon royalty. However, such discussions proved abortive. completion of mining operations. Accordingly, the group has concluded that the licence companies should themselves operate both the It is expected that coal production will be sold into both Liburdinding and Muser concessions and they are local and export markets. Local demand for coal is seeking to bring both concessions into production as expected to increase significantly in the coming months soon as possible. as a result of the commissioning of a number of new coal fired power stations in Indonesia. Detailed mining designs for the Liburdinding concession have now been completed and work has started on Pending validation of theoretical plans by actual operating mining designs for the Muser area. The exploration experience, the directors remain cautious as to the licence held in respect of Liburdinding has been returns achievable from the group's new coal interests, converted to an exploitation licence and the conversion of particularly given that coal prices have fallen significantly the exploration licence in respect of Muser is at an over the past six months. Nevertheless, the group's advanced stage. A transport and selling licence has been internal projections continue to indicate that margins achievable even at current coal prices will justify the 33 Review of the group continued investment made which amounted at 31 December 2008 Indonesian export duty, to 31 December 2008 amounted to $5.4 million. Finances Accounting policies to $431 per tonne as compared with the 20 year average to 31 December 2007 of $414 per tonne. This implies an increase in the estimated unit value of FFB for transfer to mill from 2007 to 2008 that is less than the increase in unit current costs from 2007 to 2008. However, the unit profit margin per tonne of FFB harvested that is The group continues to report in accordance with currently being achieved is greater than the estimated International Financial Reporting Standards (“IFRS”). unit profit margin applied in valuing the biological assets Following a decision taken in 2007 that the group should as at 31 December 2007. Accordingly, the same unit adopt the US dollar (which is regarded as the functional profit margin as that assumed as at 31 December 2007 currency of the group) as its presentational currency, the (namely $50 per tonne of FFB) has been applied in accompanying consolidated financial statements for the valuing the biological assets as at 31 December 2008. year ended 31 December 2008 are presented in US dollars (as were the consolidated financial statements for The discount rates used for the purposes of the biological the preceding year). asset revaluation at 31 December 2008 were 16 per cent in the case of REA Kaltim and 19 per cent in the case of The accounting policies applied under IFRS are set out in all other group companies (31 December 2007: the “Accounting policies (group)” section of this annual respectively, 17.5 per cent and 19 per cent). The report. The accounting policy relating to biological assets directors believe that the risks of successfully harvesting (comprising oil palm plantings and nurseries) is of FFB projected to be produced from newly developed particular importance. Such assets are not depreciated areas are significantly greater than those of harvesting but are instead restated at fair value at each reporting the projected FFB crops from established estates. They date and the movement on valuation over the reporting consider it appropriate to reflect this risk differential by period, after adjustment for additions and disposals, is applying a discount rate of 19 per cent to newly taken to income. Deferred tax is provided or credited as established areas, reducing this to 17.5 per cent as an appropriate in respect of each such movement. area becomes well established and then further to 16 per cent when plantings in an established area become As in previous years, the fair value of the biological assets predominantly mature. The discount rates used at 31 at 31 December 2008 has been derived by the directors December 2008 and 31 December 2007 were derived on a discounted cash flow basis by reference to the FFB accordingly. expected to be harvested from the group's oil palms over the full remaining productive life of the palms and to an The directors recognise that the IFRS accounting policy in estimated profit margin per tonne of FFB so harvested. relation to biological assets does have theoretical merits This estimated unit profit margin is based on current costs in charging each year to income a proper measure of and an estimated produce value for transfer to mill capital consumed (so that, for example, a fair distinction is derived from a twenty year average of historic CPO prices drawn each year between the cost of the shortening life but is buffered to restrict any implied change in margin in expectancy of younger plantings still capable of many contradiction of the trend in current margins. The 20 year years of cropping and that of older plantings nearing the average CPO price, FOB port of Samarinda and net of end of their productive lives). It does, however, concern 34 the directors that no estimate of fair value can ever be 2007 and 2008 of $20.5 million with net losses on completely accurate (particularly in a business in which revaluation of biological assets and agricultural produce selling prices and costs are subject to very material inventory of, respectively, $2.7 million and $4.2 million fluctuations). Moreover, in the case of the group’s against net gains of $8.0 million and $5.6 million in the biological assets, small differences in valuation prior year. Significant other differences between the two assumptions can have a quite disproportionate effect on years were a $22.0 million increase in revenue ($79.6 results. The biological assets are recorded in the group million against $57.6 million) and a $12.8 million increase balance sheet at 31 December 2008 at $180 million. An in cost of sales. increase or reduction of $5 per tonne in the estimated profit margin used for the purpose of the valuation of $50 The net loss on the revaluation of the biological assets at per tonne of FFB would increase or reduce the valuation 31 December 2008 was principally caused by the by approximately $19 million. Other sensitivities to decision taken in October 2008, as referred to under assumptions are disclosed in note 13 to the consolidated "Land development" in "Operations" above, to suspend financial statements. Accounting reference date extension planting. This meant that the hectarage developed or in course of development at 31 December 2008 was lower than it would otherwise have been and that the FFB crops projected for the purposes of the It was noted in the company's 2007 annual report that the revaluation had to be reduced commensurately. The directors were contemplating a change in the company's revaluation benefited from two factors: first, a reduction accounting reference date from 31 December to 28 in the discount rate applied in respect of the REA Kaltim February. A pre-requisite of such a change was the biological assets (from 17.5 per cent to 16 per cent), consent of the holders of the 9.5 per cent guaranteed designed to reflect the reduced risk, as REA Kaltim sterling notes 2015/17 issued by REA Finance B.V. and plantings mature, of failing to harvest projected REA this was duly obtained in August 2008. Subsequent Kaltim crops; and, secondly, an increase as compared with discussions with the group's Indonesian professional 2007 in the per hectare yields projected for newly mature advisers have indicated that negative Indonesian fiscal areas reflecting the group's actual yield experience of consequences would be likely if the company's recent years. However, the positive impact of these two Indonesian subsidiaries were to change their reporting factors did not fully offset the negative impact of the periods so that these remained co-terminous with those planting suspension. of the company following a change in the latter’s accounting reference date. Accordingly, the directors There was little change in the volume of the group's have decided that the company should retain its existing agricultural produce inventory over 2008 but the IFRS accounting reference date of 31 December. requirement to value this inventory at fair market value Group results meant that the movement between opening and closing valuations showed a loss as a result of the fall in CPO prices over 2008. This contrasted with the preceding Group operating profit for 2008 amounted to $40.6 year when an increase in the volume of produce inventory million against $49.4 million in 2007. The result reflected combined with a rise in CPO prices to produce a a negative swing in IFRS fair value adjustments between significant gain under the same caption. 35 Review of the group continued The reported increases in revenue and cost of sales for disputed and a material recovery of the amounts paid on 2008 were the result of the higher production achieved account is expected. The net result is still a reduced rate combined, as respects revenue, with higher selling prices of tax charge in 2008 as compared with 2007. and, as respects cost of sales, with inflation in most operating input costs. In particular, prices for diesel and At the after tax level, profit for the year for 2008 was fertiliser moved to new highs while labour costs rose in $25.8 million against $32.0 million in 2007 while profit line with increases in the general cost of living in attributable to ordinary shareholders was $23.8 million Indonesia. The increase in cost of sales also reflected the against $29.5 million. Fully diluted earnings per share costs of upkeeping an additional 3,189 hectares of amounted to US 71.5 cents (2007: US 89.6 cents). plantings that were classified as mature from the start of 2008. The group's target long term average annual return on adjusted equity is 20 per cent. The return achieved for Group profit before tax for 2008 amounted to $36.3 2008 was 26.0 per cent against 42.5 per cent for 2007. million against $47.0 million in 2007. The movement substantially mirrored that in operating profit but also Dividends reflected higher finance costs and lower investment revenues. The former was principally caused by a higher The fixed semi-annual dividends on the 9 per cent average level of group indebtedness during the year (the cumulative preference shares that fell due on 30 June result of the further issue of sterling notes in August and 31 December 2008 were duly paid. Absent an 2008) and the latter by the lower rates of interest unforeseen material adverse change in the group's available during the year on cash deposits. circumstances, the directors intend that all future semi- annual dividends on the preference shares should be paid Before deduction of the interest component added to as they fall due. Dividends totalling 3p per ordinary share biological assets, interest and similar charges payable in have been paid in respect of 2008 (2007: 2p per ordinary 2008 amounted to $10.0 million (2007: $9.2 million). share). These comprised a first interim dividend of 1.5p Interest cover for 2008 (measured as the ratio of per ordinary share paid on 26 September 2008 and a earnings before interest, tax, depreciation and second interim dividend in lieu of final of 1.5p per ordinary amortisation, and biological gain to interest and similar share paid on 30 January 2009. In addition, the company charges payable) was 4.7 (2007: 5.1). made a capitalisation issue to ordinary shareholders of 1,302,954 new preference shares on the basis of one During 2008, reductions were announced in future rates new preference share for every 25 ordinary shares held of Indonesian corporation tax. This has permitted a on 24 September 2008. reduction in the provision for deferred tax at 31 December 2008 with a consequential credit to income The group retains ambitious plans for continued account. Offsetting this, the amount previously provided extension planting of oil palms. This will require for tax has been increased to provide in full for an substantial investment. Moreover, the uncertainties of the Indonesian assessment of tax on REA Kaltim's 2006 current world economic situation and the possibility that profits at a higher level than was originally expected CPO prices may fall back from current levels dictate that although significant elements of the assessment are the group should be careful to husband its cash 36 resources. While this remains the case, the directors will During the year, a further £28,000,000 nominal of 9.5 per inevitably feel constrained as to the rate at which they can cent guaranteed sterling notes 2015/17 (“sterling prudently declare, or recommend the payment of, future notes”) were created of which £15,000,000 nominal ordinary dividends. were issued for cash at a subscription price of 99.8682 per cent of par by REA Finance B.V. (“REA Finance”), a The directors do appreciate that many shareholders wholly owned subsidiary of the company. The effect of invest not only for capital growth but also for income and this issue was to increase the nominal amount of sterling that the payment of dividends is important. The directors notes in issue to £37,000,000 and the prospective total have previously stated their intention that any new level of size of the eventual sterling note issue to £50,000,000 ordinary dividend set in respect of any given year should although under current market conditions an early issue be sustainable in subsequent years and they expect that of the unissued balance of £13,000,000 nominal of this will prove the case with the level of total ordinary sterling notes appears unlikely. dividend set in respect of 2008. Under normal circumstances, the directors would hope that the Following the latest issue of sterling notes, group prospective crop increases of coming years wll permit a indebtedness at 31 December 2008 amounted to progressive ordinary dividend policy albeit that the rate of $108.3 million, made up of US dollar denominated bank progression is likely to be steady rather than dramatic. indebtedness under an Indonesian consortium loan facility of $12.9 million, £37 million nominal of sterling Whilst the directors continue to believe that capitalisation notes (carrying value: $50.2 million), $15.4 million in issues of new preference shares to ordinary shareholders, respect of the hedge of the principal amount of the such as were made in both 2007 and 2008, provide a sterling notes as described below, $30 million nominal of useful mechanism for augmenting returns to ordinary 7.5 per cent dollar notes 2012/14 (“dollar notes”) shareholders in periods in which good profits are (carrying value: $29.6 million) and other short term achieved but demands on cash resources limit the scope indebtedness (including obligations under finance leases) for payment of cash dividends, the current state of of $0.2 million. Against this indebtedness, at 31 markets for fixed return securities of smaller listed December 2008 the group held cash and cash companies may make it impractical to make another such equivalents of $30.3 million. issue in 2009. Capital structure The sterling notes are secured principally on unsecured loans made by REA Finance to REA Kaltim and SYB, are guaranteed by the company and are repayable by three The group is financed by a combination of debt and equity equal annual instalments commencing 31 December (which under IFRS includes minority interests and the 2015. The dollar notes are unsecured obligations of the company's preference capital). Total equity less minority company and are repayable by three equal annual interests at 31 December 2008 amounted to $162.0 instalments commencing 31 December 2012. million as compared with $147.8 million at 31 December 2007. Minority interests amounted at those dates to, Borrowings under the Indonesian consortium loan facility respectively, $580,000 and $877,000. are secured on the assets of REA Kaltim and are guaranteed by the company. The outstanding balance 37 Review of the group continued under the facility at 31 December 2008 was repayable as capital amounted to $50.2 million in 2008 against $38.0 follows: 2009 - $10.7 million and 2010 - $2.2 million. million in the preceding year. A release of working capital Following recent discussions with the banks providing the of $0.7 million in 2008 against an absorption of $3.2 facility, it has been agreed that the terms of the facility will million in 2007 meant that cash generated from be reconstituted so as to provide the group going forward operations in 2008 at $50.9 million was significantly with an $11.75 million term loan repayable over five years ahead of the $34.8 million generated in 2007. However, and a revolving working capital facility, renewable a higher interest cost ($5.5 million against $3.5 million) annually, of $4.75 million. coupled with a very material increase in tax paid ($13.1 million against $3.2 million) following the exhaustion The group has entered into long term sterling US dollar during 2007 of tax losses brought forward from earlier debt swaps to hedge against US dollars the sterling years, reduced the difference between the two years so liability for principal and interest payable in respect of the that net cash from operating activities for 2008 was $4.1 entire issue of the sterling notes (but, in the case of million ahead of 2007 at $32.3 million against $28.2 interest only, as respects interest payments falling due up million. to 31 December 2015). The net liability at 31 December 2008 on restatement of these hedging swaps at fair value Overall, during the two year period to 31 December 2008, was $26.5 million reflecting the fall in sterling against the there was an increase in working capital of $3.9 million. US dollar since the swaps were contracted and This was principally due to the increase in the size of the substantially matching the benefit enjoyed by the group group's operational activities. The reported higher from the reduction in the dollar liability in respect of the increase of $8.8 million reported for 2007 and sterling notes over the same period as a result of the subsequent release of $4.9 million for 2008 may be same fall. attributed to the timing of payments and receipts over year ends and, in particular, to timing in relation to As referred to under "Dividends" above, 1,302,954 new produce shipments and payments for such shipments. preference shares were issued in September 2008 by way of capitalisation of share premium account pursuant Investing activities for 2008 involved a net outflow of to a capitalisation issue to ordinary shareholders. $48.3 million (2007: $31.8 million). This represented Group cash flow new investment totalling $49.6 million (2007: $33.6 million), offset by inflows from interest and other items of $1.3 million (2007: $1.8 million). The new investment Group cash inflows and outflows are analysed in the comprised expenditure on further development of the consolidated cash flow statement. Cash and cash group's plantations of $39.8 million (2007: $29.8 million), equivalents reduced slightly over 2008 from $34.2 million expenditure on acquisition of land rights and the purchase to $30.3 million. of PBJ of $4.4 million (2007: acquisition of land rights - $3.8 million) and expenditure on the new coal initiative Although operating profit for 2008 at $40.6 million was (including the acquisition of coal concession rights) of lower than the $49.4 million reported for 2007, adjusting $5.4 million (2007: $nil). for the non cash components of operating profit (and in particular the movements on revaluation of biological The net outflow in respect of investing activities was assets) operating cash flow before movements in working principally financed by a combination of net cash flow 38 from operating activities and net cash flow from financing The group may seek further debt funding to permit the activities. The latter produced a net inflow of $19.9 group to proceed with a higher level of extension planting million (2007: negligible effect). This was made up of an than the group could otherwise afford. However, the inflow from the issue of further sterling notes of $26.9 directors will require that any such additional debt funding million (2007: issue of sterling notes and equity - $28.6 is provided predominantly by way of medium term loans million), net repayments of bank debt and finance lease and will limit additional borrowings to levels that the obligations of $3.1 million (2007: $26.1 million) and an directors are confident that the group’s equity base can outflow in respect of dividend payments of $3.9 million comfortably sustain. (2007: $3.5 million). Liquidity and financing adequacy The group's financing is materially dependent upon the contracts governing the sterling and dollar notes. There are no restrictions under those contracts, or otherwise, on As noted under “Group cash flows” above, the group held the use of group cash resources or existing borrowings cash and cash equivalents at 31 December 2008 of and facilities that the directors would expect materially to $30.3 million. In addition, the group had at that date an impact the planned development of the group. Under the undrawn balance of $4 million under the Indonesian terms of the Indonesian consortium loan facility, REA consortium loan facility available for drawing until 7 Kaltim is restricted to an extent in the payment of interest September 2009 and, to the extent drawn, repayable in on borrowings from, and on the payment of dividends to, 2010. The recent agreement to reconstitute the other group companies but the directors do not believe Indonesian consortium loan facility, as referred to under that the applicable covenants will affect the ability of the "Capital structure" above, will replace the existing $4 company to meet its cash obligations. million undrawn balance under the facility with a working capital line of $4.8 million that will be subject to annual The group's oil palms fruit continuously throughout the renewal. year and there is therefore no material seasonality to the group's funding requirement. At current CPO prices and with the agreement to reconstitute the Indonesian consortium loan facility, the Financing policies group could expect that, excluding expenditure on new extension planting (but allowing for upkeep of existing The directors believe that, in order to maximise returns to immature areas), cash flows from operations for 2009 holders of the company's ordinary shares, it is essential would comfortably exceed the amounts required to fund that a proportion of the group's funding needs are met planned capital and development expenditure and debt with prior charge capital. Although the company's service. As indicated under "Land allocations and preference capital is expensive to service, in that the development" above, the directors have recently decided preference shares entitle the holders of those shares to a that extension planting should be resumed but on the cumulative annual dividend at the rate of 9 per cent of the basis that such resumption will be at a level such that the nominal value of the shares (being £1 per share), the prospective costs of development can reasonably be directors consider that the preference capital is a valuable expected to leave the group with an appropriate cash component of the group's prior charge capital in that it reserve against further weakness in CPO prices. provides relatively low risk permanent capital. They also believe that the company can now comfortably support 39 Review of the group continued preference capital at the level at which the issued Other treasury policies preference capital currently stands and that, if circumstances permit, the company should increase that The sterling notes and the dollar notes carry interest at preference capital in line with growth in the group's equity fixed rates of, respectively, 9.5 and 7.5 per cent per base. annum. Interest at 31 December 2008 was payable on drawings under the Indonesian consortium loan facility at As respects borrowings, the directors believe that the a floating rate equal to 2.75 per cent per annum over group's interests are best served if the group's Singapore Inter Bank Offered Rate ("SIBOR"). After borrowings are structured to fit the maturity profile of the reconstitution of the facility, interest on amounts assets that the borrowings are financing. Since oil palm borrowed under the facility will continue to be payable at plantings take nearly four years from nursery planting to a floating rate equal to SIBOR plus a margin but, for so maturity and then a further period of three to four years to long as inter-bank markets remain disrupted, the margin full yield, the directors aim to structure the group's will include a liquidity premium reflecting the differences borrowings so that shorter term bank debt is used only to between SIBOR and the lending banks' costs of funds. finance working capital requirements, while debt funding The margin (including liquidity premium) that would for the group's development programme is sourced from currently be applicable is 6.6 per cent per annum on the issues of medium term listed debt securities and basis of full utilisation of the facility. borrowings from development institutions. As a policy, the group does not hedge its exposure to The directors believe that the group’s existing capital floating rates but, where possible, borrows at fixed rates. structure is consistent with this policy objective but A one per cent increase in the floating rate of interest recognise that planned further investment in extension payable on the drawings under the Indonesian consortium planting and the inevitable shortening of the maturity loan facility at 31 December 2008 would have resulted in profile of the group’s current indebtedness that will result an annual cost to the group of approximately $130,000. from the passage of time will mean that action will be required to ensure that the group’s capital structure The group regards the US dollar as the functional continues to meet the objective. Given current conditions currency of most of its operations and seeks to ensure in markets for listed debt securities, the directors expect that, as respects that proportion of its investment in the that any additional debt funding obtained by the group in operations that is met by borrowings, it has no material the near term is likely to be in the form of medium term currency exposure against the US dollar. Accordingly, loans provided by development institutions. where borrowings are incurred in a currency other than the US dollar, the group endeavours to cover the resultant Whilst the directors believe that it is important that the currency exposure by way of a debt swap or other group retains flexibility as to the percentage of the appropriate currency hedge. The group does not cover group's overall funding that is represented by net debt, as the currency exposure in respect of the component of the a general indication they believe that, at the present stage investment in its operations that is financed with sterling of the group's development, net debt should not exceed denominated equity. The group's policy is to maintain a 100 per cent of total equity. Net debt represented 48 per cash balance in sterling sufficient to meet its projected cent of total equity at 31 December 2008 against a target sterling expenditure for a period of between six and of 60 per cent and a level of 35 per cent at 31 December twelve months and a cash balance in Indonesian rupiahs 2007. The target for 31 December 2009 is 60 per cent. sufficient for its immediate Indonesian rupiah 40 requirements but, otherwise, to keep all cash balances in After harvesting, FFB crops become rotten if not US dollars. Risks and uncertainties processed within a short period. Any hiatus in FFB collection or processing may therefore lead to a loss of crop. The group endeavours to maintain resilience in its palm oil mills with two mills operating separately and Because the group's new coal mining initiative is still at an some ability within each factory to switch from steam embryonic stage, the risks and uncertainties of that based to diesel based electricity generation but such initiative are considered by the directors to be material to resilience would be inadequate to compensate for any the group only as respects the risk that the initiative may material loss of processing capacity for anything other fail in which event, in a worst case, the capital so far than a short time period. invested in the initiative of some $5 million may be lost. All other risks and uncertainties relating to the group's The group has bulk storage facilities within its main area activities that the directors' consider are, or may be, of agricultural operations and at its transhipment terminal material relate to the group's established East Kalimantan downstream of the port of Samarinda. Such facilities and agricultural operations. These are as follows: the further storage facilities afforded by the group’s fleet Climatic factors of barges have hitherto always proved adequate to meet the group’s requirements for CPO and CPKO storage. Nevertheless, disruptions to river transport between the Although the group's estate operations are located in an main areas of operations and the port of Samarinda, or area of high rainfall with sunlight hours well suited to the delays in collection of CPO and CPKO from the cultivation of oil palm, climatic conditions vary from year to transhipment terminal, could result in a group requirement year and setbacks are possible. Unusually high levels of for CPO and CPKO storage exceeding the available rainfall can disrupt estate operations. Unusually low levels capacity. This would be likely to force a temporary of rainfall that lead to a water availability below the cessation in FFB processing with a resultant loss of crop. minimum required for the normal development of the oil palm may lead to a reduction in subsequent crop levels. Operational factors Such reduction is likely to be broadly proportional to the size of the cumulative water deficit. Over a long period, The group’s agricultural productivity is dependent upon crop levels should be reasonably predictable but there necessary inputs, including, in particular, fertiliser and fuel. can be material variations from the norm in individual Whilst the directors have no reason to expect shortages years. Agricultural factors in the availability of such inputs, should such shortages occur over any extended period the group’s operations could be materially disrupted. Equally, increases in input costs would be likely to reduce profit margins. As in any agricultural business, there are risks that crops from the group's estate operations may be affected by Many of the group’s operational and financial controls rely, pests and diseases. Agricultural best practice can to in part, on the group’s management systems. These some extent mitigate these risks but they cannot be include computerised systems. Any damage or failure of entirely eliminated. such computerised systems could have a deleterious effect on the group. 41 Review of the group continued The group maintains insurance to cover those risks and the early months of 2008 did not lead to a re- against which the directors consider that it is economic to imposition of such restrictions or imposts. Instead, the insure. Certain risks (including the risk of fire in planted Indonesian government continued to allow the free export areas on the group's estate), for which insurance cover is of CPO and CPKO but introduced a sliding scale of duties either not available or would, in the opinion of the on CPO and CPKO exports. Furthermore, the starting directors, be disproportionately expensive, are not insured. point for this sliding scale was set at a level such that Occurrence of an adverse uninsured event could result in when CPO and CPKO prices fell back in the last quarter the group sustaining material losses. of 2008, the rate of export duty payable was reduced to Produce prices nil. World markets for CPO and CPKO may be distorted by The profitability and cash flow of the group depend both the imposition of import controls or taxes in consuming upon world prices of CPO and CPKO and upon the countries. The directors believe that the imposition of group's ability to sell its produce at price levels such controls or taxes on CPO or CPKO will normally comparable with such world prices. result in greater consumption of alternative vegetable oils within the area in which the controls or taxes have been CPO and CPKO are primary commodities and as such are imposed and the substitution outside that area of CPO affected by levels of world economic activity and factors and CPKO for other vegetable oils. Should such arbitrage affecting the world economy, including levels of inflation fail to occur or prove insufficient to compensate for the and interest rates. This may lead to significant price market distortion created by the applicable import swings although, as noted under “Revenues and markets” controls or taxes, selling prices for the group’s CPO and in “Operations” above, the directors believe that such CPKO could be depressed. swings should be moderated by the fact that the annual oilseed crops account for the major proportion of world Expansion vegetable oil production and producers of such crops can reduce or increase their production within a relatively The group is planning further extension planting of oil short time frame. palm. The directors hope that land allocations obtained by the group will become available for planting ahead of the In the past, in times of very high CPO prices, the land becoming needed for development and that the Indonesian authorities have for short periods imposed development programme can be funded from available either restrictions on the export of CPO and CPKO or very group cash resources and future operational cash flows, high duties on export sales of such oil. The directors appropriately supplemented with further debt funding. believe that such measures are damaging not only to Should, however, land or cash availability fall short of large plantation groups but also to the large number of expectations and the group be unable to secure smallholder farmers growing oil palm in Indonesia and to alternative land or funding (as was the case in 2007 as the Indonesian economy as a whole (because CPO is an respects land), the extension planting programme, upon important component of Indonesia's US dollar earning which the group's continued growth will in part depend, exports). The directors are thus hopeful that such may be delayed or curtailed. measures will not be repeated and were encouraged that the significant rise in CPO and CPKO prices during 2007 42 Any shortfall in achieving planned extensions of the fauna. As such, the group, in common with other oil palm group's planted areas would be likely to impact negatively growers in Kalimantan, must expect scrutiny from the annual revaluation of the group's biological assets the conservation groups and could suffer adverse movements upon which are taken to the group's income consequences if its environmental policies were to be statement. Whilst this would not affect the group's singled out for criticism by such groups. underlying cash flow, it could adversely affect market perceptions as to the value of the company's securities. The group is committed to sustainable oil palm Currency development and takes great care to follow best practice on environmental issues. An environmental master plan was constructed at the start of the project using CPO and CPKO are essentially US dollar based independent environmental experts and this plan is commodities. Accordingly, the group's revenues and the updated regularly with further advice from independent underlying value of the group's oil palm operations are experts to reflect modern practice and to take account of effectively US dollar denominated. All of the group's changes in circumstances (including planned extensions borrowings other than the sterling notes are also US to the areas to be developed by the group). Substantial dollar denominated and the group has entered into a conservation reserves have been established in areas sterling US dollar debt swap to hedge the sterling notes. already developed by the group and further reserves will A substantial component of the group's costs (including be added as new areas are developed. The group fertiliser and machinery inputs) is US dollar denominated supports the principles and criteria established by RSPO or linked. Accordingly, the principal currency risk faced by and is working towards obtaining RSPO accreditation. the group is that those components of group costs that arise in Indonesian rupiah and sterling may, if such Regulatory exposure currencies strengthen against the US dollar, negatively impact margins in US dollar terms. The directors consider Changes in existing, and adoption of new, laws and that this risk is inherent in the group's business and regulations affecting the group (including, in particular, capital structure and the group does not therefore laws and regulations relating to land tenure, work permits normally hedge against such risk. Environmental practices for expatriate staff and taxation) could have a negative impact on the group’s activities. Many of the licences, permits and approvals held by the group are subject to periodic renewal. Renewals are often subject to delays The group's existing East Kalimantan agricultural and there is always a risk that a renewal may be refused operations and the planned expansion of those or made subject to new conditions. operations are based on land areas that have been previously logged and zoned by the Indonesian authorities Land in East Kalimantan held by the group is held subject as appropriate for agricultural development on the basis to the satisfaction by the group of various continuing that, regrettable as it may be from an environmental conditions, including conditions requiring the group to viewpoint, the logging has been so extensive that primary promote smallholder developments of oil palm. forest is unlikely to regenerate. Such land areas fall within a region that elsewhere includes substantial areas of unspoilt primary rain forest inhabited by diverse flora and 43 Review of the group continued Country exposure such residents also act as suppliers to the group and its employees. The directors believe that, as a result, the All of the group's operations are located in Indonesia and group's operations have been a source of increased the group is therefore significantly dependent on prosperity to the surrounding villages and that the group economic and political conditions in Indonesia. In the late has reasonable relations with those villages. The group 1990’s, in common with other parts of South East Asia, has made progress in recent years in assisting the Indonesia experienced severe economic turbulence. In surrounding villages in establishing their own recent years, there have been occasional instances of civil smallholdings of oil palm and it is hoped that this, together unrest, often attributed to ethnic tensions, in certain parts with the other initiatives described under "Community of Indonesia. However, as noted under “The Indonesian development" in "Sustainability" above, will assist in context” in “Overview” above, during 2008 Indonesia developing the group's relationships with the local remained stable and the Indonesian economy continued population. to grow. The group's operations are established in a relatively Whilst freedom to operate in a stable and secure remote and sparsely populated area. The operational environment is critical to the group and the existence of areas were acquired with the knowledge and support of security risks should never be underestimated, the group the local authorities and development has been kept has always sought to mitigate those risks and has never, wholly within the areas in respect of which the group has since the inception of the East Kalimantan operations, obtained the required development permits. These areas been adversely affected by security problems. are comprised of government owned land which was for Although there can never be certainty as to such matters, the most part unoccupied prior to the group's arrival. under current political conditions, the directors have no However, some small areas of land were previously used reason to believe that any government authority would by local villagers for the cultivation of crops and, revoke the registered land titles granted to the group, accordingly, when taking over such areas, the group impose exchange controls or otherwise seek to restrict negotiates with, and pays compensation to, the affected the group's freedom to manage its operations. parties. Local relations The negotiation of compensation payments can involve a considerable number of local individuals with differing The operations of the group could be seriously disrupted views and this can cause difficulties in reaching if there were to be a material breakdown in relations agreement with all affected parties. There is also a risk between the group and the host population in its area of that, after an agreement has been completed, a party to operations in East Kalimantan. the agreement may become disaffected with the terms agreed and may seek to repudiate the agreement. Such Whilst the group does have employees in Indonesia from difficulties and risk have in the past caused, and are likely outside East Kalimantan, care has always been taken to to continue periodically to cause, delays to the extension give priority to applications for employment from planting programme and other disruption. The group has members of the local population. Moreover, local to-date been successful in managing such periodic delays contractors used by the group provide employment and disruption so that they have not, in overall terms, opportunities for residents of surrounding villages and materially disrupted the group's extension planting 44 programme or operations generally but there is a continuing risk that they could do so. Other relationships The group is materially dependent upon its staff and employees and endeavours to manage this dependence as detailed under “Employees” in “Operations” above. Relationships with minority shareholders in Indonesian group companies are also important to the group. The group endeavours to maintain cordial relations with the persons concerned by seeking their support for decisions affecting their interests and responding constructively to any concerns that they may have. By order of the board R.E.A. SERVICES LIMITED Secretary 27 April 2009 45 Directors Richard Robinow Chairman (63) John Keatley Senior independent non-executive director (75) Was appointed a director in 1978 and has been chairman since 1984. After early investment banking experience, has been involved for over 25 years in the plantation industry. Non-executive but devotes a significant proportion of his working time to the affairs of the group, dealing principally with matters of strategy and finance. Chairman of M P Evans Group plc and a director of SA Sipef NV (a Belgian listed plantation company). John Oakley Managing director (60) After early experience in investment banking and general management, joined the group in 1983 as divisional managing director of the group's then horticultural operations. Appointed to the main board in 1985, he oversaw group businesses involved in tea, bananas, pineapples and merchanting, transferring in the early 1990s to take charge of the day to day management of the group's then embryonic East Kalimantan oil palm operations. Appointed as managing director in January 2002. As the sole executive director, has overall responsibility for operational control of the group. David Blackett Independent non-executive director (58) Appointed to the board in July 2008 and subsequently appointed chairman of the audit and remuneration committees. A qualified chartered accountant with over 25 years experience working in South East Asia, culminating, after a career in international merchant banking, in the chairmanship of AT&T Capital Inc. A director of South China Holdings Limited, listed on the Hong Kong Stock Exchange. John Green-Armytage Independent non-executive director (63) Was a non-executive director from 1984 to 1994 and rejoined the board in a non-executive capacity in 1997. Formerly chairman of the audit and remuneration committees. After a career in investment banking, moved to become managing director of a UK listed company with South East Asian involvement. Has subsequently held directorships of a number of companies in both executive and non-executive capacities. These currently include the chairmanship of AMEC PLC. 46 Was a non-executive director from 1975 to 1983 and chairman from 1978 to 1983. Rejoined the board in a non- executive capacity in 1985 and is chairman of the nomination committee. After a background in the fertiliser industry, is now involved in a family business investing in property in the UK and elsewhere. David Killick, FCIS Independent non-executive director (71) Was appointed a director in September 2006 and is a member of the audit and remuneration committees. Qualified as a barrister and is a Fellow of the Institute of Chartered Secretaries and Administrators. Worked for over 28 years for the Commonwealth Development Corporation, serving as a member of its management board from 1980 to 1994. Currently a director of Reallyenglish.com Limited and a member of the management council of Slough Council for Voluntary Service. Charles Letts Independent non-executive director (90) Was appointed a director in 1989. After serving in the British Armed Forces in World War II and thereafter in the British Foreign Office, was a main board director of Jardine Matheson & Co. Limited for 15 years and then set up his own business. Thereafter, for over 40 years, has held directorships and advisory posts in companies covering a wide range of activities in various countries, with particular emphasis on the plantation industry. Present directorships include The China Club Limited and China Investment Fund. Chan Lok Lim Independent non-executive director (67) Was appointed a director in August 2002. Has been involved for over 30 years in companies in South East Asia engaged in power generation and distribution, water and waste treatment, industrial and agro-industrial engineering (including palm oil mill design and construction) and in the plantation industry. Chairman of SPC Power Corporation listed on the Philippines Stock Exchange, and a director of Agusan Plantations Inc, Philippines, Agumil Philippines Inc and Pan Abrasives (Private) Limited, Singapore. Directors’ report The directors present their annual report on the affairs of Going concern basis the group, together with the financial statements and auditors’ reports, for the year ended 31 December 2008. The group's business activities, together with the factors Principal activities and business review position are described in the "Review of the group" likely to affect its future development, performance and section of this annual report which also provides (under The principal activity of the group is the cultivation of oil the heading "Finance") a description of the group's cash palms in the Indonesian province of East Kalimantan. A flow, liquidity and financing adequacy, and treasury review of the activities and planned future development of policies. In addition, note 21 to the consolidated financial the group together with the principal risks and statements includes information as to the group's policy, uncertainties facing the group is provided in the objectives, and processes for managing its capital; its accompanying “Chairman’s statement” and “Review of the financial risk management objectives; details of its group” sections of this annual report which are financial instruments and hedging activities; and its incorporated by reference in this Directors’ report. In exposures to credit risk and liquidity risk. particular, that review includes information as to group policy and objectives regarding the use of financial Although the group has indebtedness, that indebtedness instruments. Information as to such policy and objectives is medium term and the group is not materially reliant on and the risk exposures arising is also included in note 21 short term borrowing facilities. Moreover, the group has to the consolidated financial statements. considerable cash resources. As a consequence, the directors believe that the group is well placed to manage The group does not undertake significant research and its business risks successfully despite the current development activities. uncertain economic outlook. Details of significant events since 31 December 2008 After making enquiries, the directors have a reasonable are contained in note 40 to the consolidated financial expectation that the company and the group have statements. Results and dividends adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts. The results are presented in the consolidated income statement and notes thereto. Charitable and political donations The fixed annual dividends on the 9 per cent cumulative During the year the group made no charitable or political preference shares that fell due on 30 June and 31 donations. December 2008 were duly paid. A first interim dividend in respect of 2008 of 1.5p per share was paid on the Supplier payment policy ordinary shares on 26 September 2008 and a second interim dividend in lieu of final of a further 1.5p per share It is the company’s policy to establish appropriate was paid on those shares on 30 January 2009. The payment terms and conditions for dealings with suppliers directors do not recommend the payment of any further and to comply with such terms and conditions. The ordinary dividends in respect of 2008. holding company itself does not have trade creditors. 47 Directors’ report continued Directors Directors’ interests The directors are listed in the “Directors” section of this At 31 December 2008, the interests of directors annual report. All the directors served throughout 2008, (including interests of connected persons as defined in save for Mr Blackett who was appointed during the year. section 96B (2) of the Financial Services and Markets Act In compliance with the company’s articles of association 2000 of which the company is, or ought upon reasonable providing for the appointment of additional directors, Mr enquiry to become, aware) in the 9 per cent cumulative Blackett holds office until the forthcoming annual general preference shares of £1 each and the ordinary shares of meeting and, being eligible, offers himself for re-election. 25p each of the company were as follows: Messrs Lim and Oakley retire at the forthcoming annual general meeting and, being eligible, offer themselves for re-election, such retirements being in compliance with the company’s articles of association providing for rotation of directors. Messrs Robinow, Green-Armytage, Keatley and Letts retire at the forthcoming annual general meeting and, being eligible, offer themselves for re-election, such retirements being in compliance with the provisions of the Combined Code on Corporate Governance requiring the annual re-election of non-executive directors who have served as such for more than nine years. R M Robinow D J Blackett J M Green-Armytage J R M Keatley D H R Killick L E C Letts C L Lim J C Oakley Preference shares Ordinary shares 474,718 10,030,000 - 8,447 51,669 - - 80,704 680,878 20,000 12,224 108,008 - 513 - 1,804 The directors believe that, in the present circumstances of the company, continuity and familiarity with the issues Details of an option held by Mr Oakley to subscribe for ordinary shares of 25p each of the company are provided in the “Directors’ remuneration report” section of this immediately facing the company are important and that annual report. the variety of backgrounds and skills possessed by the longer serving non-executive directors usefully complement those of the other directors, provide perspective and facilitate balanced and effective decision making. The board therefore recommends (each affected director abstaining from such conclusion as it applies to There have been no changes in the interests of the directors detailed above between 31 December 2008 and the date of this report save that Mr Robinow is now interested in 424,718 preference shares. himself) the re-election of all of the directors offering Directors’ indemnities themselves for re-election. The senior independent non- executive director and the chairman have confirmed as regards, respectively, the chairman and the other non- executive directors offering themselves for re-election that, following formal performance evaluations, each such Qualifying third party indemnity provisions (as defined in section 234 of the Companies Act 2006) were in force for the benefit of directors of the company and of other members of the group throughout 2008 and remain in individual's performance continues to be effective and to force at the date of this report. demonstrate commitment to the role assumed, including commitment of time for board and committee meetings and, where applicable, other assigned duties. 48 Substantial shareholders of association and prevailing legislation. Rights to income and capital are summarised in note 30 to the consolidated As at the date of this report, the company has received financial statements. notifications required by The Disclosure Rules and Transparency Rules of the Financial Services Authority On a show of hands at a general meeting of the company, from the following persons of voting rights held by them every holder of shares and every duly appointed proxy of as shareholders through the holdings of ordinary shares a holder of shares, in each case being a holder entitled to indicated: vote on the resolution before the meeting, shall have one Number % vote. On a poll, every holder of shares present in person Emba Holdings Limited 9,957,500 30.57 or by proxy and entitled to vote on the resolution the Alcatel Bell Pensioenfonds VZW 4,007,049 12.30 subject of the poll shall have one vote for each share held. Prudential plc and certain subsidiaries 3,937,297 12.09 Holders of preference shares are not entitled to vote on a Artemis UK Smaller Companies 1,919,400 5.89 resolution proposed at a general meeting unless, at the date of notice of the meeting, the dividend on the In addition, the company has been notified that the above preference shares is more than six months in arrears or interest of Prudential plc and certain subsidiaries includes the resolution is for the winding up of the company or is a 3,447,792 ordinary shares (10.58 per cent) in which resolution directly and adversely affecting any of the M&G Investment Funds 3 is also interested. rights and privileges attaching to the preference shares. Deadlines for the exercise of voting rights and for the The shares held by Emba Holdings Limited are included appointment of a proxy or proxies to vote in relation to any as part of the interest of Mr R M Robinow shown under resolution to be proposed at a general meeting are “Directors’ interests” above. By deeds dated 24 governed by the company’s articles of association and November 1998 and 10 April 2001, Emba Holdings prevailing legislation and will normally be as detailed in Limited has agreed that it will not undertake activities in the notes accompanying the notice of the meeting at conflict with those of the group and that it will deal with which the resolution is to be proposed. the group only on a basis that is appropriate between a listed company and its subsidiaries and a significant There are no restrictions on the size of any holding of shareholder. Control and structure of capital Details of the company’s share capital and changes in share capital during 2008 are detailed in note 30 to the consolidated financial statements. At 31 December 2008, the preference share capital and the ordinary share capital represented, respectively, 64.7 and 35.3 per cent of the total issued share capital. The rights and obligations attaching to the ordinary and preference shares are governed by the company’s articles shares in the company. Shares may be transferred either through the CREST system (being the relevant system as defined in the Uncertificated Securities Regulations 2001 of which CRESTCo Limited is the operator) where held in uncertificated form or by instrument of transfer in any usual or common form duly executed and stamped, subject to provisions of the company’s articles of association empowering the directors under certain circumstances to refuse to register any transfer of shares, such circumstances being principally where the shares are not fully paid, the shares are to be transferred into a joint holding of more than four persons, the transfer is not appropriately supported by evidence of the right of the 49 Directors’ report continued transferor to make the transfer or the transferor is in (which are guaranteed by the company) are transferable default in compliance with a notice served pursuant to either through the CREST system where held in section 793 of the Companies Act 2006. The directors uncertificated form or by instrument of transfer in any are not aware of any agreements between shareholders usual or common form duly executed in amounts and that may result in restrictions on the transfer of securities multiples, in the former case, of $1 and, in the latter case, or on voting rights. of £1,000. There is no maximum limit on the size of any holding in either case. No person holds securities carrying special rights with regard to control of the company and there are no Significant holdings of preference shares, dollar notes arrangements in which the company co-operates by and sterling notes shown by the register of members and which financial rights carried by shares are held by a registers of dollar and sterling noteholders at 31 person other than the holder of the shares. December 2008 were as follows: The appointment and replacement of directors is governed by the company’s articles of association and prevailing legislation, augmented by the principles laid down in the Combined Code on Corporate Governance which the company seeks to apply in a manner proportionate to its size as further detailed in the “Corporate governance report” section of this annual report. The articles of association provide that the business of the company is to be managed by the directors and empower the directors to exercise all powers of the company, subject to the provisions of such articles (which include a provision specifically limiting the borrowing BNY Mellon Nominees Limited BSDTABN Account HSBC Global Custody Nominee (UK) Limited 641898 Account HSBC Global Custody Nominee (UK) Limited 993791 Account Rulegale Nominees Limited JAMSCLT Account Vidacos Nominees Limited Vidacos Nominees Limited CLRLUX Account Morris Edward Zukerman Morris Edward Zukerman ZFT Account Preference shares Dollar notes Sterling notes ‘000 $’000 £’000 – – 1,813 2,463 – – – – – – – – – 5,231 4,000 – – 16,300 3,315 9,500 9,500 – – – powers of the group) and prevailing legislation and A change of control of the company would entitle holders subject to such directions as may be given by the of the sterling notes and certain holders of the dollar company in general meeting by special resolution. The notes to require repayment of the notes held by them as articles of association may be amended only by a special detailed in notes 23 and 24 to the consolidated financial resolution of the company in general meeting and, where statements. such amendment would modify, abrogate or vary the class rights of any class of shares, with the consent of that The option held by Mr J C Oakley to subscribe for ordinary class given in accordance with the company’s articles of shares of 25p each of the company as referred to under association and prevailing legislation. “Directors’ interests” above may be exercised within six The 7.5 per cent dollar notes 2012/14 of the company executives under the company’s long term incentive plan (“dollar notes”) and the 9.5 per cent guaranteed sterling will vest and may be encashed within one month of a notes 2015/17 of REA Finance B.V. (“sterling notes”) change of control as detailed under “Long term incentive months of a change of control. Awards to senior group 50 plan” in the “Directors’ remuneration report” section of this The new ordinary shares and new preference shares the annual report. The directors are not aware of any subject of the new authorities will represent, respectively, agreements between the company and its directors or 25.9 per cent and 17.4 per cent of the ordinary shares between any member of the group and a group employee and preference shares in issue at the date of this report. that provides for compensation for loss of office or The new authorities will lapse on the date of the annual employment that occurs because of a takeover bid. general meeting to be held in 2010 or on 31 August 2010 (whichever is the earlier). The directors have no Treasury shares and power to repurchase shares present intention of exercising these authorities. No shares of the company are at present held in treasury. A fresh authority is also being sought under the provisions of section 95 of the Companies Act 1985 to enable the The company’s articles of association permit the purchase board to make a rights issue or open offer of ordinary by the company of its own shares subject to prevailing shares to existing ordinary shareholders without being legislation which requires that any such purchase, if a obliged to comply with certain technical requirements of market purchase, has been previously authorised by the the Companies Act 1985, which create problems with company in general meeting and, if not, is made pursuant regard to fractions and overseas shareholders. In to a contract of which the terms have been authorised by addition, the authority will give the board power to make a special resolution of the company in general meeting. issues of ordinary shares for cash other than by way of a There is no authority extant for the purchase by the rights issue or open offer up to a maximum nominal company of its own shares. Power to issue share capital At the annual general meeting held on 6 June 2008, shareholders authorised the board under the provisions of section 80 of the Companies Act 1985 to allot relevant securities within specified limits. Replacements of the applicable authorities are being sought at the forthcoming annual general meeting when the existing authorities will expire. The replacement authorities will provide for the allotment of (i) ordinary share capital up to an aggregate nominal amount of £2,106,536, (comprising 8,426,144 ordinary shares) equating to the unissued ordinary share capital at the date of this report and (ii) preference share capital up to an aggregate nominal amount of £2,597,046 (comprising 2,597,046 preference shares) representing the unissued preference share capital at the date of this report. amount of £407,173 representing 5 per cent of the ordinary share capital in issue at the date of this report. The section 95 authority will terminate on the date of the annual general meeting to be held in 2010 or on 31 August 2010 (whichever is the earlier). General meeting notice period The notice of the forthcoming annual general meeting includes a resolution (set out as resolution 15 in the notice) to approve the convening of general meetings on 14 clear days' notice. This resolution is being proposed in anticipation of implementation of the Shareholder Rights Directive (expected in August 2009) which, absent specific shareholder approval of shorter notice and compliance with requirements for electronic voting, will increase the notice period for general meetings of the company to 21 days. The company is currently able to call general meetings (other than an annual general meeting) on 14 clear days' notice and would like to preserve this ability. Resolution 15, if passed, would 51 Directors’ report continued provide the requisite shareholder approval. This would remain effective until the company's next annual general meeting, when it is intended that a similar resolution will be proposed. Recommendation The board considers that granting the directors authorities and power as detailed under “Power to issue share capital” and “General meeting notice period” above is in the best interests of the company and shareholders as a whole and recommends that ordinary shareholders vote in favour of the resolutions to provide the authorities and power as set out in the notice of the forthcoming annual general meeting. Auditors Each director of the company at the date of approval of this report has confirmed that, so far as he is aware, there is no relevant audit information of which the company's auditors are unaware; and that he has taken all the steps that he ought to have taken as a director in order to make himself aware of any relevant audit information and to establish that the company's auditors are aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of section 234ZA of the Companies Act 1985. Deloitte LLP have expressed their willingness to continue in office as auditors and resolutions to re-appoint them and to authorise the directors to fix their remuneration will be proposed at the forthcoming annual general meeting. By order of the board R.E.A. SERVICES LIMITED Secretary 27 April 2009 52 Corporate governance General The directors appreciate the importance of ensuring that the group’s affairs are managed effectively and with integrity and acknowledge that the principles laid down in the Combined Code on Corporate Governance issued in 2006 by the Financial Reporting Council (“the Code”) and revised in June 2008 (for accounting periods beginning on or after 29 June 2008) provide a widely endorsed model for achieving this. The directors seek to apply those principles in a manner proportionate to the group’s size but reserving the right enshrined in the Code, when it is appropriate to the individual circumstances of the company, not to comply with certain Code principles and to explain why. Throughout the year ended 31 December 2008, the company was in compliance with the provisions set out in section 1 of the Code. In making this statement, the directors have reflected their view detailed below as to the independence of long serving non-executive directors. Board of directors The board currently comprises one executive director and seven non-executive directors (including the chairman). Biographical information concerning each of the directors is set out in the “Directors” section of this annual report. The board believes that the variety of backgrounds and skills provided by its members provides perspective and facilitates balanced and effective decision making. The chairman and managing director (being the chief executive) have defined separate responsibilities: the chairman has responsibility for matters of strategy and finance; the managing director has responsibility for operational matters. Neither has unfettered powers of decision. All of the non-executive directors, with the exception of the chairman, are considered by the board to have been independent throughout the year. The directors acknowledge that some institutional investors take the view that non-executive directors who have served on the board of the company for more than nine years can never be regarded as independent and that, on this basis, three such non-executive directors should not be treated as independent. In fact what the Code states is that service by a director for more than nine years is to be taken into account by the board in assessing his independence but it is not, under the Code, determinative of independence. All of the long serving non-executive directors of the company are re-elected annually after endorsement of their independence by their co-directors as required by the Code and none of these directors is financially or otherwise materially dependent upon the company. The board continues to be satisfied that the independence of the long serving independent non-executive directors is not affected by their length of service. Three independent non-executive directors have served on the board for less than nine years and the company, therefore, complies with the Code requirement that at least two members of the board be independent non- executive directors even if all longer serving non- executive directors are treated as not independent. The Code also requires that some or all members of the audit, remuneration and nomination committees, and the person appointed as senior independent non-executive director, be independent non-executive directors. The board’s view as to the independence of long serving non- executive directors is relevant to the company’s compliance with these aspects of the Code. Whilst as already noted the directors do not agree that long service automatically negates the independence of a non-executive director, they do accept that it is important to retain shareholder confidence in the board and, in particular, in the audit committee’s contribution to the integrity of the audit process. Accordingly, during 2008 the directors concluded that the time was appropriate to seek the appointment of an additional non-executive director to refresh and strengthen the composition of the board. Following a recommendation by the nomination committee, Mr D J Blackett, who has a relevant financial background as well as considerable experience and expertise in the commercial and geographical areas in 53 Corporate governance continued which the group operates, was duly appointed to the board on 1 July 2008 and has now taken over the chairmanship of the audit and remuneration committees. Under the company’s articles of association, any director who has not been appointed or re-appointed at each of the preceding two annual general meetings shall retire by rotation and may submit himself for re-election. This has the effect that each non-executive director is subject to re-election at least once every three years. In addition, in order to comply with the Code, non-executive directors who have served on the board for more than nine years submit themselves for re-election every year. Further, any director appointed during the year holds office until the next annual general meeting and may then submit himself for re-election. Directors’ conflicts of interest In connection with the statutory duty to avoid any situation which conflicts or may conflict with the interests of the company, the board has approved the continuance of potential conflicts notified by Messrs Robinow and Green- Armytage, each of the two directors absenting himself from the discussion in respect of himself. Such notifications relate to each of the directors’ interests as shareholders in and/or directors of companies the interests of which might conflict with those of the group but are not at present considered to conflict. No other conflicts or potential conflicts have been notified by directors. executive directors and the company secretary. In addition, the board is responsible for ensuring that resources are adequate to meet objectives and for reviewing performance, financial controls and risk. The company carries appropriate insurance against legal action against its directors. The current policy which became effective on 1 January 2007 was in place throughout 2008 the Code requirement to carry such insurance. in compliance with Board committees The board has appointed audit, nomination and remuneration committees to undertake certain of the board’s functions, with written terms of reference which are available for inspection on the company’s website. Information concerning the remuneration of directors is provided in the “Directors’ remuneration report” section of this annual report together with details of the basis upon which such remuneration is determined. Performance evaluation A formal evaluation of the performance of the board, the committees and individual directors is undertaken annually. Balance of powers, contribution to strategy, monitoring and accountability to stakeholders are reviewed by the board as a whole and the performance of the chairman is appraised by independent non-executive directors led by the senior independent director. Board responsibilities Professional development The board is responsible for the proper management of the company. Full quarterly operational and financial reports are issued to all directors following the end of each quarter for their review and comment. These reports are augmented by annual budgets and positional papers on matters of a non routine nature. The board has a schedule of matters reserved for its decision. Such matters include strategy, material investments and financing decisions and the appointment or removal of In view of their previous relevant experience and, in most cases, length of service on the board, all directors are familiar with the financial and operational characteristics of the group’s activities. Directors are required to ensure that they maintain that familiarity and keep themselves fully cognisant of the affairs of the group and matters affecting its operations and finances. Whilst there are no formal training programmes, the board regularly reviews its own competences, receives periodic briefings on legal 54 and regulatory developments affecting the group and may arrange training on specific matters where it is thought to be required. Directors are able to seek the advice of the company secretary and, individually or collectively, may take independent professional advice at the expense of the company if necessary. committee. A meeting of the remuneration committee was held in January 2008 and a meeting of the nomination committee was held in June 2008. All committee meetings were attended by all committee members. Steps are taken to ensure that newly appointed directors become fully informed as to the group’s activities. Nomination committee Board proceedings A minimum of four meetings of the full board are held each year. Other board meetings are held as required to consider corporate and operational matters with all directors consulted in advance regarding significant matters for consideration. Minutes of board meetings are circulated to all directors. The executive director, unless travelling, is normally present at full board meetings but, where appropriate, telephone discussions take place between the chairman and the other non-executive directors outside the formal meetings. Committee meetings are held as and when required. The attendance of individual directors at the full and “ad hoc” board meetings held during 2008 were as follows: R M Robinow J C Oakley J M Green-Armytage J R M Keatley L E C Letts C L Lim D H R Killick D J Blackett (appointed 1 July 2008) Full Ad hoc meeting meeting 8 7 7 8 7 5 8 2 12 12 - 1 - - - - In addition, during 2008, there were three meetings of the audit committee; the third of these was held following the change in the composition of the committee upon the appointment of Mr D J Blackett as chairman of the The nomination committee comprises Mr J R M Keatley (chairman), Mr L E C Letts and Mr R M Robinow. It is responsible for recommending appointments to the board. Recommendations from the committee are submitted for approval by the full board. During the year, the committee, in response to an invitation from the board to make a recommendation for the appointment of an additional non-executive director, recommended the appointment of Mr D J Blackett. In establishing the specification for this appointment, the committee concurred with the view of the board that the appointee must have had the necessary financial experience to qualify him or her to serve on the audit committee but also decided that the appointee should have a background in South East Asia, a knowledge of matters affecting UK listed companies and experience relevant to the group's activities. In view of the specialised character of these combined requirements, it was not considered appropriate to employ consultants or to advertise. Instead, a short list of candidates considered to have the necessary skills and qualifications was assembled and Mr Blackett was selected from this short list. Audit committee The audit committee currently comprises Mr D J Blackett (chairman) and Mr D H R Killick both of whom are considered by the directors to have the relevant financial experience. Mr J M Green-Armytage stepped down on 11 November 2008, following the appointment of Mr Blackett to the committee on 28 October 2008. 55 Corporate governance continued The audit committee is responsible for: (cid:129) monitoring the integrity of the financial statements and the significant reporting issues and judgements that they contain; (cid:129) reviewing the effectiveness of the internal control functions (including the internal audit function and raised staff arrangements whereby concerns as to financial reporting and other relevant matters are considered); internally (cid:129) making recommendations to the board in relation to the appointment, reappointment and removal of the external auditors, their remuneration and terms of engagement; and (cid:129) reviewing and monitoring the independence of the external auditors and the effectiveness of the audit process. The audit committee also monitors the engagement of the auditors to perform non-audit work. During 2008, the only non-audit work undertaken by the auditors was routine compliance reporting in connection with covenant obligations applicable to certain group loans. The audit committee considered that the nature and scope of, and remuneration payable in respect of, these engagements was such that the independence and objectivity of the auditors was not impaired. The members of the audit committee discharge their informal discussions between responsibilities by the external auditors and themselves and with management, by consideration of reports by management, the Indonesian internal audit function and the external auditors and by holding at least three formal meetings in each year. Relations with shareholders The “Chairman's statement” and “Review of the group” sections of the annual report, when read in conjunction with the financial statements, directors' report and directors’ remuneration report, are designed to present a comprehensive and understandable assessment of the group's position and prospects. The respective responsibilities of the directors and auditors in connection with the financial statements are detailed in the “Directors’ responsibilities” section of this report and in the auditors’ report. The directors endeavour to ensure that there is satisfactory dialogue, based on mutual understanding, between the company and its shareholder body. The annual report, interim communications, periodic press releases and such circular letters to shareholders as circumstances may require are intended to keep shareholders fully informed as to progress in the operational activities and financial affairs of the group. In addition, within the limits imposed by considerations of confidentiality, the company has regular meetings and other contact with institutional and other major shareholders in order to understand their concerns. The views of shareholders are communicated to the board as a whole to ensure that the board maintains a balanced understanding of shareholder opinions and issues arising. All ordinary shareholders may attend the company’s annual and other general meetings and put questions to the board. Two non-executive directors are based in Singapore and the nature of the group’s business requires that the chairman and managing director travel frequently to Indonesia. It is therefore not always feasible, for all directors to attend general meetings, but those directors who are present are available to talk on an informal basis to shareholders after the meeting’s conclusion. All proxy votes are counted and full details of all proxies lodged for each resolution are reported to the meeting and made available on the company’s website. At least twenty working days' notice is given of the annual general meeting and related papers are sent to shareholders. The company maintains a corporate website at “www.rea.co.uk.” This provides information regarding the company, including photographs illustrating various 56 aspects of the group’s operations, and provides a facility for downloading recent press releases issued by the company and other relevant documentation concerning the company. failings or weaknesses in internal control which it deemed to be significant. Internal audit and reporting The group’s Indonesian operations have an internal audit function supplemented where necessary by the use of external consultants. The function reports regularly and summaries of the reports are issued to the audit committee. In the opinion of the board, there is no need for an internal audit function outside Indonesia due to the limited nature of the non-Indonesian operations. The group has established a management hierarchy which is designed to delegate the day to day responsibility for specific departmental functions within each working location, including financial, operational and compliance controls and risk management, to a number of senior managers, reporting through the local senior executive to the managing director. Management reports to the board on a regular basis by way of the circulation of progress reports, management reports and management accounts. Management is required to seek authority from the board in respect of any transaction outside the normal course of trading which is above an approved limit and in respect of any matter that is likely to have a material impact on the operations that the transaction concerns. At least two supervisory visits each year are undertaken to the overseas operations by the executive director and other directors make periodic visits to those operations. Reports of such visits are circulated to the board and reviewed by the board at the regular board meetings. Internal control The board has overall responsibility for the group’s system of internal control and reviewing its effectiveness. The board has established a continuous process for identifying, evaluating and managing the significant risks the group faces. The process, which accords with the revised guidance on internal control published in October 2005, was in place throughout 2008 and has remained in place up to the date of approval of this report. Such a process is designed to manage rather than eliminate the risk of failure to achieve business objectives, and can only provide reasonable and not absolute assurance against material misstatement or loss. The board regularly reviews the effectiveness of the group’s system of internal control. The board’s monitoring covers all controls, including financial, operational and compliance controls and risk management. It is based principally on reviewing reports from management to consider whether significant risks are identified, evaluated, managed and controlled and whether any significant weaknesses are promptly remedied or indicate a need for more extensive monitoring. The board performed a specific review of the system of internal control on 12 November 2008 (including the group’s internal audit arrangements) and reconfirmed the review for the purposes of this annual report. The review, as reconfirmed, considered all aspects of internal control arising during the period covered by the report. The review resulted in the board querying aspects of the established system for approving variations to budgetary approvals. An independent report was commissioned and, following its receipt, the budgetary variation system has been modified. During the course of the review, the board did not otherwise identify or become aware of any 57 Directors’ remuneration report Introduction currently the only executive director but the committee would set the remuneration and benefits of any other This report has been prepared in accordance with executive directors who might in future be appointed. In Schedule 7A to the Companies Act 1985 (the “Act”). The setting remuneration and benefits, it considers the report also meets the relevant requirements of the Listing achievement of each individual in attaining the objectives Rules of the Financial Services Authority and describes set for that individual (including objectives relating to how the board has applied the principles relating to corporate performance on environmental and social directors’ remuneration set out in the Combined Code on matters and corporate governance), the responsibilities Corporate Governance (the “Code”). As required by the assumed by the individual and, where the role is part time, Act, a resolution to approve the report will be proposed at the time commitment involved. It draws on data of the the annual general meeting at which the accompanying remuneration of others performing similar functions in financial statements are laid before the company’s similarly sized organisations but does not use members. independent consultants. The Act requires the auditors to report to the company’s The key objective of the remuneration policy (which members on certain parts of the directors’ remuneration applies for 2009 and subsequent years) is to attract, report and to state whether in their opinion those parts of motivate, retain and fairly reward executive directors of a the report have been properly prepared in accordance high calibre, while ensuring that the remuneration of each with the Companies Act 1985. The report has therefore individual executive director is consistent with the best been divided into separate sections for audited and interests of the company and its shareholders. In framing unaudited information. Unaudited information The remuneration committee its policy on performance related remuneration (which is payable only to executive directors) the committee follows the provisions of schedule A to the Code. The committee considers all proposals for executive directors to hold outside directorships. Such directorships The company has established a remuneration committee. are normally permitted only if considered to be of value to The members of the remuneration committee during the group and on terms that any remuneration payable will 2008 and, in particular, when directors’ remuneration for be accounted for to the group. 2008 was considered, were Mr J M Green-Armytage (chairman), Mr D H R Killick and Mr R M Robinow. The Basis of remuneration membership of the committee was changed on 23 April 2009 and now comprises Mr D J Blackett (chairman) and The policy on remuneration of executive directors is that Mr D H R Killick. While Mr Robinow was a member of the basic remuneration of each executive director should committee, any matter concerning Mr Robinow was comprise an annual salary, part of which is pensionable, discussed without Mr Robinow being present. and certain benefits-in-kind, principally a company car. In Remuneration policy addition an executive director should be paid non- pensionable performance related bonuses. These are to be awarded annually in arrears on a discretionary basis The committee sets the remuneration and benefits of the taking into account the performance of the group during chairman and the managing director. The latter is the relevant year and the contribution to performance that 58 each director is assessed by the committee to have made. 2008. This index has been selected as there is no index Bonuses should not normally exceed 50 per cent of available that is specific to the activities of the company. salary and are paid in cash. There is no separate pension scheme for executive directors and the only current Long term incentive plan executive director (the managing director) is a member of the R.E.A. Pension Scheme. Service contracts A long term incentive plan (the "plan") was introduced in 2007. It is designed to provide incentives, linked to the increase in value of ordinary shares in the company, to a small number of key senior executives in Indonesia with a The company’s current policy on service contracts is that view to their participating over the long term in value contracts should have a notice period of not more than created for the group. No director may participate. The one year and a maximum termination payment not plan period commenced on 1 January 2007 and ends on exceeding one year’s salary. No director has a service 31 December 2010 (the "performance period"). contract that is not fully compliant with this policy. Under the plan, participants are awarded potential The group entered into a service contract with Mr J C entitlements over notional ordinary shares of the Oakley on 16 December 1988 initially for a period of two company. These potential entitlements then vest to an years, thereafter determinable by either party by giving extent that is dependent upon the achievement of targets. notice to the other party of not less than six months. At 31 A vested entitlement may be exercised in whole or part at December 2008 the unexpired term remained as six any time from 1 January 2011 until 31 December 2016. months. There are no provisions for compensation for On exercising a vested entitlement, a participant will early termination save that Mr Oakley would be entitled to receive a cash amount for each ordinary share over which a payment in lieu of notice if due notice had not been the entitlement is exercised, equal to the excess (if any) given. of the market price of an ordinary share on the date of exercise over 433.5p, being the market price of an Non-executive directors ordinary share on 1 January 2007. The remuneration of non-executive directors other than The extent to which a participant’s potential entitlement to the chairman is determined by the board within the limits notional ordinary shares will vest will be determined by set by the articles of association, no director taking part in three key performance targets. These three targets relate the determination of his own remuneration. The level of to total shareholder return, cost per tonne of crude palm remuneration is determined having regard to that paid by oil produced and annual planting rate achieved, in each comparable organisations. Performance graph case measured on a cumulative basis over the performance period. Each performance target governs the vesting of one third of each potential entitlement and for each performance target there are threshold, target A performance graph is shown in the “Key statistics” and maximum levels of performance which determine the section of this annual report. This compares the exact number of notional ordinary shares that vest in performance of the company’s ordinary shares (measured relation to that target. The remuneration committee has by total shareholder return) with that of the FTSE all share discretion to adjust targets if it considers that actual index for the period from January 2004 to December performance warrants this. 59 Directors’ remuneration report continued The vesting of potential entitlements and the exercise of participants in respect of the potential entitlements vested entitlements is dependent on continued awarded would, if such entitlements had vested in full, employment with the group. If a participant ceases have been £nil. employment with the group before the end of the performance period, his potential entitlement will lapse Audited information unless he leaves by reason of death, injury, disability, redundancy or retirement or the remuneration committee Directors’ remuneration exercises a discretion to decide that his potential entitlement should not lapse. Where the potential The following table shows details of the remuneration of entitlement does not lapse, it will vest on a basis that individual directors holding office during the year ended reflects achievement of performance targets up to the 31 December 2008 (with comparative totals for 2007): end of the financial year last ended before the date (the “cessation date”) that the affected participant ceases employment with the group (as determined by the remuneration committee) and time apportioned for the elapsed portion of the performance period up to the cessation date expressed as a fraction of the full performance period. The resultant vested entitlement will be exercisable for a period of twelve months from the cessation date. If a participant leaves after the end of the performance period, the participant may exercise a vested entitlement within six months of leaving. In the event of a change in control of the company as a result of a takeover offer or similar corporate event, potential entitlements will vest on a basis that reflects achievement of performance targets up to the date (the “applicable date”) of change of control or other relevant event (as determined by the remuneration committee) and time apportioned for the elapsed portion of the performance period up to the applicable date expressed as a fraction of the full performance period. The resultant vested entitlements will be exercisable for a period of one month following the applicable date. At 31 December 2008, the total number of notional ordinary shares over which awards of potential entitlements had been made amounted to 195,000. On the basis of the market price of the ordinary shares on 31 December 2008 of 202.5p per share, the total gain to Salary and fees Other* 2008 Total £’000 £’000 £’000 168 205 9 17 17 17 17 17 8 34 176 239 - - - - - - 9 17 17 17 17 17 2007 Total £’000 174 300 - 13 13 13 13 13 467 42 509 539 R M Robinow (chairman) J C Oakley D J Blackett** J M Green-Armytage J R M Keatley D H R Killick L E C Letts C L Lim * comprises benefits. ** appointed 1 July 2008. The above table includes amounts payable in respect of service arrangements with companies in which Mr Robinow, Mr Green-Armytage, Mr Letts and Mr Lim were interested. In addition to the benefits shown under “Other” above, in 2006 Mr Oakley received a benefit in kind relating to the tax liability arising on a gain on exercise of share options estimated at £163,000. It was agreed with Mr Oakley that he would effectively refund this amount by commensurate reduction in future non pensionable remuneration to which he would otherwise become entitled after 1 January 2008. In 2008, the non- pensionable salary ordinarily payable was reduced by £42,500 and the bonus that would normally have been paid by £50,000. 60 Director’s pension entitlement - Mr J C Oakley was granted. As a result, at the beginning of the year the number of ordinary shares the subject of the option was Mr Oakley (who was aged 60 at 31 December 2008) is 828,113 and the exercise price was 44.8289p per share an ordinary member of the R.E.A. Pension Scheme which and, at the end of the year and at the date of this report, is a defined benefit scheme of which details are shown in the number of ordinary shares so subject was 840,689 note 37 to the consolidated financial statements. and the exercise price was 43.753p per share. The Pensionable earnings are calculated on part of the annual option expires on 21 May 2012. salary only. Details of the accrued pension are set out below. Accrued annual pension at beginning of year Increase in accrued annual pension during year Accrued annual pension at end of year Pension transfer value at beginning of year Contributions made by the director Increase in pension transfer value during year* Pension transfer value at end of year *net of director’s contributions £ 81,756 6,669 88,425 1,706,745 10,275 216,794 1,933,814 The increase during the year in excess of inflation in accrued annual pension was £5,894 and in pension transfer value was £200,609. Share options - Mr J C Oakley Pursuant to an option agreement of 22 May 2002, Mr Oakley was granted an option to subscribe new ordinary shares of 25p each at a price of 45p per share payable in cash. There were no performance conditions attached to the grant of this option as the directors did not consider, in the particular circumstances in which the option was granted, that it would be appropriate to impose any conditions and the option was based on the full market value of the ordinary shares at the date of the grant. The grant of the option to Mr Oakley on this basis was approved by special resolution of the company prior to execution of the option agreement. The number of shares the subject of the option and the option subscription price have been amended from time to time to take account of share issues since the option The market price of the ordinary shares at 31 December 2008 was 202.5p and the range during the year was 190p to 727p. No other options have been granted by the company. Approved by the board on 27 April 2009 RICHARD M ROBINOW Chairman 61 Directors’ responsibilities The directors are responsible for preparing the annual law). The parent company financial statements are report including the directors’ report, the directors' required by law to give a true and fair view of the state of remuneration report and the financial statements in affairs of the company. In preparing these financial accordance with applicable law and regulations. statements, the directors are required to: Company law requires the directors to prepare financial (cid:129) select suitable accounting policies and then apply statements for each financial year. The directors are them consistently; (cid:129) make judgements and estimates that are reasonable and prudent; (cid:129) state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and (cid:129) prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the parent company financial statements comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company's website. Legislation in the required to prepare financial statements for the group in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union, the Companies Act 1985 and Article 4 of European Commission Regulation 1606/2002. International Accounting Standard 1 requires that IFRS financial statements present fairly for each financial year the company's financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board's “Framework for the preparation and presentation of financial statements”. In virtually all circumstances, a fair presentation should be achieved by compliance with all applicable IFRS. However, directors are also required to: properly select and apply suitable accounting policies; present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; and (cid:129) (cid:129) (cid:129) transactions, other events and conditions on the entity's financial position and financial performance. The directors have elected to prepare the parent company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (including United Kingdom Accounting Standards and applicable 62 provide additional disclosures when compliance with United Kingdom governing the preparation and the specific requirements in IFRS are insufficient to dissemination of financial statements may differ from enable users to understand the impact of particular legislation in other jurisdictions. Directors’ confirmation The directors are responsible for the preparation of this annual report. To the best of the knowledge of each of the directors: (cid:129) the accompanying financial statements prepared in accordance with the applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and (cid:129) the accompanying "Directors' report" section of this annual report including the "Review of the group" section of this annual report which the Directors' report incorporates by reference provides a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole together with a description of the principal risks and uncertainties that they face. The current directors of the company and their respective functions are set out in the "Directors" section of this annual report. By order of the board R.E.A. SERVICES LIMITED Secretary 27 April 2009 63 Auditors’ report (group) Independent auditors’ report to the members of R.E.A. Holdings plc Our responsibility is to audit the group financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK We have audited the group financial statements of R.E.A. and Ireland). Holdings plc for the year ended 31 December 2008 which comprise the consolidated income statement, the We report to you our opinion as to whether the group consolidated balance sheet, the consolidated statement financial statements give a true and fair view, whether the of recognised income and expense, the consolidated group financial statements have been properly prepared in statement of changes in equity, the consolidated cash accordance with the Companies Act 1985 and Article 4 of flow statement, the accounting policies and the related the IAS Regulation and whether the part of the directors' notes 1 to 41. These group financial statements have remuneration report described as having been audited has been prepared under the accounting policies set out been properly prepared in accordance with the Companies therein. We have also audited the information in the Act 1985. We also report to you whether in our opinion the directors' remuneration report that is described as having information given in the Directors' Report is consistent with been audited. the group financial statements. The information given in the directors' report includes that specific information We have reported separately on the parent company presented in the review of the group that is cross referred financial statements of R.E.A. Holdings plc for the year from the principal activities and business review section of ended 31 December 2008. the directors' report. This report is made solely to the company’s members, as In addition we report to you if, in our opinion, we have not a body, in accordance with section 235 of the Companies received all the information and explanations we require for Act 1985. Our audit work has been undertaken so that our audit, or if information specified by law regarding we might state to the company’s members those matters director's remuneration and other transactions is not we are required to state to them in an auditors’ report and disclosed. for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone We review whether the corporate governance statement other than the company and the company’s members as reflects the company's compliance with the nine provisions a body, for our audit work, for this report, or for the of the 2006 Combined Code specified for our review by the opinions we have formed. Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider Respective responsibilities of directors and auditors whether the board's statements on internal control cover all risks and controls, or form an opinion on the effectiveness The directors' responsibilities for preparing the annual of the group's corporate governance procedures or its risk report, the directors' remuneration report and the group and control procedures. financial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as We read the other information contained in the annual adopted by the European Union are set out in the report and consider whether it is consistent with the statement of directors' responsibilities. audited group financial statements. The other information comprises only the directors' report, the chairman's 64 statement, the unaudited part of the directors' remuneration Opinion report, the review of the group and the corporate governance statement. We consider the implications for our In our opinion: report if we become aware of any apparent misstatements or material inconsistencies with the group financial statements. Our responsibilities do not extend to any further information outside the annual report. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the group financial statements and the part of the directors' remuneration report to be audited. It also (cid:129) the group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the group's affairs as at 31 December 2008 and of its profit for the year then ended; (cid:129) (cid:129) the group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation; the part of the directors' remuneration report described as having been audited has been properly prepared in accordance with the Companies Act includes an assessment of the significant estimates and 1985; and judgements made by the directors in the preparation of the group financial statements, and of whether the accounting policies are appropriate to the group's circumstances, consistently applied and adequately disclosed. (cid:129) the information given in the directors' report is consistent with the group financial statements. We planned and performed our audit so as to obtain all DELOITTE LLP the information and explanations which we considered Chartered Accountants and Registered Auditors necessary in order to provide us with sufficient evidence to give reasonable assurance that the group financial London, United Kingdom 27 April 2009 statements and the part of the directors' remuneration report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the group financial statements and the part of the directors' remuneration report to be audited. 65 Consolidated income statement for the year ended 31 December 2008 Note 2008 $’000 2007 $’000 2 4 13 2 2, 7 8 5 9 10 34 11 79,630 (4,214) (27,682) 47,734 (2,660) 4 (1,049) (3,466) 40,563 1,185 (5,439) 57,600 5,578 (14,875) 48,303 8,030 6 (1,028) (5,925) 49,386 1,641 (4,017) 36,309 (10,536) 47,010 (15,013) 25,773 31,997 23,833 2,360 (420) 25,773 29,453 2,266 278 31,997 73.2 cents 71.5 cents 91.9 cents 89.6 cents Revenue Net (loss) / gain arising from changes in fair value of agricultural produce inventory Cost of sales Gross profit Net (loss) / gain arising from changes in fair value of biological assets Other operating income Distribution costs Administrative expenses Operating profit Investment revenues Finance costs Profit before tax Tax Profit for the year Attributable to: Ordinary shareholders Preference shareholders Minority interests Earnings per 25p ordinary share Basic Diluted All operations in both years are continuing. 66 Consolidated balance sheet as at 31 December 2008 Non-current assets Goodwill Biological assets Property, plant and equipment Prepaid operating lease rentals Indonesian coal rights Deferred tax assets Non-current receivables Total non-current assets Current assets Inventories Trade and other receivables Cash and cash equivalents Total current assets Total assets Current liabilities Trade and other payables Current tax liabilities Obligations under finance leases Bank loans Other loans and payables Total current liabilities Non-current liabilities Bank loans Sterling notes US dollar notes Hedging instruments Deferred tax liabilities Obligations under finance leases Other loans and payables Total non-current liabilities Total liabilities Net assets Equity Share capital Share premium account Translation reserve Retained earnings Minority interests Total equity Approved by the board on 27 April 2009 and signed on behalf of the board. RICHARD M ROBINOW Chairman Note 12 13 14 15 16 26 18 19 20 29 27 22 28 22 23 24 25 26 27 28 30 31 32 33 34 2008 $’000 12,578 179,745 63,069 13,088 5,386 2,444 1,917 2007 $’000 12,578 166,347 41,772 8,823 – 5,817 1,376 278,227 236,713 12,795 8,872 30,316 51,983 13,040 3,301 34,216 50,557 330,210 287,270 (12,113) (904) (53) (10,750) (380) (24,200) (2,167) (50,234) (29,632) (26,517) (31,478) (61) (3,310) (7,070) (2,935) (111) (3,000) (449) (13,565) (12,917) (41,604) (29,389) 168 (37,166) (127) (4,037) (143,399) (125,072) (167,599) (138,637) 162,611 148,633 40,714 27,322 (16,388) 110,383 162,031 580 162,611 38,299 29,787 (9,822) 89,492 147,756 877 148,633 67 Consolidated statement of recognised income and expense for the year ended 31 December 2008 for the year ended 31 December 2003 Exchange translation differences and loss on fair valuation of hedging instruments Tax on items taken directly to equity Net loss recognised directly in equity Profit for the year Share based payment - deferred tax (charge) / credit Total recognised income and expense for the year Attributable to: Ordinary shareholders Preference shareholders Minority interests 2008 $’000 (14,638) 8,023 (6,615) 25,773 (1,444) 17,714 15,823 2,360 (469) 17,714 2007 $’000 (1,460) 528 (932) 31,997 385 31,450 28,907 2,266 277 31,450 Consolidated statement of changes in equity for the year ended 31 December 2008 Total recognised income and expense for the year Issue of new ordinary shares by way of placings and open offer (net of costs) Issue of new preference shares by way of placings (net of costs) Costs re scrip issue of preference shares Dividends to preference shareholders Dividends to ordinary shareholders Minority interest in subsidiary acquired Equity at beginning of year Equity at end of year 2008 $’000 17,714 – – (50) (2,360) (1,498) 172 2007 $’000 31,450 13,027 2,180 – (2,266) (1,279) – 13,978 148,633 43,112 105,521 162,611 148,633 68 Consolidated cash flow statement for the year ended 31 December 2008 Net cash from operating activities 35 32,300 28,176 Note 2008 $’000 2007 $’000 Investing activities Interest received Proceeds on disposal of property, plant and equipment Purchases of property, plant and equipment Expenditure on biological assets Expenditure on prepaid operating lease rentals Acquisition of subsidiary company Investment in Indonesian coal rights Net cash used in investing activities Financing activities Preference dividends paid Ordinary dividends paid Repayment of borrowings Repayment of obligations under finance leases Proceeds of issue of preference share capital less expenses Proceeds of issue of ordinary share capital less expenses Issue of sterling notes, net of expenses New bank borrowings drawn Net cash from financing activities Cash and cash equivalents Net increase / (decrease) in cash and cash equivalents 36 Cash and cash equivalents at beginning of year Effect of exchange rate changes Cash and cash equivalents at end of year 1,185 103 (24,665) (15,126) (1,205) (3,158) (5,386) 1,641 200 (15,010) (14,820) (3,787) – – (48,252) (31,776) (2,360) (1,498) (3,000) (90) (50) – 26,880 – 19,882 (2,266) (1,279) (25,833) (268) 2,180 13,027 13,438 1,000 (1) 3,930 34,216 (7,830) (3,601) 37,266 551 30,316 34,216 69 Accounting policies (group) General information R.E.A. Holdings plc is a company incorporated in the United Kingdom under the Companies Act 1985. The company’s registered office is at First Floor, 32-36 Great Portland Street, London W1X 8QX. Details of the group's principal activities are provided in the “Directors’ report”. Basis of accounting The consolidated financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) as endorsed for use by the European Union as at the date of approval of the financial statements and therefore comply with Article 4 of the EU IAS Regulation. The statements are prepared under the historical cost convention except where otherwise stated in the accounting policies. The comparative consolidated balance sheet and related notes contain some reclassifications of headings and amounts so as to align the prior year presentation with that at 31 December 2008. Such reclassifications principally concern the presentation of amounts relating to derivative financial instruments and do not affect the prior year consolidated income statement and consolidated cash flow statement. For the reasons given under “Going concern basis” in the “Directors’ report”, the financial statements have been prepared on the going concern basis. Functional and presentational currency The consolidated financial statements of the group are presented in US dollar, which is considered to be the currency of the primary economic environment in which the group operates. References to “$” or “dollar” in these financial statements are to the lawful currency of the United States of America. Adoption of new and revised standards Interpretations issued by the International Financial Reporting Interpretations Committee (“IFRIC”) and brought into effect for the latest reporting period have not led to any changes in the group’s accounting policies. At the date of authorisation of the consolidated financial statements, the following standards and interpretations which have not been applied in these financial statements were in issue but not yet effective: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) IAS 1 (Revised): “Presentation of financial statements” IFRS 2 (Revised): “Share based payments vesting conditions and cancellations” IFRS 3 (Revised): “Business combinations” IFRS 8 (Revised): “Operating segments” IAS 23 (Revised): “Borrowing costs” IAS 27 (Revised): “Consolidated and separate financial statements” IFRIC 12: “Service concession arrangements” IFRIC 13: “Customer loyalty programmes” IFRIC 16: “Hedges of a net investment in a foreign operation” interpretations come The directors anticipate that when the relevant standards and into effect for periods commencing on or after 1 January 2009 their adoption will have no material impact on the consolidated financial statements, save for additional disclosures which may be required. Basis of consolidation The consolidated financial statements consolidate those of the company and its subsidiary companies (as listed in note (i) to the company’s individual financial statements) made up to 31 December of each year. The acquisition method of accounting is adopted with assets and liabilities valued at fair values at the date of acquisition. The interest of minority shareholders is stated at the minority’s proportion of the fair values of the assets and liabilities recognised. Any subsequent losses attributable to the minority shareholders in excess of the minority interest are allocated against the interest of the parent. Results of subsidiaries acquired or disposed of are included in the consolidated income statement from the effective date of acquisition or to the effective date of 70 disposal. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies into line with those used by the group. On acquisition, any excess of the fair value of the consideration given over the fair value of identifiable net assets acquired is recognised as goodwill. Any deficiency in consideration given against the fair value of the identifiable net assets acquired is credited to profit or loss in the consolidated income statement in the period of acquisition. intra-group transactions, balances, All expenses are eliminated on consolidation. income and Goodwill Goodwill is recognised as an asset on the basis described in the above policy “Basis of consolidation” and once recognised is tested for impairment at least annually. Any impairment is debited immediately as a loss in the consolidated income statement and is not subsequently reversed. On disposal of a subsidiary, the attributable amount of any goodwill is included in the determination of the profit or loss on disposal. For the purpose of impairment testing, goodwill is allocated to each of the group's cash generating units expected to benefit from the synergies of the combination. Cash generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. Goodwill arising between 1 January 1998 and the date of transition to IFRS is retained at the previous UK Generally Accepted Accounting Practice amount subject to testing for impairment at that date. Goodwill written off to reserves prior to 1 January 1998, in accordance with the accounting standards then in force, has not been reinstated and is not included in determining any subsequent profit or loss on disposal. Revenue recognition Revenue is measured at the fair value of the consideration received or receivable in respect of goods and services provided in the normal course of business, net of VAT and other sales related taxes. Sales of goods are recognised when the significant risks and rewards of ownership of the goods are transferred to the buyer and include contracted sales in respect of which the contracted goods are available for collection by the buyer in the accounting period. Income from services is accrued on a time basis by reference to the rate of fee agreed with the buyer. Interest income is accrued on a time basis by reference to the principal outstanding and at the effective interest rate applicable (which is the rate that exactly discounts estimated future cash receipts, through the expected life of the financial asset, to that asset’s net carrying amount). Dividend income is recognised when the shareholders’ rights to receive payment have been established. Leasing Assets held under finance leases and other similar contracts are recognised as assets of the group at their fair values or, if lower, at the present values of minimum lease payments (for each asset, determined at the inception of the lease) and are depreciated over the shorter of the lease terms and their useful lives. The corresponding liabilities are included in the balance sheet as finance lease obligations. Lease payments are apportioned between finance charges and a reduction in the lease obligation to produce a constant rate of interest on the balance of the capital repayments outstanding. Hire purchase transactions are dealt with similarly, except that assets are depreciated over their useful lives. Finance and hire purchase charges are charged directly against income. Rental payments under operating leases are charged to income on a straight-line basis over the term of the relevant lease. Foreign currencies Transactions in foreign currencies are recorded at the rates of exchange ruling at the dates of the transactions. At each balance sheet date monetary assets and liabilities denominated in foreign currencies are retranslated at the rates of exchange prevailing at that date. Non-monetary items that are measured in terms of historical cost in a retranslated. Exchange foreign currency are not differences arising on the settlement of monetary items, 71 Accounting policies (group) continued and on the retranslation of other items that are subject to retranslation, are included in the net profit or loss for the period, except for exchange differences arising on non- monetary assets and liabilities, including foreign currency loans, which, to the extent that they relate to investment in overseas operations or hedge the group’s investment in such operations, are recognised directly in equity. For consolidation purposes, the assets and liabilities of any group entity with a functional currency other than the US dollar are translated at the exchange rate at the balance sheet date. Income and expenses are translated at the average rate for the period unless exchange rates fluctuate significantly. Exchange differences arising are classified as equity and transferred to the group’s translation reserve. Such exchange differences are recognised as income or expenses in the period in which the entity is sold. Goodwill and fair value adjustments arising on the acquisition of an entity with a functional currency other than the US dollar are treated as assets and liabilities of that entity and are translated at the closing rate of exchange. Borrowing costs Borrowing costs incurred in financing construction or installation of qualifying property, plant or equipment are added to the cost of the qualifying asset, until such time as the construction or installation is substantially complete and the asset is ready for its intended use. Borrowing costs incurred in financing the planting of extensions to the developed agricultural area are treated as expenditure relating to biological assets until such extensions reach maturity. All other borrowing costs are recognised in the consolidated income statement of the period in which they are incurred. Operating profit Operating profit is stated after any gain or loss arising from changes in the fair value of biological assets (net of expenditure relating to those assets up to the point of maturity) but before investment income and finance costs. 72 Retirement benefit costs For defined benefit retirement schemes, the estimated regular cost of providing for the benefits is calculated so that it represents a substantially level percentage of current and future pensionable payroll and is charged as an expense as it is incurred. Amounts to recover actuarial losses, which are assessed at each actuarial valuation, are payable over a recovery period agreed with the scheme trustees. Provision is made for the present value of future amounts payable by the group to cover its share of such losses. The provision is reassessed at each accounting date, with the difference on reassessment being charged or credited the consolidated income statement in addition to the adjusted regular cost for the period. to Taxation The tax expense represents the sum of tax currently payable and deferred tax. Tax currently payable represents amounts expected to be paid (or recovered) based on the taxable profit for the period using the tax rates and laws that have been enacted or substantially enacted at the balance sheet date. Deferred tax is calculated on the balance sheet liability method on a non-discounted basis on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding fiscal balances used in the computation of taxable profits (temporary differences). Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. A deferred tax asset or liability is not recognised in respect of a temporary difference that arises from goodwill or from the initial recognition of other assets or liabilities in a transaction which affects neither the profit for tax purposes nor the accounting profit. Deferred tax is calculated at the tax rates that are expected to apply in the periods when deferred tax liabilities are settled or deferred tax assets are realised. Deferred tax is charged or credited in the consolidated income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Biological assets Biological assets comprise oil palm trees and nurseries, in the former case from initial preparation of land and planting of seedlings through to maturity and the entire productive life of the trees and in the latter case from planting of seed through to field transplanting of seedlings. Biological assets do not include the land upon which the trees and nurseries are planted, or the buildings, equipment, infrastructure and other facilities used in the upkeep of the planted areas and harvesting of crops. Up to 31 December 2006 biological assets included plantation infrastructure, which includes such assets as roads, bridges and culverts. With effect from 1 January 2007 new expenditure on these assets is included in property, plant and equipment. The biological process commences with the initial preparation of land and planting of seedlings and ceases with the delivery of crop in the form of fresh fruit bunches (“FFB”) to the manufacturing process in which crude palm oil and palm kernel are extracted from the FFB. Biological assets are revalued at each accounting date on a discounted cash flow basis by reference to the FFB expected to be harvested over the full remaining productive life of the trees, applying an estimated produce value for transfer to the manufacturing process and allowing for upkeep, harvesting costs and an appropriate allocation of overheads. The estimated produce value is derived from a long term average of historic crude palm oil prices buffered so that the implied movement in unit profit margin in any year does not exceed 5 per cent, and further, so as to restrict any implied change in unit profit margin in contradiction of the trend in current margins. Assets which are not yet mature at the accounting date, and hence are not producing FFB, are valued on a similar basis but with the discounted value of the estimated cost to complete planting and to maintain the assets to maturity being deducted from the discounted FFB value. together with costs (including depreciation) arising from the use of agricultural buildings, plantation infrastructure and vehicles. The variation in the value of the biological assets in each accounting period, after allowing for additions to the biological assets in the period, is charged or credited to profit or loss as appropriate, with no depreciation being provided on such assets. Property, plant and equipment All property, plant and equipment (including, with effect from 1 January 2007, additions to plantation infrastructure) is carried at original cost less any accumulated depreciation and any accumulated impairment losses. Depreciation is computed using the straight line method so as to write off the cost of assets, other than property and plant under construction, over the estimated useful lives of the assets as follows: buildings - 20 years; plant and machinery - 5 to 16 years. Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the terms of the relevant leases. The gain or loss on the disposal or retirement of an asset is determined as the difference between the sales proceeds, less costs of disposal, and the carrying amount of the asset and is recognised in the consolidated income statement. Prepaid operating lease rentals Payments to acquire leasehold interests in land are treated as prepaid operating lease rentals and amortised over the periods of the leases. Impairment of tangible and excluding goodwill intangible assets All expenditure on the biological assets up to maturity, including interest, is treated as an addition to the biological assets. Expenditure to maturity includes an allocation of overheads to the point that trees are brought into productive cropping. Such overheads include general charges and the costs of the Indonesian head office (including in both cases personnel costs and local fees) At each balance sheet date, the group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that any asset has suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are 73 Accounting policies (group) continued independent from other assets, the group estimates the recoverable amount of the cash-generating unit to which the asset belongs. An intangible asset with an indefinite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired. The recoverable amount of an asset (or cash-generating unit) is the higher of fair value less costs to sell and value in use. In assessing value in use, estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and those risks specific to the asset (or cash-generating unit) for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where, with respect to assets other than goodwill, an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash- generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. (having regard to any outstanding contracts for forward sales of produce) less all estimated costs of processing and costs incurred in marketing, selling and distribution. Recognition and derecognition of instruments financial Financial assets and liabilities are recognised in the group’s financial statements when the group becomes a party to the contractual provisions of the relative constituent instruments. Financial assets are derecognised only when the contractual rights to the cash flows from the asset expire or if the group transfers substantially all the risks and rewards of ownership to another party. Financial liabilities are derecognised when the group’s obligations are discharged, cancelled or have expired. Non-derivative financial assets The group’s non-derivative financial assets comprise loans and receivables, and cash and cash equivalents. The group does not hold any financial assets designated as held at ‘fair value through profit and loss’ (“FVTPL”), or as ‘held-to- maturity’ or ‘available-for-sale’ financial assets. Loans and receivables Trade receivables, loans and other receivables in respect of which payments are fixed or determinable and which are not quoted in an active market are classified as loans and receivables. All loans and receivables held by the group are non interest bearing and are stated at their nominal amount, as reduced by appropriate allowances for irrecoverable amounts. Inventories Cash and cash equivalents Inventories of agricultural produce harvested from the biological assets are stated at the fair value, less estimated sale costs, at the point of harvest of the FFB from which the produce derives plus costs incurred in the processing of such FFB (including direct labour costs and overheads that have been incurred in bringing such inventories to their present location and condition) or at net realisable value if lower. Inventories of engineering and other items are valued at the lower of cost, on the weighted average method, or net realisable value. For these purposes, net realisable value represents the estimated selling price Cash and cash equivalents comprise cash on hand and demand deposits and other short-term highly liquid investments that are readily convertible to a known amount of cash and, being subject to an insignificant risk of changes in value, are stated at their nominal amounts. Non-derivative financial liabilities The group’s non-derivative financial liabilities comprise note issues, bank borrowings, finance leases and trade payables. The group does not hold any financial liabilities 74 classified as held for trading or designated as held at FVTPL. Cash flow hedges Note issues, bank borrowings and finance leases Note issues, bank borrowings and finance leases are classified in accordance with the substance of the relative contractual arrangements. Finance costs are charged to income on an accruals basis, using the effective interest method, and comprise, with respect to notes, the coupon payable together with the amortisation of note issuance costs (which include any premiums payable on settlement or redemption) and, with respect to bank borrowings and finance leases, the contractual rate of interest together with the amortisation of costs associated with the negotiation of, and compliance with, the contractual terms and conditions. Note issues are recorded in the accounts at their redemption value net of the relative unamortised balances of issuance costs. Bank borrowings and finance leases are recorded at the amounts of the proceeds received less subsequent repayments with the relative unamortised balance of costs treated as non-current receivables. Trade payables All trade payables owed by the group are non interest bearing and are stated at their nominal value. Derivative financial instruments The group enters into derivative financial instruments to manage its exposure to interest rate and foreign exchange rate risk; further details are disclosed in note 21. Derivatives are initially recognised at fair value at the date of the contract and remeasured to their fair value at the balance sheet date. The resulting gain or loss is recognised immediately in profit or loss unless the derivative is designated and qualifies as a hedging instrument (either as a cash flow hedge or a fair value hedge), in which case the timing of the recognition in profit or loss depends on the nature of the hedge relationship. A derivative is presented as a non-current asset or non- current liability if the remaining maturity of the instrument is more than 12 months and the derivative is not expected to be realised or settled within 12 months. Other derivatives are presented as current assets or liabilities. Changes in the fair value of derivatives which are designated and qualify as cash flow hedges are deferred in equity to the extent attributable to the components of the derivatives that are effective hedges and as such offset the exchange fluctuations relating to the principal amount of the liability or asset being hedged. Other gains or losses arising are recognised immediately in profit or loss, and are included as ‘other gains and losses’ in the consolidated income statement. Hedge accounting is discontinued when the group revokes the hedging relationship or the hedging instrument expires, is sold, terminated, or exercised, or no longer qualifies for hedge accounting. Any cumulative gain or loss deferred in equity at discontinuance remains in equity. Fair value hedges The group does not hold any derivatives designated and qualifying as fair value hedges. Equity instruments Instruments are classified as equity instruments if the substance of the relative contractual arrangements evidences a residual interest in the assets of the group after deducting all of its liabilities. Equity instruments issued by the company are recorded at the proceeds received, net of direct issue costs. The preference shares of the company are regarded as equity instruments. Share-based payments The group has applied the requirements of IFRS 2 “Share- based payments” which contain transitional provisions which provide certain exemptions for grants of equity instruments prior to 7 November 2002. 75 Notes to the consolidated financial statements 1. Critical accounting judgements and key sources of estimation uncertainty In the application of the group’s accounting policies, which are set out in the “Accounting policies (group)” section of this annual report, the directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual values of assets and amounts of liabilities may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised. The key sources of estimation uncertainty at the balance sheet date, which have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below. Biological assets The method by which the directors have determined the fair value of the group’s biological assets is described in “Accounting policies (group)” above. Because of the inherent uncertainty associated with such fair valuation methodology and in particular the volatility of prices for the group’s agricultural produce and the absence of a liquid market for oil palm plantations, the carrying value of the biological assets may differ from their realisable value (see note 13). Derivatives As described in note 21, the directors use their judgement in selecting appropriate valuation techniques for financial instruments not quoted in an active market. For derivative financial instruments, assumptions are made based on quoted market rates adjusted for the specific features of the instruments. Income taxes The group is subject to income taxes in various jurisdictions. Significant judgement is required in determining the group’s liability to income tax both current and deferred having regard to the uncertainties relating to the availability of tax losses and to the future periods in which timing differences are likely to reverse as well as uncertainty regarding recoverability of tax paid against disputed items in an assessment of tax on an Indonesian group company. 2. Revenue Sales of goods Revenue from services Other operating income Investment income Total revenue 2008 $’000 79,107 523 79,630 4 1,185 80,819 2007 $’000 57,581 19 57,600 6 1,641 59,247 In 2008 four customers accounted for respectively 38 per cent, 12 per cent, 11 per cent and 11 per cent of the group’s sales of goods (2007: two customers each accounted for 24 per cent). The crop of oil palm fresh fruit bunches for 2008 amounted to 450,906 tonnes (2007: 393,217 tonnes). The fair value of the crop of fresh fruit bunches was $51,840,000 (2007: $39,269,000), based on the price formula determined by the Indonesian government for purchases of fresh fruit bunches from smallholders. 76 3. Segment information In the table below, the group’s sales of goods are analysed by geographical destination and the carrying amount of segment net assets and additions to property, plant and equipment by geographical area of location. No analyses are provided by business segment as the group had only one operating business segment in 2008. Sales by geographical destination: United Kingdom and Continental Europe Indonesia Rest of Asia Carrying amount of segment net assets by geographical area of asset location: United Kingdom and Continental Europe Indonesia Additions to property, plant and equipment by geographical area of asset location: United Kingdom and Continental Europe Indonesia 2008 $’m – 45.8 33.3 79.1 25.3 137.3 162.6 – 24.7 24.7 2007 $’m – 28.1 29.5 57.6 38.2 110.4 148.6 0.4 14.8 15.2 4. Agricultural produce inventory movement The net (loss) / gain arising from changes in fair value of agricultural produce inventory represents the movement in the fair value of that inventory less the amount of the movement in such inventory at historic cost (which is included in cost of sales). 5. Profit before tax Profit before tax has been arrived at after charging / (crediting): Net foreign exchange gains Movement in inventories (at historic cost) Depreciation of property, plant and equipment Amortisation of prepaid operating lease rentals 2008 $’000 (2,936) (509) 2,420 57 2007 $’000 (232) (2,161) 1,846 144 The amount payable to Deloitte LLP for the audit of the company’s financial statements was $100,000 (2007: $137,000). Amounts payable to Deloitte LLP for the audit of accounts of associates of the company pursuant to legislation were $25,000 (2007: $10,000). Amounts payable to Deloitte LLP for other services were $2,000 (2007: for services pursuant to legislation - $46,000; for other services - $2,000). In 2007 the services pursuant to legislation were in respect of corporate finance work, and as such the amounts paid for those services were added to the capitalised costs of the relevant transactions. Amounts payable to an associate of Deloitte LLP for the audit of a subsidiary’s financial statements were $9,000 (2007: $nil). 77 Notes to the consolidated financial statements continued 5. Profit before tax - continued Earnings before interest, tax, depreciation and amortisation and net biological gain: Operating profit Depreciation and amortisation Net biological loss / (gain) 6. Staff costs, including directors Average number of employees (including executive directors): Agricultural - permanent Agricultural - temporary Head office Their aggregate remuneration comprised: Wages and salaries Social security costs Pension costs 7. Investment revenues Interest on bank deposits 8. Finance costs Interest on bank loans and overdrafts Interest on US dollar notes Interest on sterling notes Interest on obligations under finance leases Other finance charges Amount included as additions to biological assets 2008 $’000 40,563 2,477 2,660 45,700 2007 $’000 49,386 1,990 (8,030) 43,346 2008 Number 2007 Number 3,418 2,578 7 6,003 3,059 2,488 7 5,554 $’000 $’000 15,095 1,394 922 17,411 2008 $’000 1,185 1,185 2008 $’000 886 2,564 5,349 16 1,149 9,964 (4,525) 5,439 11,869 598 707 13,174 2007 $’000 1,641 1,641 2007 $’000 1,916 2,360 4,443 23 439 9,181 (5,164) 4,017 Amount included as additions to biological assets arose on the general pool of borrowings applicable to the Indonesian operations and reflected a capitalisation rate of 35.5 per cent (2007: 43.7 per cent); there is no directly related tax relief. 78 9. Tax Current tax: UK corporation tax Foreign tax (includes prior years $3,065,000) (2007: $nil) Total current tax Deferred tax: Current year (includes prior years $1,588,000) (2007: $nil) Attributable to a decrease in the rate of tax Total deferred tax Total tax 2008 $’000 28 13,478 13,506 2,825 (5,795) (2,970) 2007 $’000 – 5,318 5,318 9,466 229 9,695 10,536 15,013 Taxation is provided at the rates prevailing for the relevant jurisdiction. For Indonesia, the current taxation provision is based on a tax rate of 30 per cent (2007: 30 per cent) and the deferred tax provision reflects the proposed reduction in the corporate taxation rate from 30 per cent to 25 per cent, the effect of which is also disclosed below and in note 26. For the United Kingdom, the taxation provision reflects the reduction in the corporation tax rate from 30 per cent to 28 per cent for 2008/09, the effect of which is also disclosed below and in note 26. Prior year adjustments of $3,065,000 in respect of foreign tax and $1,588,000 in respect of deferred tax arise as a result of an Indonesian assessment of tax on a group company’s 2006 profits at a higher level than was originally expected. Full provision has been made for this assessment although significant elements are disputed. The tax charge for the year can be reconciled to the profit per the consolidated income statement as follows: Profit before tax Notional tax at the UK standard rate of 28.5 per cent (2007: 30 per cent) Tax effect of the following items: Expenses not deductible in determining taxable profit Deferred tax asset not recognised Non taxable income Overseas tax rates in excess of UK standard rate Overseas withholding taxes, net of relief Tax effect of unrelieved tax losses not recognised for deferred tax Tax effect of change in rate on UK net deferred tax (liability)/asset Tax effect of change in rate on Indonesian deferred tax liabilities Additional tax provisions Other 2008 $’000 36,309 2007 $’000 47,010 10,348 14,103 673 (61) (349) 531 625 22 (23) (5,773) 4,543 – 161 – (10) – 541 6 229 – – (17) Tax expense at effective tax rate for the year 10,536 15,013 79 Notes to the consolidated financial statements continued 10. Dividends Amounts recognised as distributions to equity holders: Preference dividends of 9p per share Ordinary dividends 2008 $’000 2,360 1,498 3,858 2007 $’000 2,266 1,279 3,545 An interim dividend of 1.5p per ordinary share in lieu of final in respect of the year ended 31 December 2008 was paid on 30 January 2009. In accordance with IAS10 “Events after the reporting period”, this dividend has not been included in the 2008 financial statements. 11. Earnings per share Earnings for the purpose of basic and diluted earnings per share * * being net profit attributable to ordinary shareholders Weighted average number of ordinary shares for the purpose of basic earnings per share Effect of dilutive potential ordinary shares Weighted average number of ordinary shares for the purpose of diluted earnings per share 12. Goodwill and acquisition of subsidiary Beginning of year End of year Goodwill 2008 $’000 23,833 ‘000 32,574 761 33,335 2008 $’000 12,578 12,578 2007 $’000 29,453 ‘000 32,044 837 32,881 2007 $’000 12,578 12,578 The goodwill arose from the acquisition by the company in 2006 of a minority interest in the issued ordinary share capital of Makassar Investments Limited, the parent company of PT REA Kaltim Plantations, for a consideration of $19 million. The goodwill of $12.6 million at the balance sheet date is considered by the directors to be supported fully by the assessment of the value in use for the oil palm business in Indonesia, which is regarded by the directors to be the cash generating unit to which the goodwill applies. Acquisition of subsidiary On 11 July 2008 the group acquired 95 per cent of the issued share capital of PT Putra Bongan Jaya (“PBJ”) for a cash consideration of $3,295,000. At the date of acquisition PBJ held a land permit (izin locasi) in respect of 19,837 hectares in the West Kutai district of East Kalimantan, Indonesia. The transaction has been accounted for by the purchase method of accounting. The book values of the net assets acquired were: Prepaid operating lease rentals Cash and cash equivalents End of year Satisfied by: Cash payment by group Subscription by Indonesian investor 80 $’000 3,330 137 3,467 3,295 172 3,467 12. Goodwill and acquisition of subsidiary - continued Net cash outflow arising on acquisition: Cash consideration Cash and cash equivalents acquired $’000 3,467 (137) 3,330 The directors consider that the fair value of the assets acquired equalled their book value. Since the date of acquisition, PBJ has not contributed any revenues to the group, and has recorded a loss before tax of approximately $15,000. 13. Biological assets Beginning of year Additions to planted area and costs to maturity including finance costs (see note 8) Transfers from property, plant and equipment (see note 14) Transfers to non-current receivables Net biological (loss) / gain End of year Net biological (loss) / gain comprises: Gain arising from movement in fair value attributable to physical changes Gain arising from movement in fair value attributable to price changes 2008 $’000 166,347 15,763 339 (44) (2,660) 179,745 2007 $’000 143,496 14,821 – – 8,030 166,347 (2,660) – (2,660) 8,030 – 8,030 The nature of the group’s biological assets and the basis of determination of their fair value is explained under “Biological assets” in “Accounting policies (group)”. The valuation assumed a discount rate of 16 per cent in the case of REA Kaltim and 19 per cent in the case of all other group companies (2007: 17.5 per cent in the case of REA Kaltim and 19 per cent in the case of all other group companies) and a twenty year average CPO price of $431 per tonne, net of Indonesian export duties, FOB Samarinda (2007: twenty year average of $414 per tonne). The effect of the accounting policy on biological assets was that there was no change in the unit profit margin assumed. The valuation of the group’s biological assets would have been reduced by $9,505,000 (2007: $10,310,000) if the crops projected for the purposes of the valuation had been reduced by 5 per cent; by $8,887,000 (2007: $10,915,000) if the discount rates assumed had been increased by 1 per cent and by $18,987,000 (2007: $20,595,000) if the assumed unit profit margin per tonne of oil palm fresh fruit bunches had been reduced by $5. As a general rule, all palm products produced by the group are sold for immediate delivery but on occasions, when market conditions appear favourable, the group makes forward sales. When making such sales, the group would not normally commit more than 60 per cent of its projected production for a forthcoming period of twelve months. At 31 December 2007, the group had outstanding forward sales of crude palm oil (“CPO”) at the rate of 2,000 tonnes per month for the two year period to 31 December 2009 at prices equivalent to $620 per tonne, CIF Rotterdam, for the period January to June 2008 (inclusive), $870 per tonne for the period July to December 2008 (inclusive) and $860 per tonne for the period January to December 2009 (inclusive). During 2008, the group delivered 12,000 tonnes of CPO against forward sale contracts at the equivalent of a CIF Rotterdam price of $620 per tonne; the remaining forward sales were cancelled by mutual agreement with the counterparty. 81 Notes to the consolidated financial statements continued 13. Biological assets - continued At the balance sheet date, biological assets of $161,452,000 (2007: $141,571,000) had been charged as security for bank loans (see note 22) but there were otherwise no restrictions on titles to the biological assets (2007: none). Expenditure approved by the directors for the development of immature areas in 2009 amounts to $13,000,000 (prior year - $28,000,000). 14. Property, plant and equipment Buildings and structures Plant, Construction in progress Total Cost: At 1 January 2007 Additions Exchange differences Disposals Transfers (see note 13) At 31 December 2007 Additions Exchange differences Disposals Transfers (see note 13) At 31 December 2008 Accumulated depreciation: At 1 January 2007 Charge for year Exchange differences Eliminated on disposals At 31 December 2007 Charge for year Exchange differences Eliminated on disposals At 31 December 2008 Carrying amount: End of year Beginning of year equipment and vehicles $’000 $’000 5,707 8,123 – (6) 4,178 18,002 10,227 – – 7,064 35,293 874 295 – (2) 1,167 637 – – 1,804 $‘000 $‘000 17,226 1,392 2 (460) 11,430 29,590 3,135 (183) (268) 30 32,304 6,573 1,551 3 (258) 7,869 2,206 (102) (163) 9,810 13,159 5,665 – – (15,608) 3,216 11,303 – – (7,433) 7,086 – – – – – – – – – 36,092 15,180 2 (466) – 50,808 24,665 (183) (268) (339) 74,683 7,447 1,846 3 (260) 9,036 2,843 (102) (163) 11,614 33,489 16,835 22,494 21,721 7,086 3,216 63,069 41,772 The depreciation charge for the year includes $423,000 (2007: $nil) which has been capitalised as part of the additions to biological assets. At the balance sheet date, the book value of finance leases included in property, plant and equipment was $174,000 (2007: $413,000). At the balance sheet date, the group had entered into contractual commitments for the acquisition of property, plant and equipment amounting to $2,394,000 (2007: $4,093,000). 82 15. Prepaid operating lease rentals Cost: Beginning of year Additions End of year Accumulated depreciation: Beginning of year Charge for year End of year Carrying amount: End of year Beginning of year 2008 $‘000 9,188 4,535 13,723 365 270 635 13,088 8,823 2007 $‘000 5,401 3,787 9,188 221 144 365 8,823 5,180 The depreciation charge for the year includes $212,000 (2007: $nil) which has been capitalised as part of the additions to biological assets. Additions in the year include $3,330,000 (2007: $nil) in respect of a subsidiary acquired during the year. Land title certificates have been obtained in respect of areas covering 46,841 hectares (2007: 35,216 hectares). 16. Indonesian coal rights The balance of $5,386,000 (2007: $nil) comprises interest bearing loans made to two Indonesian companies which own rights in respect of certain coal concessions in East Kalimantan, Indonesia. Arrangements are in place for a substantial part of the economic benefit from exploiting these concessions to accrue to the group, after the cost of servicing the loans. The loans are repayable as and when the cash resources of the debtor companies permit, but in any event on 31 December 2020. 17. Subsidiaries A list of the principal subsidiaries, including the name, country of incorporation and proportion of ownership is given in note (i) to the company’s individual financial statements. Certain borrowings incurred by PT REA Kaltim Plantations (“REA Kaltim”) limit the payment of dividends by REA Kaltim to a proportion of REA Kaltim’s annual profit after tax. 18. Inventories Agricultural produce Engineering and other operating inventory 2008 $’000 4,879 7,916 2007 $’000 8,603 4,437 12,795 13,040 The fair value of the agricultural produce as at 31 December 2007 took into account certain outstanding forward sales contracts for delivery in 2008 at a CIF Rotterdam price of $620 per tonne of crude palm oil as disclosed in note 13. At 31 December 2008 there were no outstanding forward sales contracts of crude palm oil. 83 Notes to the consolidated financial statements continued 19. Trade and other receivables Due from sale of goods Prepayments and advance payments Advance payment of taxation Deposits and other receivables 2008 $’000 712 1,200 6,199 761 8,872 2007 $’000 444 853 1,149 855 3,301 Sales of goods are normally made on a cash against documents basis with an average credit period (which takes account of customer deposits as disclosed in note 29) of nil days (2007: 6 days). The directors consider that the carrying amount of trade and other receivables approximates their fair value. 20. Cash and cash equivalents Cash and cash equivalents comprise cash held by the group and short-term bank deposits with a maturity of one month or less. 21. Financial instruments Capital risk management The group manages as capital its debt, which includes the borrowings disclosed in notes 22 to 24, cash and cash equivalents and equity attributable to shareholders of the parent, comprising issued ordinary and preference share capital, reserves and retained earnings as disclosed in notes 30 to 33. The group is not subject to externally imposed capital requirements. The directors’ policy in regard to the capital structure of the group is to seek to enhance returns to holders of the company's ordinary shares by meeting a proportion of the group's funding needs with prior charge capital and to constitute that capital as a mix of preference share capital and borrowings from banks and development institutions and from the public debt market, in proportions which suit, and as respects borrowings having a maturity profile which suits, the assets that such capital is financing. In so doing, the directors regard preference share capital as permanent capital and then seek to structure the group's borrowings so that shorter term bank debt is used only to finance working capital requirements while debt funding for the group's development programme is sourced from issues of medium term listed debt securities and borrowings from development institutions. Net debt to equity ratio Whilst the directors believe that it is important that the group retains flexibility as to the percentage of the group's overall funding that is represented by net debt, as a general indication, they believe that, at the present stage of the group's development, net debt should not exceed 100 per cent of total equity. The target for 31 December 2009 is 60 per cent (2008: 60 per cent). Net debt, equity and the net debt to equity ratio at the balance sheet date were as follows: Debt * Cash and cash equivalents Net debt * being the book value of long and short term borrowings as detailed in the table below under “Fair value of financial instruments”. Equity (including minority interests) Net debt to equity ratio 2008 $’000 108,264 (30,316) 77,948 2007 $’000 86,257 (34,216) 52,041 162,611 47.9% 148,633 35.0% 84 21. Financial instruments - continued Significant accounting policies Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial instrument are disclosed in the “Accounting policies (group)” section of this annual report. Categories of financial instruments Non-derivative financial assets as at 31 December 2008 comprised loans and receivables and cash and cash equivalents amounting to $32,448,000 (2007: $35,953,000). Non-derivative financial liabilities as at 31 December 2008 comprised liabilities at amortised cost amounting to $102,920,000 (2007: $93,032,000). Derivative financial instruments at 31 December 2008 comprised instruments in designated hedge accounting relationships at fair value amounting to a liability of $26,517,000 (2007: an asset of $168,000). Financial risk management objectives The group’s head office provides services to the business, co-ordinates access to domestic and international financial markets and monitors and manages the financial risks relating to the operations of the group through internal reports which permit the degree and magnitude of such risks to be assessed. These risks include market risk, credit risk and liquidity risk. The group seeks to reduce risk by using, where appropriate, derivative financial instruments to hedge risk exposures. The use of derivative financial instruments is governed by group policies set by the board of directors of the company. The board also sets policies on foreign exchange risk, interest rate risk, credit risk, the use of non-derivative financial instruments, and the investment of excess liquidity. Compliance with policies and exposure limits is reviewed on a continuous basis. The group does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes. Market risk The financial market risks to which the group is primarily exposed are those arising from changes in interest rates and foreign currency exchange rates. The group’s policy as regards interest rates is to borrow whenever possible at fixed interest rates, but where borrowings are raised at floating rates the directors would not normally seek to hedge such exposure. The sterling notes and the US dollar notes carry interest at fixed rates of, respectively, 9.5 and 7.5 per cent per annum. In addition, the company’s preference shares carry an entitlement to a fixed annual dividend of 9 pence per share. Interest is payable on drawings under the Indonesian consortium loan facilities at a floating rate equal to 2.75 per cent per annum over Singapore Inter Bank Offered Rate (“SIBOR”) (2007: 2.75 per cent). A one per cent increase in interest applied to those financial instruments shown in the table below entitled “Fair value of financial instruments” as held at 31 December 2008 (other than the cross currency interest rate swap) which carry interest at floating rates would have resulted over a period of one year in a pre-tax profit (and equity) increase of approximately $174,000 (2007: pre-tax profit (and equity) increase of $183,000). 85 Notes to the consolidated financial statements continued 21. Financial instruments - continued The group regards the US dollar as the functional currency of most of its operations and seeks to ensure that, as respects that proportion of its investment in the operations that is met by borrowings, it has no currency exposure against the US dollar. Accordingly, where borrowings are incurred in a currency other than the US dollar, the group endeavours to cover the resultant currency exposure by way of a debt swap or other appropriate currency hedge. The group does not cover the currency exposure in respect of the component of the investment that is financed with pounds sterling denominated equity. The group's policy is to maintain limited balances in pounds sterling sufficient to meet its projected sterling expenditure for a period of between six and twelve months and a balance in Indonesian rupiahs sufficient for its immediate Indonesian rupiah requirements but, otherwise, to keep all cash balances in US dollars. The group does not normally otherwise hedge its revenues and costs arising in currencies other than the US dollar. At the balance sheet date, the group had non US dollar monetary items denominated in pounds sterling and Indonesian rupiah. A 5 per cent strengthening of the pound sterling against the US dollar would have resulted in a gain dealt with in the consolidated income statement and equity of $100,000 on the net sterling denominated non-derivative monetary items (excluding the sterling notes which are hedged) (2007: gain of $400,000). A 5 per cent strengthening of the Indonesian rupiah against the US dollar would have resulted in a loss dealt with in the consolidated income statement and equity of $125,000 on the net Indonesian rupiah denominated, non- derivative monetary items (2007: negligible effect). Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the group. The directors consider that the group is not exposed to any major concentrations of credit risk. At 31 December 2008, 71 per cent of bank deposits were held with banks with a Moody’s prime rating of P1 and the balance with a bank with a Moody’s prime rating of P3. Substantially all sales of goods are made on the basis of cash against documents or letters of credit. At the balance sheet date, no trade receivables were past their due dates, nor were any impaired; accordingly no bad debt provisions were required. The maximum credit risk exposures in respect of the group’s financial assets at 31 December 2008 and 2007 equal the amounts reported under the corresponding balance sheet headings. Liquidity risk Ultimate responsibility for liquidity risk management rests with the board of directors of the company, which has established an appropriate framework for the management of the group’s short, medium and long-term funding and liquidity requirements. Within this framework, the board continuously monitors forecast and actual cash flows and endeavours to maintain adequate liquidity in the form of cash reserves and borrowing facilities while matching the maturity profiles of financial assets and liabilities. Undrawn facilities available to the group at balance sheet date are disclosed in note 22. The board reviews the cash forecasting models for the operation of the plantations and compares these with the forecast outflows for debt obligations and projected capital expenditure programmes for the plantations, applying sensitivities to take into account perceived major uncertainties. In their review, the directors place the greatest emphasis on the cash flow of the first two years. Non-derivative financial instruments The following tables detail the contractual maturity of the group’s non-derivative financial liabilities. The tables have been drawn up based on the undiscounted amounts of the group’s financial liabilities based on the earliest dates on which the group can be required to discharge those liabilities. The table includes liabilities for both principal and interest. 86 21. Financial instruments - continued 2008 Bank loans US dollar notes Sterling notes Trade and other payables, and customer deposits Obligations under finance leases 2007 Bank loans US dollar notes Sterling notes Trade and other payables Obligations under finance leases Weighted average interest rate 5.8% 8.0% 10.4% 10.0% Weighted average interest rate 8.4% 8.0% 10.4% 10.0% Under 1 year $’000 11,119 2,250 5,035 8,332 62 26,798 Under 1 year $’000 4,167 2,250 4,096 3,989 127 Between 1 and 2 years $’000 2,180 2,250 4,944 – 65 Over 2 years $’000 – 36,750 77,983 – – Total $’000 13,299 41,250 87,962 8,332 127 9,439 114,733 150,970 Between 1 and 2 years $’000 11,344 2,250 4,034 – 143 Over 2 years $’000 2,181 39,000 69,908 – – Total $’000 17,692 43,500 78,038 3,989 270 14,629 17,771 111,089 143,489 At 31 December 2008, the group’s non-derivative financial assets (other than receivables) comprised cash and deposits of $30,316,000 (2007: $34,216,000) carrying a weighted average interest rate of 3.1 per cent (2007: 4.5 per cent) all having a maturity of under one year. Derivative financial instruments The following table details the amounts due in respect of the group’s derivative financial instruments. These arise under the cross currency interest rate swaps (“CCIRS”) described in note 25. The cash flows are settled gross and, therefore, the table takes no account of sterling receipts under the CCIRS. At 31 December 2008 At 31 December 2007 Fair value of financial instruments Under 1 year $’000 7,197 4,570 Between 1 and 2 years $’000 7,197 Over 2 years $’000 104,607 Total $’000 119,001 4,596 70,474 79,640 The table below provides an analysis of the book values and fair values of financial instruments, excluding receivables and trade payables, as at the balance sheet date. 87 Notes to the consolidated financial statements continued 21. Financial instruments - continued Cash and deposits + Debt - within one year + Debt - after more than one year + Finance leases o US dollar notes o Sterling notes o Cross currency interest rate swap - hedge against principal liabilities Net debt Cross currency interest rate swap - hedge against interest liabilities +bearing interest at floating rates o bearing interest at fixed rates 2008 Book value $’000 30,316 (10,750) (2,167) (114) (29,632) (50,234) (15,367) (77,948) (11,150) 2008 Fair value $’000 30,316 (10,750) (2,167) (114) (21,382) (44,906) (15,367) (64,370) (11,150) 2007 Book value $’000 34,216 (3,000) (12,917) (238) (29,389) (41,604) 891 (52,041) (723) 2007 Fair value $’000 34,216 (3,000) (12,917) (238) (28,050) (42,248) 891 (51,346) (723) (89,098) (75,520) (52,764) (52,069) The fair values of cash and deposits and bank debt approximate their carrying values since these carry interest at current market rates. The fair value of the US dollar notes and sterling notes is based on the latest price at which the notes were traded prior to the balance sheet date. The fair value of the sterling notes at 31 December 2007 was estimated by the directors, based on a yield comparision with UK government debt issues. The fair value of the cross currency interest rate swaps (“CCIRS”) has been derived by a discounted cash flow analysis using quoted foreign forward exchange rates and yield curves derived from quoted interest rates with maturities corresponding to the applicable cash flows. The valuation of the CCIRS at 31 December 2008 at fair value resulted in a loss of $26,517,000 (2007: gain of $168,000) which has been taken directly to equity, net of related tax relief. A 50 basis points movement in the spread between the assumed yield curves for pounds sterling and the US dollar would increase or decrease the valuation by approximately $2,783,000. 22. Bank loans Bank loans The bank loans are repayable as follows: On demand or within one year Between one and two years Between three and five years Amount due for settlement within 12 months (shown under current liabilities) Amount due for settlement after 12 months 2008 $‘000 12,917 10,750 2,167 – 12,917 10,750 2,167 12,917 2007 $‘000 15,917 3,000 10,750 2,167 15,917 3,000 12,917 15,917 All bank loans are denominated in US dollars and are at floating rates, thus exposing the group to interest rate risk. The weighted average interest rate in 2008 was 5.8 per cent (2007: 8.4 per cent). Bank loans of $12,917,000 (2007: $15,417,000) are secured on substantially the whole of the assets and undertaking of PT REA Kaltim Plantations (“REA Kaltim”), amounting to $265 million (2007: $215 million), and are the subject of an unsecured guarantee by the company. The banks are entitled to have recourse to their security on usual banking terms. 88 22. Bank loans - continued At the balance sheet date, the group had undrawn US dollar denominated bank facilities of $4.0 million (2007: $7.0 million). On 23 April 2009, REA Kaltim concluded a new agreement with its bankers which will increase its bank facilities to $15.5 million and significantly extend the average maturity of drawings under the facility. In addition, the interest rate formula now includes an allowance for the bankers’ cost of funds. 23. Sterling notes The sterling notes comprise £37 million nominal of 9.5 per cent guaranteed sterling notes 2015/17 issued by the company’s subsidiary, REA Finance B.V.. Of these, £15 million nominal were issued during 2008 for cash at a subscription price of 99.8682 per cent of par. Unless previously redeemed or purchased and cancelled by the issuer, the sterling notes are repayable in three equal instalments commencing on 31 December 2015. The repayment obligation in respect of the sterling notes of £37 million ($53.3 million) is hedged by a forward foreign exchange contract for the purchase of £37 million and for the sale of $68.6 million and is carried in the balance sheet net of the unamortised balance of the note issuance costs. If a person or group of persons acting in concert obtains the right to exercise more than 50 per cent of the votes that may generally be cast at a general meeting of the company, each holder of sterling notes has the right to require that the notes held by such holder be repaid at 101 per cent of par, plus any interest accrued thereon up to the date of completion of the repayment. 24. US dollar notes The US dollar notes comprise US$30 million nominal of 7.5 per cent dollar notes 2012/14 of the company, and are stated net of the unamortised balance of the note issuance costs. Unless previously redeemed or purchased and cancelled by the company, the US dollar notes are redeemable in three equal annual instalments commencing on 31 December 2012. Pursuant to a supplemental rights agreement dated 23 January 2006, between the company and the holders of $19 million nominal of US dollar notes, the latter have the right, exercisable under certain limited circumstances, to require the company to purchase the US dollar notes held by them at a price equal to the aggregate of the nominal amount of the notes being purchased and any interest accrued thereon up to the date of completion of the purchase. Such circumstances include a material disposal of assets by the group or a person or group of persons acting in concert obtaining the right to exercise more than 50 per cent of the votes that may generally be cast at a general meeting of the company. 25. Hedging instruments At 31 December 2008 the group had outstanding three contracts for the forward purchase of £37 million and sale of $68.6 million maturing in 2015 (2007: the group had outstanding a contract for the forward purchase of £22 million and sale of $42.9 million maturing in 2015) pursuant to the cross currency interest rate swaps (“CCIRS”) entered into by the group to hedge the foreign currency exposure of the group arising from the interest and principal repayment obligations of its 9.5 per cent guaranteed sterling notes 2015/17 (“sterling notes”). Either party to the CCIRS has the option to terminate the contracts on the fifth anniversary of the initial trade date. During the year, the hedges were effective in hedging the related sterling interest payment obligations on the sterling notes up to and including 31 December 2015 and in providing the £37 million required to meet the principal repayment obligations. The fair value of the CCIRS has been described in note 21. 89 Notes to the consolidated financial statements continued 26. Deferred tax The following are the major deferred tax liabilities and assets recognised by the group and the movements thereon during the year and preceding year: Deferred tax assets / (liabilities) At 1 January 2007 (Charge)/credit to income for the year (Charge)/credit to equity for the year Exchange differences Effect of change in tax rate - income statement Effect of change in tax rate - equity Transfers Property, plant and equipment $’000 (15,760) (2,325) – 496 – – (12) At 31 December 2007 (Charge) / credit to income for the year (Charge) / credit to equity for the year Exchange differences Effect of change in tax rate - income statement Effect of change in tax rate - equity Transfers (17,601) (3,847) – 3,209 3,318 – – Biological assets $’000 (14,960) (2,409) – – – – – (17,369) 798 – – 2,913 – – At 31 December 2008 (14,921) (13,658) Deferred tax assets Deferred tax liabilities At 31 December 2008 Deferred tax assets Deferred tax liabilities 7 (14,928) – (13,658) (14,921) (13,658) 18 (17,619) – (17,369) Income/ Share based payments expenses* $’000 $’000 1,895 1,488 – (3,048) 551 – 24 (81) – (10) (166) – – 377 (1,274) 291 (1,529) (348) (371) – 1,243 (1,988) 904 (2,892) (1,988) 904 (2,178) 2,304 – (1,444) (322) – – – 538 538 – 538 2,304 – Tax losses $’000 4,765 (1,684) 98 37 (219) (41) (365) 2,591 93 (2) (219) (225) – (1,243) 995 995 – 995 Total $’000 (22,572) (9,466) 649 476 (229) (207) – (31,349) (2,665) (2,975) 2,320 5,635 – – (29,034) 2,444 (31,478) (29,034) 2,591 – 5,817 (37,166) At 31 December 2007 * included as income, recognised gains or expenses for reporting purposes, but not yet charged to or allowed for tax, allowed for tax but not yet recognised for (17,601) (17,369) (1,274) 2,304 2,591 (31,349) reporting purposes. At the balance sheet date, the group had unused tax losses including a share based payments provision of $5.9 million (2007: $17.4 million) available to be applied against future profits. A deferred tax asset of $1,533,000 (2007: $4,895,000) has been recognised in respect of these losses. At the balance sheet date, the aggregate amount of temporary differences associated with undistributed earnings of subsidiaries for which deferred tax liabilities have not been recognised was $3,750,000 (2007: $4,750,000). No liability has been recognised in respect of these differences because the group is in a position to control the reversal of the temporary differences and it is probable that such differences will not significantly reverse in the foreseeable future. The deferred tax asset in respect of tax losses assumes that losses for tax purposes incurred by the plantation companies in Indonesia may be carried forward for five years. The proposed reduction in UK corporation tax from 30 per cent to 28 per cent (for 2008/2009) has reduced the net amount of UK deferred tax assets by $nil (2007: $436,000). 90 26. Deferred tax - continued The proposed reduction in Indonesian corporation tax from 30 per cent to 25 per cent has reduced the net amount of Indonesian deferred tax liabilities by $5,635,000. 27. Obligations under finance leases Minimum lease payments: Amounts payable under finance leases Within one year In the second to fifth years inclusive Less: Future finance charges Present value of lease obligations Representing: Amounts payable under finance leases Within one year In the second to fifth years inclusive Present value of lease obligations Amount due for settlement within 12 months (shown under current liabilities) Amount due for settlement after 12 months 2008 $’000 2007 $’000 62 65 127 13 114 53 61 114 53 61 114 127 143 270 32 238 111 127 238 111 127 238 The group leases certain items of plant and equipment under finance leases. The average lease term is one to two years (2007: one to two years). Interest rates are fixed at the contract rate. The average borrowing rate for the year was 10.0 per cent (2007: 10.0 per cent). All leases are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments. Most lease obligations are denominated in Indonesian rupiahs. Obligations under finance leases are secured by the lessor’s charge over the leased assets. 28. Other loans and payables Retirement benefit obligations (see note 37) Other The amounts are repayable as follows: On demand or within one year (shown under current liabilities) In the second year In the third to fifth years inclusive After five years Amount due for settlement after 12 months 2008 $’000 3,078 612 3,690 2007 $’000 3,800 686 4,486 380 449 373 1,159 1,778 3,310 478 1,439 2,120 4,037 3,690 4,486 91 Notes to the consolidated financial statements continued 28. Other loans and payables - continued Amounts of liabilities by currency: Sterling US dollar Indonesian rupiah 2008 $’000 2,117 509 1,064 3,690 2007 $’000 3,219 544 723 4,486 Further details of the retirement benefit obligations which relate to the R.E.A. Pension Scheme (the “Scheme”) are set out in note 37. The directors estimate that the fair value of retirement benefit obligations (being the retirement benefit funding obligations agreed with the trustees of the Scheme following the 2005 actuarial valuation referred to in note 37) and of other loans and payables approximates their carrying value. 29. Trade and other payables Trade purchases and ongoing costs Customer deposits Other tax and social security Accruals Other payables The average credit period taken on trade payables is 37 days (2007: 29 days). The directors estimate that the fair value of trade payables approximates their carrying value. 30. Share capital Authorised (in pounds sterling): 17,500,000 - 9 per cent cumulative preference shares of £1 each (2007: 14,500,000) 41,000,000 - ordinary shares of 25p each (2007: 41,000,000) Issued and fully paid (in US dollars): 14,902,954 - 9 per cent cumulative preference shares of £1 each (2007: 13,600,000) 32,573,856 - ordinary shares of 25p each (2007 – 32,573,856) 2008 $’000 6,071 2,021 282 3,499 240 12,113 2008 £’000 17,500 10,250 27,750 $’000 26,484 14,230 40,714 2007 $’000 3,331 – 230 2,851 658 7,070 2007 £’000 14,500 10,250 24,750 $’000 24,069 14,230 38,299 The preference shares entitle the holders thereof to payment, out of the profits of the company available for distribution and resolved to be distributed, of a fixed cumulative preferential dividend of 9 per cent per annum on the nominal value of the shares and to repayment, on a winding up of the company, of the amount paid up on the preference shares and any arrears of the fixed dividend in priority to any distribution on the ordinary shares. Subject to the rights of the holders of preference shares, holders of ordinary shares are entitled to share equally with each other in any dividend paid on the ordinary share capital and, on a winding up of the company, in any surplus assets available for distribution among the members. 92 30. Share capital - continued Changes in share capital: (cid:129) (cid:129) on 6 June 2008, the authorised share capital was increased from £24,750,000 to £27,750,000 by the creation of an additional 3,000,000 9 per cent cumulative preference shares. on 24 September 2008, 1,302,954 9 per cent cumulative preference shares were issued, credited as fully paid, at par to ordinary shareholders by way of capitalisation of share premium account. Details of a director’s share options are disclosed in the audited part of the directors’ remuneration report, as required by FRS 20 “Share based payments”. 31. Capital reserves At 1 January 2007 Issue of new ordinary shares Issue of new preference shares Capitalisation issue of new preference shares Expenses of issue Release of special reserve At 31 December 2007 Capitalisation issue of new preference shares Expenses of issue At 31 December 2008 Share premium account $’000 19,506 12,731 108 (2,016) (542) – 29,787 (2,415) (50) 27,322 Special reserve $’000 3,254 – – – – (3,254) – – – – Pursuant to a reduction of capital confirmed by the High Court and effective on 17 May 2006, the company’s capital redemption reserve was cancelled and the amount standing to the credit of the company’s share premium account was reduced by £2,760,334 ($4,747,774); as a result the sum of £6,000,000 ($10,320,000) was credited to a special reserve. The company issued fresh capital in 2006 and 2007 of more than £6,000,000 and, as permitted under the terms of the undertaking given to the High Court, transferred in 2006 and 2007 sums of an equivalent amount from special reserve to the company’s profit and loss account. 32. Translation reserve At 1 January 2007 Exchange translation differences arising during the year Fair value loss on cash flow hedge At 31 December 2007 Reclassification of balances brought forward Exchange translation differences arising during the year Fair value loss on cash flow hedge At 31 December 2008 Hedging reserve $’000 – – (506) (506) 624 - (18,757) (18,639) Other reserve $’000 (8,890) (426) – (9,316) (624) 12,191 – 2,251 Total $’000 (8,890) (426) (506) (9,822) – 12,191 (18,757) (16,388) 93 Notes to the consolidated financial statements continued 33. Retained earnings Beginning of year Profit for the year Ordinary dividend paid Transfer from special reserve Share based payment - deferred tax (charge) / credit End of year 34. Minority interest Beginning of year Share of (loss) / profit after taxation Share of items taken directly to equity Exchange translation differences Acquisition of PT Putra Bongan Jaya (5 per cent minority) End of year 35. Reconciliation of operating profit to operating cash flows Operating profit Depreciation of property, plant and equipment Decrease / (increase) in fair value of agricultural produce inventory Amortisation of prepaid operating lease rentals Amortisation of sterling and US dollar note issue expenses Biological loss / (gain) Loss on disposal of property, plant and equipment Operating cash flows before movements in working capital Increase in inventories (excluding fair value movements) (Increase) / decrease in receivables Increase / (decrease) in payables Exchange translation differences Cash generated by operations Taxes paid Interest paid Net cash from operating activities 2008 $’000 89,492 23,833 (1,498) – (1,444) 110,383 2008 $’000 877 (420) (89) 40 172 580 2008 $’000 40,563 2,420 4,214 57 287 2,660 2 50,203 (5,091) (581) 5,329 1,036 50,896 (13,122) (5,474) 32,300 2007 $’000 57,679 29,453 (1,279) 3,254 385 89,492 2007 $’000 600 278 – (1) – 877 2007 $’000 49,386 1,846 (5,578) 144 242 (8,030) 6 38,016 (2,555) 1,283 (583) (1,330) 34,831 (3,165) (3,490) 28,176 Additions to property, plant and equipment during the year amounting to $nil (2007: $171,000) were financed by new finance leases. 94 36. Movement in net borrowings Change in net borrowings resulting from cash flows: Increase / (decrease) in cash and cash equivalents Net decrease in borrowings Amortisation of US dollar notes issue expenses Issue of sterling notes less amortised expenses Lease repayments New leases Currency translation differences Net borrowings at beginning of year Net borrowings at end of year 37. Pensions 2008 $’000 3,930 3,000 6,930 (94) (27,073) 90 – (20,147) 9,607 (52,041) (62,581) 2007 $’000 (3,601) 24,833 21,232 (94) (13,587) 268 (171) 7,648 843 (60,532) (52,041) The company is the principal employer of the R.E.A. Pension Scheme (the “Scheme”) and a subsidiary company is a participating employer. The Scheme is a multi-employer contributory defined benefit scheme with assets held in a trustee-administered fund, which has participating employers outside the group. The Scheme is closed to new members. As the Scheme is a multi-employer scheme, in which the employer is unable to identify its share of the underlying assets and liabilities (because there is no segregation of the assets) and does not prepare valuations on an IAS 19 basis, the group accounts for the Scheme as if it were a defined contribution scheme. A non-IAS 19 valuation of the Scheme was last prepared, using the attained age method, as at 31 December 2005. This method was adopted in the previous valuation, as at 1 January 2003, as this was considered the appropriate method of calculating future service benefits as the Scheme is closed to new members. At 31 December 2005 the Scheme showed an overall shortfall in assets (deficit), when measured against the Scheme’s technical provisions, of £3,549,000. The technical provisions were calculated using assumptions of an annual investment return of 6.1 per cent pre-retirement and 4.7 per cent post-retirement, an annual increase in pensionable salaries of 3.75 per cent and an annual increase in present and future pensions of 2.75 per cent in respect of accruals to 31 December 2005 and 2.5 per cent thereafter. The rate of increase in the retail price index was assumed to be 2.75 per cent. It was further assumed that both non-retired and retired members’ mortality would reflect PA92 tables with short cohort improvements and that members would take the maximum cash sums permitted on retirement from April 2006. Had the scheme been valued at 31 December 2005 using the projected unit method and the same assumptions, the overall deficit would have been similar. The Scheme has agreed a statement of funding principles with the principal employer and has also agreed a schedule of contributions with the principal and participating employers covering normal contributions which are payable at a rate calculated to cover future service benefits under the Scheme. The Scheme has further agreed a recovery plan with the employers which sets out the basis for the recovery of the deficit shown by the 31 December 2005 valuation through the payment of quarterly additional contributions over the period from 1 January 2007 to 31 December 2015, after taking account of the additional contributions paid in 2006 under the 1 January 2003 valuation. 95 Notes to the consolidated financial statements continued 37. Pensions - continued The normal contributions paid by the group in 2008 were £67,000 - $123,000 (2007: £63,000 - $128,000) and represented 24.9 per cent (2007: 24.9 per cent) of pensionable salaries. For 2009, the contribution rate will remain at 24.9 per cent. The additional contribution applicable to the group for 2008 was £212,000 - $390,000 (2007: £206,000 - $414,000) and for 2009 the additional contribution will rise to £218,000 - $314,000. The total additional contributions for the period from 2009 to 2015 are £1,438,000 - $2,071,000. A liability of £1,399,000 - $2,015,000 (2007: £1,546,000 - $3,077,000) for these additional contributions adjusted for the time value of money has been recognised under retirement benefit obligations (see note 28) with an equal charge to income. The next actuarial valuation which is to be made as at 31 December 2008 has not yet been prepared and the assumptions to be applied to the valuation have yet to be agreed. It is proposed to apply members’ mortality based on PNXA00 and the investment return will be based on current market rates. Principally as a result of a decline in the value of listed equity investments in the last quarter of 2008, the market value of the assets held by the Scheme at 31 December 2008 is likely to have fallen short of the value that would have been expected at that date by the 31 December 2005 valuation to an extent that may increase the deficit to be funded by the group by £1.3 million - $1.9 million but as the outcome of the 31 December 2008 valuation is not known, no further provision has been made for additional contributions in respect of any increase in the deficit. The company has a contingent liability for additional contributions payable by other (non-group) employers in the Scheme; such liability will only arise if other (non-group) employers do not pay their contributions. There is no expectation of this at the present time, and, therefore, no provision has been made. 38. Related party transactions Transactions between the company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the company and its subsidiaries are dealt with in the company’s individual financial statements. The remuneration of the directors, who are the key management personnel of the group, is set out below in aggregate for each of the categories specified in IAS 24 “Related party disclosures”. Further information about the remuneration of, and fees paid in respect of services provided by, individual directors is provided in the audited part of the “Directors’ remuneration report”. 2008 $’000 941 94 – – – 1,035 2007 $’000 1,083 98 – – – 1,181 2008 Closing 2008 Average 2007 Closing 2007 Average 10,950 1.44 9,757 1.84 9,419 1.99 9,166 2.01 Short term benefits Post employment benefits Other long term benefits Termination benefits Share based payments 39. Rates of exchange Indonesia rupiah to US dollar US dollar to pound sterling 96 40. Events after the reporting period An interim dividend of 1.5p per ordinary share in lieu of final in respect of the year ended 31 December 2008 was paid on 30 January 2009. In accordance with IAS10 “Events after the reporting period” this dividend has not been included in these financial statements. As described in note 22, PT REA Kaltim Plantations has concluded a new agreement with its bankers. 41. Contingent liabilities As disclosed in note 37, the company has a contingent liability for additional contributions payable by other (non-group) employers in the R.E.A. Pension Scheme; such liability will only arise if other (non-group) employers do not pay their contributions. There is no expectation of this at the present time, and, therefore, no provision has been made. In addition, as also disclosed in note 37, the company has a potential exposure to any increase in deficit which may arise as a result of the forthcoming actuarial valuation of the R.E.A. Pension Scheme as at 31 December 2008 and which the group may be required to fund to an extent. 97 Auditors’ report (company) Independent auditors’ report to the members of R.E.A. Holdings plc regulatory requirements and International Standards on Auditing (UK and Ireland). We have audited the parent company financial We report to you our opinion as to whether the parent statements of R.E.A. Holdings plc for the year ended 31 company financial statements give a true and fair view December 2008 which comprise the balance sheet, the and whether the parent company financial statements movement in total shareholders’ funds, the statement of have been properly prepared in accordance with the total recognised gains and losses, the accounting Companies Act 1985. We also report to you whether in policies and the related notes (i) to (xiv). These parent our opinion the directors' report is consistent with the company financial statements have been prepared under parent company financial statements. The information the accounting policies set out therein. given in the directors' report includes that specific information presented in the review of the group that is We have reported separately on the group financial cross referred from the principal activities and business statements of R.E.A. Holdings plc for the year ended 31 review section of the directors' report. December 2008 and on the information in the directors' remuneration report that is described as having been In addition we report to you if, in our opinion, the audited. company has not kept proper accounting records, if we have not received all the information and explanations we This report is made solely to the company’s members, as require for our audit, or if information specified by law a body, in accordance with section 235 of the regarding directors' remuneration and other transactions Companies Act 1985. Our audit work has been is not disclosed. undertaken so that we might state to the company’s members those matters we are required to state to them We read the other information contained in the annual in an auditors’ report and for no other purpose. To the report and consider whether it is consistent with the fullest extent permitted by law, we do not accept or audited parent company financial statements. The other assume responsibility to anyone other than the company information comprises only the directors' report, the and the company’s members as a body, for our audit chairman's statement and the review of the group. We work, for this report, or for the opinions we have formed. consider the implications for our report if we become aware of any apparent misstatements or material Respective responsibilities of directors and auditors inconsistencies with the parent company financial statements. Our responsibilities do not extend to any The directors' responsibilities for preparing the annual further information outside the annual report. report and the parent company financial statements in accordance with applicable law and United Kingdom Basis of audit opinion Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are set out in the We conducted our audit in accordance with International statement of directors' responsibilities. Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, Our responsibility is to audit the parent company financial on a test basis, of evidence relevant to the amounts and statements in accordance with relevant legal and disclosures in the parent company financial statements. It 98 also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the parent company financial statements, and of whether the accounting policies are appropriate to the company's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the parent company financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the parent company financial statements. Opinion In our opinion: (cid:129) the parent company financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the company's affairs as at 31 December 2008; (cid:129) (cid:129) the parent company financial statements have been properly prepared in accordance with the Companies Act 1985; and the information given in the directors' report is consistent with the parent company financial statements. DELOITTE LLP Chartered Accountants and Registered Auditors London, United Kingdom 27 April 2009 99 Company balance sheet as at 31 December 2008 Fixed and non-current assets Investments Tangible fixed assets Deferred tax asset Current assets Debtors Cash Total current assets Creditors: amounts falling due within one year Net current assets Note (i) (ii) (vi) (iii) (iv) 2008 £’000 58,932 99 371 59,402 1,118 5,633 6,751 (1,213) 5,538 2007 £’000 47,596 112 2,390 50,098 842 11,419 12,261 (1,084) 11,177 Total assets less current liabilities 64,940 61,275 Creditors: amounts falling due after more than one year US dollar notes Provision for liabilities and charges Net assets (v) (vi) (20,576) (75) (14,767) (670) 44,289 45,838 Capital and reserves Share capital Share premium account Exchange reserve Profit and loss account Total shareholders’ funds (vii) (viii) (viii) (viii) 23,046 14,675 181 6,387 44,289 21,743 16,005 213 7,877 45,838 Approved by the board on 27 April 2009 and signed on behalf of the board. RICHARD M ROBINOW Chairman 100 Movement in total shareholders’ funds for the year ended 31 December 2008 Total recognised gains / (losses) for the year Dividends to preference shareholders Dividends to ordinary shareholders Issue of new ordinary shares by way of placings and open offer Issue of new preference shares by way of placings Issue costs of ordinary shares, preference shares and debt securities Shareholders' funds at beginning of year Shareholders' funds at end of year 2008 £’000 2007 £’000 575 (1,283) (814) – – (27) (1,549) 45,838 44,289 (472) (1,127) (637) 6,750 1,118 (266) 5,366 40,472 45,838 Statement of total recognised gains and losses for the year ended 31 December 2008 Profit / (loss) for the year Share based payment - deferred tax (charge) / credit Currency translation loss taken direct to reserves 2008 £’000 1,392 (785) (32) 575 2007 £’000 (340) 191 (323) (472) 101 Accounting policies (company) Accounting convention Taxation Separate financial statements of R.E.A. Holdings plc (the “company”) are required by the Companies Act 1985; as permitted by that act they have been prepared in accordance with generally accepted accounting practice in the United Kingdom (“UK GAAP”). The principal accounting policies have been applied consistently and are unchanged from the previous year. The accompanying financial statements have been prepared under the historical cost convention. By virtue of section 230 of the Companies Act 1985, the company is exempted from presenting a profit and loss account. Equally, no cash flow statement has been prepared, as permitted by FRS 1 (revised 1996) “Cash flow statements”. Current tax including UK corporation tax and foreign tax is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantially enacted by the balance sheet date. Deferred tax is calculated on the liability method. Deferred tax is provided on a non discounted basis on timing and other differences which are expected to reverse, at the rate of tax likely to be in force at the time of reversal. Deferred tax is not provided on timing differences which, in the opinion of the directors, will probably not reverse. Deferred tax assets are only recognised to the extent that it is regarded as more likely than not that there will be suitable taxable profits from which the future reversal of timing differences can be deducted. Investments Tangible fixed assets The company’s investments in its subsidiaries are stated at cost less any provision for impairment. Impairment provisions are charged to the profit and loss account. Dividends declared by subsidiaries are credited to the company's profit and loss account. Foreign exchange Tangible fixed assets are stated at cost, net of depreciation and provision for impairment. Depreciation is provided on all tangible fixed assets at rates calculated to write off the cost, less estimated residual value, of each asset on a straight line basis over its expected useful life as follows: land and buildings (short leasehold) - 10 years, and fixtures and fittings - 5 years. Transactions in foreign currencies are recorded at the rates of exchange at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are reported at the rates of exchange prevailing at that date. Differences arising on the translation of foreign currency borrowings have been offset against those arising on an equivalent amount of investment in the equity of, or loans to, foreign subsidiaries and taken to reserves, net of any related taxation. All other exchange differences are included in the profit and loss account. 102 Notes to the company financial statements (i) Investments Shares in subsidiaries Loans to subsidiaries Beginning of year Additions to shares in and loans to subsidiaries Exchange translation difference arising on foreign currency hedge End of year 2008 £’000 27,876 31,056 58,932 2007 £’000 24,139 23,457 47,596 £’000 47,596 7,689 3,647 58,932 The principal subsidiaries at the year end, together with their countries of incorporation, are listed below. Details of dormant subsidiaries and UK subsidiary sub-holding companies are not shown. Subsidiary Activity Makassar Investments Limited (Jersey) PT Cipta Davia Mandiri (Indonesia) PT Kartanegara Kumala Sakti (Indonesia) PT Putra Bongan Jaya (Indonesia) PT REA Kaltim Plantations (Indonesia) PT Sasana Yudha Bhakti (Indonesia) REA Finance B.V. (Netherlands) R.E.A. Services Limited (England and Wales) Sub holding company Plantation agriculture Plantation agriculture Plantation agriculture Plantation agriculture Plantation agriculture Group finance Group services Class of shares Percentage owned Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 100 95 95 95 100 95 100 100 The entire shareholdings in Makassar Investments Limited, R.E.A. Services Limited and REA Finance B.V. are held direct by the company. All other shareholdings are held by subsidiaries. (ii) Tangible fixed assets Cost: Beginning of year Additions End of year Accumulated depreciation: Beginning of year Charge for year End of year Carrying amount: End of year Beginning of year Land and buildings Fixtures and fittings £‘000 (short leasehold) £’000 85 4 89 9 8 17 72 76 45 – 45 9 9 18 27 36 Total £‘000 130 4 134 18 17 35 99 112 103 Notes to the company financial statements continued (iii) Debtors Trade debtors Amount owing by group undertakings Other debtors Prepayments and accrued income (iv) Creditors: amounts falling due within one year Amount owing to group undertakings Other creditors Accruals (v) Creditors: amounts falling due after more than one year US dollar notes: Amounts due between two and five years Amounts due after five years 2008 £’000 11 1,011 35 61 1,118 2008 £’000 810 62 341 1,213 2008 £’000 13,717 6,859 20,576 2007 £’000 5 761 22 54 842 2007 £’000 285 34 765 1,084 2007 £’000 4,917 9,850 14,767 The US dollar notes comprise US$30 million (2007: US$30 million) nominal of 7.5 per cent dollar notes 2012/14 issued by the company (“US dollar notes”) and are stated net of the unamortised balance of the issuance costs. Unless previously redeemed or purchased and cancelled by the company, the notes are redeemable in three equal annual instalments commencing on 31 December 2012. As disclosed in note (ix), the company’s US dollar notes are designated as a hedge against the exchange translation exposure in respect of an equivalent amount of the company’s investment in subsidiaries whose functional currency is the US dollar. Pursuant to a supplemental rights agreement dated 23 January 2006 between the company and holders of $19 million nominal of US dollar notes, those holders have the right, exercisable under certain limited circumstances, to require the company to purchase the US dollar notes held by them at a price equal to the aggregate of the nominal amount of the notes being purchased and any interest accrued thereon up to the date of completion of the purchase. Such circumstances include a material disposal of assets by the group or a person or group of persons acting in concert obtaining the right to exercise more than 50 per cent of the votes that may generally be cast at a general meeting of the company. (vi) Deferred tax asset and provision for liabilities and charges Deferred tax: Beginning of year Net amount debited / (credited) to profit and loss account Net amount debited to reserves End of year 2008 £’000 (1,720) 652 772 (296) 2007 £’000 (1,580) (350) 210 (1,720) 104 (vi) Deferred tax asset and provision for liabilities and charges - continued Included in provisions for liabilities and charges Included in non-current assets Net deferred tax asset at end of year The provision for deferred tax is made up as follows: Timing differences Tax losses available Undiscounted deferred tax (vii) Share capital Authorised: 17,500,000 - 9 per cent cumulative preference shares of £1 each (2007: 14,500,000) 41,000,000 - ordinary shares of 25p each (2007: 41,000,000) Called-up and fully paid: 14,902,954 - 9 per cent cumulative preference shares of £1 each (2007: 13,600,000) 32,573,856 - ordinary shares of 25p each (2007: 32,573,856) 2008 £’000 75 (371) (296) 75 (371) (296) 2008 £’000 17,500 10,250 27,750 14,903 8,143 23,046 2007 £’000 670 (2,390) (1,720) 670 (2,390) (1,720) 2007 £’000 14,500 10,250 24,750 13,600 8,143 21,743 The preference shares entitle the holders thereof to payment, out of the profits of the company available for distribution and resolved to be distributed, of a fixed cumulative preferential dividend of 9 per cent per annum on the nominal value of the shares and to repayment, on a winding up of the company, of the amount paid up on the preference shares and any arrears of the fixed dividend in priority to any distribution on the ordinary shares. Subject to the rights of the holders of preference shares, holders of ordinary shares are entitled to share equally with each other in any dividend paid on the ordinary share capital and, on a winding up of the company, in any surplus assets available for distribution among the members. Changes in share capital: (cid:129) (cid:129) on 6 June 2008, the authorised share capital was increased from £24,750,000 to £27,750,000 by the creation of an additional 3,000,000 9 per cent cumulative preference shares. on 24 September 2008, 1,302,954 9 per cent cumulative preference shares were issued, credited as fully paid, at par to ordinary shareholders by way of capitalisation of share premium account. Details of a director’s share options are disclosed in the audited part of the directors’ remuneration report, as required by FRS 20 “Share based payments”. 105 Notes to the company financial statements continued (viii) Movement in reserves Beginning of year Dividends to preference shareholders Dividends to ordinary shareholders Capitalisation issue of new preference shares Expenses of issue Retained profit for the year End of year Share premium account £’000 16,005 – – (1,303) (27) – 14,675 Exchange reserve £’000 213 – – – – (32) 181 Profit and loss account £’000 7,877 (1,283) (814) – – 607 6,387 As permitted by section 230 of the Companies Act 1985, a separate profit and loss account dealing with the results of the company has not been presented. The profit before dividends recognised in the company's profit and loss account is £1,392,000 (2007: loss £340,000). (ix) Financial instruments and risks Financial instruments The company’s financial instruments comprise borrowings, cash and liquid resources and in addition certain debtors and trade creditors that arise from its operations. The main purpose of these financial instruments is to raise finance for, and facilitate the conduct of, the company’s operations. The table below provides an analysis of the book and fair values of financial instruments excluding debtors and creditors at balance sheet date. Cash and deposits US dollar notes Net debt 2008 Book value £’000 5,633 (20,576) 2008 Fair value £’000 5,633 (15,104) 2007 Book value £’000 11,419 (14,767) 2007 Fair value £’000 11,419 (14,095) (14,943) (9,471) (3,348) (2,676) The fair value of the US dollar notes reflects the last price at which transactions in those notes were effected prior to the year end. Risks The main risks arising from the company’s financial instruments are liquidity risk, interest rate risk and foreign currency risk. The board reviews and agrees policies for managing each of these risks. These policies have remained unchanged since the beginning of the year. It is and was throughout the year, the company’s policy that no trading in financial instruments be undertaken. 106 (ix) Financial instruments and risks - continued The company finances its operations through a mixture of share capital, retained profits, borrowings in US dollars at fixed rates and credit from suppliers. At 31 December 2008, the company had outstanding US$30 million of 7.5 per cent dollar notes 2012/14. In accordance with a decision of the board of the company at the time of issue of the first tranche of these notes, such notes are treated as a currency hedge against the company’s long term loans to subsidiaries (which are denominated in US dollars) and the additional investment in Makassar Investments Limited that was acquired during 2006 for a consideration of US$19 million. The company’s policy towards currency risk is not to cover the long-term exposure in respect of its investment in subsidiaries (whose operations are mainly conducted in US dollars) to the extent that this exposure relates to the component of investment that is financed with sterling denominated equity. A limited degree of interest rate risk is accepted. A substantial proportion of the company’s financial instruments at 31 December 2008 carried interest at fixed rates and on the basis of the company’s analysis, it is estimated that a rise of one percentage point in all interest rates would give rise to an increase of approximately £52,000 (2007: £115,000) in the company’s interest revenues in its profit and loss account. (x) Pensions The company is the principal employer of the R.E.A. Pension Scheme (the “Scheme”) and a subsidiary company is a participating employer. The company has no active members of the Scheme, which is a multi-employer contributory defined benefit scheme with assets held in a trustee-administered fund and has participating employers outside the group. The Scheme is closed to new members. As the Scheme is a multi-employer scheme, in which the participating employer is unable to identify its share of the underlying assets and liabilities (because there is no segregation of the assets), pension costs are being accounted for as if the Scheme were a defined contribution scheme. The subsidiary company that is a participating employer and other participating employers in the Scheme have entered into an agreement with the Scheme to make special contributions to the Scheme to cover any deficit. The company made no payments to the Scheme in 2008 (2007: nil). The company has a contingent liability for special contributions payable by other participating employers in the Scheme; such liability will only arise if such other participating employers do not pay their contributions. There is no expectation of this at the present time, and, therefore, no provision has been made. A non-FRS 17 valuation of the scheme was last prepared, using the attained age method, as at 31 December 2005. This was considered to be the most appropriate method of calculating contributions to cover future service benefits at 31 December 2005. Had the scheme been valued at 31 December 2005 using the projected unit method and the same other assumptions, the overall deficit would have been similar. The principal actuarial assumptions adopted in this valuation were annual pre-retirement and post-retirement returns of respectively 6.1 per cent and 4.7 per cent, an annual increase in pensionable salaries of 3.75 per cent and an annual increase in present and future pensions and in the retail price index of 2.75 per cent. The overall valuation deficit applicable to all participants was £3,549,000 which is being funded by special contributions by participating employers over the period to 31 December 2015. The next actuarial valuation which is to be made as at 31 December 2008 has not yet been prepared and the assumptions to be applied to the valuation have yet to be agreed. It is proposed to apply members’ mortality based on PNXA00 and the investment return will be based on current market rates. Principally as a result of a decline in the value of listed equity investments in the last quarter of 2008, the market value of the assets held by the Scheme at 31 December 2008 is likely to have fallen short of the value that would have been expected at that date by the 31 December 2005 valuation to an extent that may increase the scheme deficit by £2.6 million. It is not known what the overall outcome of the 31 December 2008 valuation will be. 107 Notes to the company financial statements continued (xi) Related party transactions Aggregate directors’ remuneration: Salaries and fees Benefits Annual bonus Gains on exercise of share options 2008 £’000 2007 £’000 467 42 – – 509 466 33 40 – 539 During 2008 and 2007, there were service arrangements with companies connected with certain directors as detailed under “Directors’ remuneration” in the “Directors’ remuneration report”, the costs of which are included in the table above. (xii) Rates of exchange See note 39 to the consolidated financial statements. (xiii) Commitments The company has guaranteed a principal obligation of £8,970,000 (2007: £7,747,000) in respect of bank loans to PT REA Kaltim Plantations, a principal obligation of £nil (2007: £251,000) in respect of bank loans to PT Sasana Yudha Bhakti and a principal obligation of £37 million (2007: £22 million) relating to the outstanding 9.5 per cent guaranteed sterling notes 2015/17 issued by REA Finance B.V.. In each case, the company has also guaranteed all interest payments arising. The company’s contingent liability for pension contributions is disclosed in note (x) above. (xiv) Post balance sheet events An interim dividend of 1.5p per ordinary share in lieu of final in respect of the year ended 31 December 2008 was paid on 30 January 2009. In accordance with FRS 21 “Events after the Balance Sheet Date”, this dividend has not been included in these financial statements. 108 Notice of annual general meeting This notice is important and requires your immediate attention. If you are in any doubt as to what action to take, you should consult an independent professional adviser authorised under the Financial Services and Markets Act 2000 if you are resident in the United Kingdom or, if you are not so resident, another appropriately authorised independent adviser. If you have sold or otherwise transferred all your ordinary shares in R.E.A. Holdings plc, please forward this document and the accompanying form of proxy to the person through whom the sale or transfer was effected, for transmission to the purchaser or transferee. Notice is hereby given that the forty ninth annual general meeting of the company will be held at the London office of Ashurst LLP at Broadwalk House, 5 Appold Street, London EC2A 2HA on 4 June 2009 at 10.00 am to consider and, if thought fit, to pass the following resolutions: As ordinary business (resolutions 1 to 13 (inclusive) of which will be proposed as ordinary resolutions and resolution 14 of which will be proposed as a special resolution): 1 To receive the company’s annual accounts for the year ended 31 December 2008, together with the directors’ report, the directors’ remuneration report and the auditors’ report. 2 To approve the directors’ remuneration report for the year ended 31 December 2008. 3 To re-elect as a director Mr R M Robinow, who, having been a non-executive director for more than nine years, retires as required by the Combined Code on Corporate Governance and submits himself for re-election. 4 To re-elect as a director Mr J C Oakley, who, having been a director at each of the two preceding annual general meetings and who was not re-appointed by the company in general meeting at or since either of such meetings, retires in accordance with the articles of association and submits himself for re-election. 5 To re-elect as a director Mr D J Blackett, who was appointed as a director since the last annual general meeting and submits himself for re-election. 6 To re-elect as a director Mr J M Green-Armytage, who, having been a non-executive director for more than nine years, retires as required by the Combined Code on Corporate Governance and submits himself for re-election. 7 To re-elect as a director Mr J R M Keatley, who, having been a non-executive director for more than nine years, retires as required by the Combined Code on Corporate Governance and submits himself for re-election. 8 To re-elect as a director Mr L E C Letts, who, having been a non-executive director for more than nine years, retires as required by the Combined Code on Corporate Governance and submits himself for re-election. 9 To re-elect as a director Mr C L Lim, who, having been a director at each of the two preceding annual general meetings and who was not re-appointed by the company in general meeting at or since either of such meetings, retires in accordance with the articles of association and submits himself for re-election. 10 To re-appoint Deloitte LLP, chartered accountants, as auditors of the company to hold office until the conclusion of the next general meeting at which accounts are laid before the company. 11 To authorise the directors to fix the remuneration of the auditors. 12 That the directors of the company be generally and unconditionally authorised for the purposes of section 80 of the Companies Act 1985 to exercise all the powers of the company to allot relevant securities (as defined in sub- section (2) of section 80 of the Companies Act 1985), other than 9 per cent cumulative preference shares, up to an aggregate nominal amount of £2,106,536, such authority to expire at the conclusion of the annual general meeting to be held in 2010 (or on 31 August 2010, whichever is the earlier), save that the company may before such expiry make an offer or agreement which would or might require relevant securities to be allotted after such expiry. 13 That the directors of the company be and are hereby further generally and unconditionally authorised in accordance with section 80 of the Companies Act 1985 to exercise all the powers of the company to allot 9 per cent cumulative preference shares up to an aggregate nominal amount of £2,597,046, such authority to expire at the conclusion of the annual general meeting to be held in 2010 (or on 31 August 2010, whichever is the earlier), save that the company may 109 Notice of annual general meeting continued before such expiry make an offer or agreement which would or might require 9 per cent cumulative preference shares to be allotted after such expiry. 15 That a general meeting other than an annual general meeting may be called on not less than 14 clear days’ notice. 14 That, subject to the passing of resolution 12 set out in the notice of annual general meeting of the company convened for 4 June 2009, By order of the board R.E.A. SERVICES LIMITED Secretary 27 April 2009 (i) the directors of the company be and are hereby empowered in accordance with section 95 of the Companies Act 1985 (I) to allot equity securities (as defined in sub-section (2) of section 94 of the Companies Act 1985) and (II) to sell relevant shares (as defined in sub-section (5) of section 94 of the Companies Act 1985) held by the company as treasury shares for cash pursuant to the authority conferred on them by such resolution 12 as if sub-section (1) of section 89 of the Companies Act 1985 did not apply to the allotment or sale, such power to expire at the conclusion of the annual general meeting of the company to be held in 2010 (or on 31 August 2010, whichever is the earlier) provided that this power is limited to: (a) the allotment of equity securities in connection with or pursuant to an offer or invitation by way of a rights issue in favour of holders of ordinary shares in proportion (as nearly as practicable) to the respective number of ordinary shares held by them on the record date for such allotment but subject to such exclusions or other arrangements as the directors may consider necessary or appropriate to deal with fractional entitlements, treasury shares, record dates or legal, regulatory or practical difficulties which may arise under the laws of, or the requirements of, any regulatory body or stock exchange in any territory; and (b) the allotment (otherwise than pursuant to (a) above) of equity securities up to an aggregate nominal value of £407,173; and (ii) the power conferred on the directors by paragraph (i) above includes the power to make an offer or agreement which would or might require equity securities to be allotted after the power has expired. Notes The sections of the accompanying “Directors’ report” entitled “Power to issue share capital”, “General meeting notice period” and “Recommendation” contain information regarding, and recommendations by the board of the company as to voting on, resolutions 12 to 15 set out in the above notice. A member of the company entitled to attend and vote at the meeting may appoint one or more proxies to exercise all or any of his or her rights to attend, speak and vote at the meeting provided that each proxy is appointed to exercise the rights attaching to (a) different share(s) held by the member. A form of proxy is enclosed with this notice. A proxy need not be a member of the company. The appointment of a proxy will not prevent a member from attending and voting at the meeting should he or she wish to do so. A member wishing to appoint more than one proxy may photocopy the accompanying form of proxy. One form must be completed for each proxy appointed and each such form must show the name of the proxy appointed, the number of shares the subject of the appointment and whether multiple appointments are being made. The aggregate number of shares in relation to which any member appoints proxies may not exceed the number of shares held by that member. All forms must be signed and should be returned together in the same envelope. In order to be valid, a form of proxy (and any power of attorney, or other authority under which it is signed, or a notarially certified copy of such power or authority) must be deposited at the offices of the company’s registrars, Capita Registrars (Proxies), The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU by no later than 10.00 am on 2 June 2009 or in the case of CREST members lodged electronically in accordance with the procedures set out below. As special business (to be proposed as a special resolution): To appoint a proxy or to give or amend an instruction to a previously appointed proxy via the CREST system, the appropriate CREST 110 message (a “CREST Proxy Instruction”) must be received by the representatives will give voting directions to that designated company’s registrars (ID: RA10) by 10.00 am on 2 June 2009. For corporate representative. the purpose of this deadline, the time of receipt will be taken to be the time (as determined by the time stamp applied to the message The company, pursuant to Regulation 41(1) of the Uncertificated by the CREST applications host) from which the company’s Securities Regulations 2001, specifies that in relation to securities registrars are able to retrieve the message. CREST personal held in dematerialised form only those holders of shares registered members or other CREST sponsored members, and those CREST in the register of members of the company at 6.00 pm on 2 June members that have appointed voting service provider(s), should 2009 shall be entitled to attend and vote at the meeting in respect contact their CREST sponsor or voting service provider(s) for of the number of shares registered in their name at that time. assistance with appointing proxies via CREST. For further Changes to entries on the register of members after 6.00 pm on 2 information on CREST procedures, limitations and system timings June 2009 shall be disregarded in determining the rights of any referenc should be made to the CREST manual. CREST members, person to attend and vote at the meeting. and where applicable their CREST sponsors or voting service providers, should note that CREST does not make available special Copies of letters setting out the terms and conditions of procedures in CREST for a particular message. Normal system appointment of non-executive directors are available for inspection timings and limitations will therefore apply in relation to the input of at the company's registered office during normal business hours CREST proxy instructions. The company may treat as invalid a and will be available for inspection at the place of the annual CREST proxy instruction in the circumstances set out in Regulation general meeting for at least 15 minutes prior to and during the 35(5) (a) of the Uncertified Securities Regulations 2001. meeting. The right to appoint a proxy does not apply to persons whose As at the date of this notice, the issued share capital of the shares are held on their behalf by another person and who have company comprises 32,573,856 ordinary shares and 14,902,954 been nominated to receive communications from the company in 9 per cent cumulative preference shares. Only holders of ordinary accordance with section 146 of the Companies Act 2006 shares (and their proxies) are entitled to attend and vote at the (“nominated persons”). Nominated persons may have a right under annual general meeting. Accordingly, the voting rights attaching to an agreement with the registered shareholder who holds the shares of the company exercisable in respect of each of the shares on their behalf to be appointed (or to have someone else resolutions to be proposed at the annual general meeting total appointed) as a proxy. Alternatively, if nominated persons do not 32,573,856 as at the date of this notice. have such a right, or do not wish to exercise it, they may have the right under such an agreement to give instructions to the person holding the shares as to the exercise of voting rights. In order to facilitate voting by corporate representatives at the meeting, arrangements will be put in place at the meeting so that: (i) if a corporate shareholder has appointed the chairman of the meeting as its corporate representative with instructions to vote on a poll in accordance with the directions of all of the other corporate representatives for that shareholder at the meeting, then on a poll those corporate representatives will give voting directions to the chairman and the chairman will vote (or withhold a vote) as corporate representative in accordance with those directions; and (ii) if more than one corporate representative for the same corporate shareholder attends the meeting but the corporate shareholder has not appointed the chairman of the meeting as its corporate representative, a designated corporate representative will be nominated, from those corporate representatives who attend, who will vote on a poll and the other corporate 111 

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