R.E.A. HOLDINGS PLC - ANNUAL REPORT 2 0 0 9 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 comprehensive income 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 15 51 53 60 66 71 72 73 75 76 77 77 78 79 85 109 111 112 112 113 114 121 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 2009 Revenue 2009 $’000 2008 $’000 Change % 78,885 79,630 - 1 Earnings before interest, tax, depreciation, amortisation and biological gain 1 41,290 45,700 - 10 Profit before tax Profit for the year 41,717 36,309 + 15 29,856 25,773 + 16 Profit attributable to ordinary shareholders 27,119 23,833 + 14 Cash generated by operations 2 38,829 50,896 - 24 Earnings per ordinary share (diluted) in US cents 81.4 71.5 + 14 Dividend per ordinary share in pence 3 4.0 3.0 + 33 Average exchange rates 2009 2008 2007 2006 2005 Indonesian rupiah to US dollar US dollar to pound sterling 10,356 1.56 9,757 1.84 9,166 2.01 9,129 1.86 9,756 1.82 1. See note 5 to consolidated financial statements 2. See note 35 to consolidated financial statements 3. Paid in respect of the year 4 Key statistics for the year ended 31 December 2009 Allocated area - Hectares Mature oil palm Immature oil palm (prior years) Oil palm development (current year) 1 Planned oil palm development (succeeding year) 2 Reserve area 3 Reapplied for area 4 Total 2009 2008 2007 2006 2005 18,736 16,487 8,171 4,083 30,990 4,000 59,828 20,000 9,032 2,781 28,300 – 86,541 – 13,080 11,814 1,514 26,408 11,500 84,018 – 13,080 13,085 5,250 6,564 24,894 6,500 34,022 – 3,000 2,250 18,335 6,000 41,801 – 114,818 114,841 121,926 65,416 66,136 Production - Tonnes Oil palm fresh fruit bunch crop - group 490,178 450,906 393,217 332,704 312,676 Oil palm fresh fruit bunch crop - external 13,248 6,460 2,767 1,372 679 503,426 457,366 395,984 334,076 313,355 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 118,357 105,597 23,740 20,846 93,229 15,660 142,097 126,443 108,889 77,597 12,698 90,295 73,262 12,647 85,909 23.5% 4.7% 23.1% 4.6% 23.5% 4.0% 23.2% 3.8% 23.4% 4.0% 26.2 27.3 29.6 25.5 23.8 6.2 1.2 7.4 6.3 1.2 7.5 7.1 1.2 8.3 5.9 1.0 6.9 5.6 1.0 6.6 1. Includes 1,393 hectares in 2009 and 889 hectares in 2008 also included as oil palm development in the preceding year. 2. Includes 5,000 hectares in 2007 outstanding from that year’s planting programme. 3. Includes conservation areas, roads and other infrastructure and areas available for planting and under negotiation. 4. Prior to 2009 included under reserve area. 5 Crude palm oil monthly average price e n n o t / $ S U 1400 1200 1000 800 600 400 200 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Share performance graph REA Ordinary FT All Share 2005 2006 2007 2008 2009 300 200 100 0 x e d n I 6 Chairman’s statement Presentation of annual report extension planting programme and the resultant increase in planted hectarage during 2009. The “Review of the group” section of this annual report provides detailed information intended to assist An apparently marked increase in administrative shareholders in understanding the group's business and expenses from $3.5 million in 2008 to $7.2 million in strategic objectives. This “Chairman's statement” 2009 was almost entirely accounted for by a reduction essentially represents a synopsis of the more significant from 2008 to 2009 in net exchange gains of $2.1 million, matters noted in that review. Results a swing of $1.0 million on movements on accruals in respect of the company's prospective liability for employer national insurance contributions on exercise of a director's option (which reflected movements in the The group continues to report in accordance with market price of the company's ordinary shares) and a International Financial Reporting Standards (“IFRS”) and swing of $0.8 million on movements in the accrued to present its consolidated financial statements in US liability for pension funding which was adjusted during dollars. 2009 to reflect the latest triennial actuarial valuation of the group's pension scheme. With increased sales volumes and despite lower selling prices, revenue for 2009 at $78.9 million was only At the after tax level, profit for the year for 2009 was marginally below that of 2008 ($79.6 million). The $29.9 million against $25.8 million in 2008 while profit increased volumes coupled with inflation did, however, attributable to ordinary shareholders was $27.1 million mean, that cost of sales for 2009 at $34.0 million was against $23.8 million. Fully diluted earnings per share higher than the comparable figure for 2008 of $27.7 amounted to US 81.4 cents (2008 - US 71.5 cents). million. Other significant movements in the components of operating profit between 2008 and 2009 comprised a Agricultural operations positive swing in the aggregate IFRS fair value adjustments of $18.2 million (reflecting gains of $11.3 Operational matters million in 2009 against losses of $6.9 million in 2008) and an increase in administrative expenses ($7.2 million The crop out-turn for 2009 amounted to 490,178 tonnes in 2009 against $3.5 million in 2008). of oil palm fresh fruit bunches (“FFB”). This was slightly ahead of the budgeted crop of 486,000 tonnes and an The 2009 gains on IFRS fair value adjustments increase of 8.6 per cent on the FFB crop for 2008 of comprised a gain of $1.5 million on the revaluation of 450,906 tonnes. External purchases of FFB from agricultural produce inventory and a gain of $9.8 million smallholders in 2009 totalled 13,248 tonnes (2008: on the revaluation of biological assets (2008: losses of, 6,460 tonnes). respectively, $4.2 million and $2.7 million). The gain on revaluation of agricultural produce inventory reflected a Rainfall across the group's estates averaged 3,123 mm higher CPO price at 31 December 2009 than at 31 for 2009, compared with 3,504 mm for the previous year. December 2008 partly offset by a reduction in inventory During 2009, there was an extended drier period volumes, while the gain on revaluation of biological assets between August and October, probably reflecting the resulted mainly from the reinstatement of the group's reported El Nino effect. Although this was of some 7 Chairman’s statement continued concern to the group, an analysis of the rainfall received Steps were taken during 2009 to extend the group’s use during this drier period suggests that the rainfall was just of natural fertilisers by the use of composted empty fruit sufficient to avoid deficits in the moisture required by the bunches and oil mill effluent, both being residues of the group's palms for optimal development. If correct, this CPO production process. The group has always recycled would mean that the reduced levels of rainfall between empty fruit bunches and oil mill effluent but, prior to the August and October should not have a negative impact on introduction of composting, these residues were cropping in 2010. distributed in the oil palm areas without processing (apart from treatment of effluent in effluent ponds to reduce its Processing of the group's own FFB production and the biological and chemical oxygen demand). Under the new externally purchased FFB, together totalling 503,426 composting process, the residues (in the case of effluent, tonnes (2008: 457,366 tonnes), produced 118,357 again after treatment in effluent ponds) are delivered to a tonnes of CPO (2008: 105,957 tonnes) and 23,740 composting contractor at sites adjacent to the group’s oil tonnes of palm kernels (2008: 20,846 tonnes) reflecting mills. The contractor takes title to the residues, manages extraction rates of 23.51 per cent for CPO (2008: 23.17 the composting process (which takes 45 days and per cent) and 4.72 per cent for kernels (2008: 4.56 per involves seeding the residues with an accelerant of micro- cent). Production of crude palm kernel oil amounted to organisms (which the contractor supplies), mixing the 9,636 tonnes (2008: 8,190 tonnes) representing an residues and macerating the mix to encourage extraction rate of 40.04 per cent (2008: 40.11 per cent). biodegradation) and then sells back the resultant compost to the group at an agreed price with a Some problems were experienced during 2009 with the guaranteed nutrient content. The composted residues group's older oil mill. Deterioration in one of the two provide greater substitution for inorganic fertilisers than boilers reduced available power and this, combined with did the previous recycling of uncomposted residues and inefficiencies in other ageing mill machinery, made it the financial effect is a reduction in cost. difficult to operate the mill at the intended capacity of 80 tonnes per hour over any extended period. Steps have Land allocations and development been taken to address this problem. The deteriorating boiler will be replaced as soon as possible and the mill The group made good progress with its land titling during processing lines will be upgraded to provide greater 2009 and increased its overall area of fully titled resilience. The planned expansion of the group' second agricultural land to 52,029 hectares. Land allocations still newer mill from a capacity 60 tonnes per hour to a subject to titling comprise some 43,000 hectares. In capacity of 80 tonnes per hour is currently in hand. addition, the group continues to seek title to a 20,000 hectare land area as respects which the original allocation The upgrading of the older mill and the expansion of the has expired. newer mill should provide the group with sufficient capacity to meet the expected FFB processing The process of titling land allocations may be expected to requirements of 2010 and 2011. By 2012 the group will result in exclusion of areas the subject of conflicting land require a third mill. Work is already in hand on the claims and having special environmental value. For some planning of this third mill and it is expected that allocations the areas to be excluded may be quite construction of the mill will start during 2010. substantial. Moreover, not all of the areas in respect of which full titles are issued can be planted with oil palms. 8 Some fully titled land may be unsuitable for planting or Nevertheless, it does remain the case that achievement of subject to zoning or similar restrictions (such as areas this planting target is critically dependent upon land potentially available for mining), a proportion has to be set becoming available for development as needed. New aside for conservation and a further proportion is required regulations recently announced by the Ministry of for roads, buildings and other infrastructural facilities. Forestry mean that planting of the planned further 8,000 This means that the prospective maximum area that the hectares will require permits additional to those that have group could plant with oil palms on the land areas already been obtained. The directors have no reason to currently held or earmarked by it must be expected to be believe that such permits will not be forthcoming within considerably less than the gross hectarage that those the time frame in which they will be needed. areas comprise. Social responsibility Following the onset of the international financial crisis and the sharp falls in commodity prices that accompanied 2009 saw the establishment by the group of its first it, the directors decided in October 2008 to suspend all smallholder oil palm cooperative. Out of an initial gross new plantation development until the world financial area of 1,500 hectares provided by a cooperative of three outlook became clearer. With the recovery in CPO prices local villages, 1,300 hectares were cleared and a total of seen in the early months of 2009 and a seeming 770 hectares had been planted by year end. The balance improvement in the world economic outlook, it was of the 1,300 hectares cleared area will be planted during decided in April 2009 to resume development. As a result 2010. Financing for the scheme has been agreed with a of this decision, an area of 2,690 hectares was cleared local development bank in the form of a fifteen year loan and planted out or prepared for planting out during 2009. secured on the land and assets of the scheme and guaranteed by the group. It is expected that the loan will Reserve land held by the group only becomes available finance most of the initial development costs of the for development when the titling process has proceeded scheme but will be supplemented to the extent necessary to a point at which the group has been granted necessary by funds to be advanced by the group. The group plans development and land clearing licences and to initiate further cooperative schemes during 2010 on compensation agreements have been reached with local land areas totalling 4,500 hectares provided by villagers who have claims in respect of their previous use cooperatives formed by a number of other villages. It is of the land. In the past, delays in making available land intended that these schemes will be organised on a basis areas for development have been a serious impediment to similar to that adopted for the initial scheme. achievement of target extension planting programmes. The group therefore sought during the period that the Camera trapping and walking surveys within the group's development programme was temporarily suspended to conservation reserves and adjacent estate areas have take maximum advantage of the opportunity that this detected a number of orang-utans (estimated at between afforded to improve the pipeline of land areas immediately 11 and 15). At least two baby orang-utans are known to available for planting. have been born on the conservation reserves during 2009. The group's conservation department is In consequence, the group is now well placed to proceed monitoring the health of this promising orang-utan with its plans for planting in total a further 8,000 hectares population and will consider enrichment planting in the of oil palms over the two year period to the end of 2011. conservation reserves if it appears that the naturally available food resources need to be enhanced. 9 Chairman’s statement continued The group has now obtained ISO 14001 certification in the right to acquire the concession holding companies at respect of both of its oil mills, its kernel crushing plant and original cost as soon as Indonesian law allows this on a two of its estate units. It is hoped that certification of the basis that will give the group (through KCC) 95 per cent balance of the established estate units will be completed ownership with the balance of 5 per cent remaining during 2010. The group has applied for Roundtable on owned by the local partners. Sustainable Palm Oil (“RSPO”) accreditation audits (conducted by RSPO approved independent certifiers) to During 2009, the group's development focus was on be initiated during 2010 with a view to obtaining final bringing the Liburdinding concession into production. A certification during 2011. Coal operations mining plan had been completed, and the necessary infrastructural facilities (principally a port facility and a 38 kilometre road to the port) were substantially complete, by June 2009. However, the group withdrew from its Following its acquisition of interests in the Liburdinding original plan to establish, as rapidly as possible, a and Muser coal mining concessions located near Tanah production level of 30,000 tonnes per month when it Grogot in the southern part of East Kalimantan in the became clear that the sulphur content of the Liburdinding second half of 2008, the group further extended its coal coal was such that, in what had then become a buyer's operations in December 2009 with the acquisition of an market for export coal, it would be necessary either to interest in a third coal mining concession located near blend the coal mined with purchased coal having a lower Kota Bangun in the central part of East Kalimantan which sulphur content or to accept a significant price penalty. was purchased for a cash consideration of $4,500,000. The group concluded that it was important to be able to Pending clarification of a new Indonesian mining law that market Liburdinding coal within Indonesia and steps were should permit foreign direct ownership of Indonesian taken to establish a coal depot at Semarang in Central companies holding mining concessions (which has not in Java to facilitate deliveries to industrial users of coal in recent years been allowed), the group has entered into that area (a large coal consuming district) and to permit arrangements with a local investor and members of his blending with other coal to meet specific buyer family (together the group's “local partners”) whereby the requirements. The Semarang depot is now in operation Liburdinding and Muser concessions are currently held by and sales of Liburdinding coal are being made through it. two companies which are wholly owned by the group's Additionally, with the recovery in coal prices of recent local partners and which in turn own the company holding months, export demand has improved and some export the Kota Bangun concession. A fourth company, shipments of Liburdinding coal are in prospect. The incorporated under the Indonesian foreign investment law group is budgeting for total output from Liburdinding of and owned 95 per cent by KCC Resources Limited 150,000 tonnes in 2010. (“KCC”) (a wholly owned subsidiary of the company incorporated in England and Wales that acts as a co- The group also intends that the newly acquired Kota ordinating company for the group's coal operations) and 5 Bangun concession should be brought into production per cent by the local partners, has been established by during 2010 with a view to achieving, by December 2010, KCC to spearhead the group's coal operations. The three an output of 16,000 tonnes per month. The Kota Bangun coal mining concession holding companies are being concession is well located, being approximately 5 financed by loan funding from the group. KCC will have kilometres from the Mahakam river, and the high calorific 10 value coal that the concession contains is very suitable for coal operations will be critically dependent upon sales export. volumes and prevailing coal prices. The group aims to augment the basic mining revenues Finance from the Liburdinding and Kota Bangun concessions in two respects during 2010. First, it intends to make No new debt securities were issued by the group during available the port facility established for the Liburdinding 2009 but, in November 2009, the company issued concession for use by third parties for an appropriate 1,490,000 new 9 per cent cumulative preference shares charge. Secondly, the group intends to take advantage of for cash by way of a placing at a price of 103.18p per the acceptance of one of the concession holding share (3.18p being an amount equal to the accrued companies as one of a limited number of approved dividend attaching to each such share at the date of suppliers to the Indonesian state electricity company allotment). The net proceeds of the placing were utilised (“PLN”) to establish a limited coal trading activity in which to increase the cash available to the group as a cushion the group will source coal from third parties, either by against possible additional cash requirements for the outright purchase or by mining third party concessions group's development programmes. against payment of an agreed royalty, and will then sell the coal so sourced to PLN and others. As both of these Group indebtedness and related engagements at 31 proposed additions to the coal operations will be new, December 2009 amounted to $82.5 million, made up of there can be no certainty as to how fast and in what US dollar denominated bank indebtedness under an volumes they can be added. However, the directors Indonesian consortium loan facility of $10.2 million, £37 consider it reasonable to aim over time to achieve levels million nominal of 9.5 per cent guaranteed sterling notes of 20,000 tonnes per month of third party throughput 2015/17 (“sterling notes”) (carrying value: $57.0 million), through the Liburdinding port and of 50,000 tonnes per $7.7 million in respect of the hedge of the principal month of traded coal sales (sourced by a combination of amount of the sterling notes as described below and $30 outright purchases and mining of third party concessions million nominal of 7.5 per cent dollar notes 2012/14 under royalty arrangements). (“dollar notes”) (carrying value: $29.7 million). Against these obligations, at 31 December 2009 the group held The group is budgeting the overheads of its coal cash and cash equivalents of $22.1 million. The group operations for 2010 (excluding head office costs in the has entered into a long term sterling US dollar debt swap UK, interest, depreciation and amortisation) at $100,000 to hedge against US dollars the sterling liability for per month. Once commercial levels of production are principal and interest payable in respect of the entire being achieved, production costs per tonne are projected issue of the sterling notes (but in the case of interest only in the ranges $64 to $78 per tonne for Kota Bangun coal as respects interest payments falling due up to 31 and $23 to $29 per tonne for Liburdinding coal. Net December 2015). contribution from third party coal throughput in the Liburdinding port is projected at $2.50 per tonne and the In February 2010, the company issued an additional $15 contribution margins achievable on traded coal sales at million nominal of dollar notes at $90 per $100 nominal between $5 and $10 per tonne (depending on the mix of of notes in conjunction with an issue by KCC of 150,000 coal sourced by outright purchase and coal sourced by redeemable participating preference shares of $10 each mining third party concessions). The overall results of the at par. The monies raised, totalling $15 million before 11 Chairman’s statement continued issue expenses, have been deployed in the group’s coal During 2010, capital will also be required to fund the coal operations save to the extent of $4.5 million which has operations in developing the Kota Bangun concession been applied in repaying short term advances of an and meeting the working capital requirements that will equivalent amount that had previously been made to the arise if the coal operations develop as envisaged. It is coal operations from elsewhere in the group. expected that the funds provided to the coal operations from the recent issue of additional dollar notes and KCC The KCC participating preference shares will provide a participating preference shares will be sufficient for these limited interest in the group's coal operations such that if purposes. In addition, the coal operations should shortly those operations achieve an average annual level of have available to them an undrawn working capital line of earnings before interest, tax, depreciation and $3 million that is subject to annual renewal. amortisation of $8 million over the four and a half year period from 1 January 2010 to 30 June 2014 (equivalent The directors have no immediate plans for the group to to $36 million for the full period), the combined return to issue further listed debt securities but they are aware that persons who subscribed the additional dollar notes and the Indonesian tax authorities have recently announced KCC participating preference shares and who retain their revisions to the rates of withholding tax to be applied to notes and shares until redeemed will be 15 per cent per payments of interest from Indonesia to the Netherlands annum. as well as changes to the basis upon which such authorities will accept that a foreign company is eligible The planned planting of a further 8,000 hectares of oil for the concessionary tax treatment provided for in any palm during 2010 and 2011 and the concomitant double tax agreement between the applicable company's requirement for continuing investment in estate buildings, country of domicile and Indonesia. This development oil palm processing facilities and other estate plant and appears likely to result in the rate of withholding tax equipment will involve the group in continuing major applicable to payments of interest (the aggregate gross capital expenditure over the next two years. Given the amount of which in 2009 was $8.9 million) on loans to group's existing cash resources and provided that the Indonesian subsidiaries of the company from REA CPO price remains at reasonable levels, the directors Finance increasing from 10 per cent to 20 per cent. The expect that such capital expenditure can be funded from directors are investigating the possibility of reorganising internally generated cash flow. Because of the volatility of the sterling notes to mitigate this adverse fiscal commodity markets, the directors cannot rely on this development. expectation and, whilst the expansion programme can, in extremity, be rapidly scaled back to align with available Dividends cash resources, once areas have been planted with oil palms, some or all of the benefits of investment thereby The fixed semi-annual dividends on the 9 per cent made will be lost if the areas are not maintained and the cumulative preference shares that fell due on 30 June milling capacity needed to process the resultant FFB is and 31 December 2009 were duly paid. Dividends not installed. Accordingly, the directors believe that it is totalling 4p per ordinary share have been paid in respect essential that the group holds some cash cushion to meet of 2009 (2008 – 3p per ordinary share). These possible calls for additional cash to fund the oil palm comprised a first interim dividend of 2p per ordinary share expansion programme. To this end, the group is currently paid on 4 September 2009 and a second interim dividend seeking to arrange further fixed term bank facilities in in lieu of final of 2p per ordinary share paid on 29 January Indonesia. 2010. 12 The directors continue to believe that capitalisation issues plans for the establishment of the new Singapore office of new preference shares to ordinary shareholders, such but has agreed that thereafter the composition of the as were made on several previous occasions, provide a board should be reconstituted. useful mechanism for augmenting returns to ordinary shareholders in periods in which good profits are Prospects achieved but demands on cash resources limit the scope for payment of cash dividends. Because of the then state The group is budgeting for an FFB crop of 561,000 of markets for fixed return securities of smaller listed tonnes for 2010. The FFB crop to end March 2010 was companies, the directors did not propose any such some 16,000 tonnes short of budget. The shortfall is capitalisation issue during 2009 but they hope that the attributed by the directors to a combination of the current indications of economic recovery may make particular weather pattern experienced during the first possible a further capitalisation issue of new preference quarter of 2010 and to some oil palms entering a cyclical shares during 2010. Staff depression or rest phase during this quarter. Variations from year to year in the monthly phasing of each year's crops are normal and the directors do not believe that any conclusions should be drawn as to the likelihood of the The directors extend their thanks to all of the group's staff group achieving its budgeted crop for 2010. for their continued loyalty and hard work. Succession The modest recovery in CPO prices seen in the last two months of 2008 continued into 2009 with the price rising from an opening level of $525 per tonne, spot CIF The group has decided to work towards opening a small Rotterdam, to a high of $830 per tonne in May 2009. The regional office in Singapore. The immediate function of price then fell back to consolidate at a little over $600 per the new office will be to provide greater capacity to tonne in July 2009 but gradually recovered to close 2009 handle the increasing workload falling on existing senior at just above $800 per tonne, a level at which it has management but the group plans that new staff put in broadly remained during the early months of 2010. place for this purpose should ultimately provide options for succession to existing top management. The group Although stocks in CPO producing countries reached plans during 2010 to recruit an experienced and quite high levels in January 2010, subsequent offtake has committed manager to head the new office. It is been good and stock levels have moderated. Moreover, envisaged that the individual recruited would spend an the recovery in crude petroleum oil prices has meant that initial induction period in the group's London office and the floor for vegetable and animal oil and fat prices that would then operate from Singapore where it is intended crude petroleum oil prices provide has been rising. Whilst that the new office should be fully functional by the end professional forecasters have generally been in of 2011. agreement that CPO prices would probably stay at around current levels at least until mid 2010, there had been The directors recognise the need for succession planning concerns that, after that, the harvests from the latest in relation not only to executive management but also to soybean plantings in Brazil and Argentina (which are non executive directors. The board intends to continue as reported to have been at record levels) might lead to currently constituted pending full implementation of their some fallback in prices. This may still prove to be the case 13 Chairman’s statement continued but heavy rains in some key soybean growing areas and fungus problems with the Brazilian crop, coupled with some indications that the negative impact on current CPO production of the recent El Nino weather phenomenon is proving greater than forecast, may mean that the supply demand balance in the second half of 2010 will be tighter than had been predicted and that CPO prices may remain at good levels. With the prospects of healthy margins, increasing crops and further extension of the areas under oil palm, the agricultural operations can look forward to continued growth. The development of the coal operations is still at an early stage but the directors are optimistic that those operations have the potential to make a worthwhile contribution to the future profits of the group. Overall, the directors regard the outlook for the group with confidence. RICHARD M ROBINOW Chairman 27 April 2010 14 Review of the group Introduction Overview This review has been prepared to provide holders of the Nature of business and resources company’s shares with information that complements the accompanying financial statements. It is intended that The group is principally engaged in the cultivation of oil such information should help shareholders in palms in the province of East Kalimantan in Indonesia and understanding the group’s business and strategic in the production of crude palm oil (“CPO”) and by- objectives and thereby assist them in assessing how the products from fruit harvested from its oil palms. A directors have performed their duty of promoting the detailed description of the group's oil palm activities is success of the company. This review should not be relied provided under “Agricultural operations” below. upon by any persons other than shareholders or for any purposes other than those stated. During 2008, the directors decided to augment the traditional plantation operations of the group by This review contains forward-looking statements which developing a modest coal mining business in Indonesia. have been included by the directors in good faith based Following this decision, the group has acquired rights in on the information available to them up to the time of their respect of three coal concessions in East Kalimantan and approval of this review. Such statements should be is now endeavouring to establish an open cast coal treated with caution given the uncertainties inherent in mining operation and coal trading activity based on these any prognosis regarding the future and the economic and concessions. Details of this diversification are provided business risks to which the group's operations are under “Coal operations” below. exposed. The group and predecessor businesses have been In preparing this review, the directors have complied with involved for over one hundred years in the operation of section 417 of the Companies Act 2006. They have also agricultural estates growing a variety of crops in sought to follow best practice as recommended by the developing countries in South East Asia and elsewhere. reporting statement on operating and financial reviews The group today sees itself as marrying developed world published by the Accounting Standards Board but this capital and Indonesian opportunity by offering investors review may not comply with that reporting standard in all in, and lenders to, the company the transparency of a UK respects. listed company and then using capital raised by the company (or with the company’s support) to develop This review has been prepared for the group as a whole natural resource based operations in Indonesia from and therefore gives emphasis to those matters that are which the group believes that it can achieve good returns. significant to the company and its subsidiaries when In this endeavour, the group’s inheritance from its past taken together. The review is divided into five sections: and the group’s recent track record represent significant overview; agricultural operations, coal operations; intangible resources because they underpin the group’s finances; and risks and uncertainties. credibility. This assists materially in sourcing capital, in negotiating with the Indonesian authorities in relation to project development and in recruiting management of a high calibre. 15 Review of the group continued Other resources that are important to the group are its Ancillary to the first component of this approach, the developed base of operations, bringing with it an group seeks to add to its land bank when circumstances established management team familiar with Indonesian are conducive to its doing so. The directors intend that, as regulatory processes and social customs, a trained the coal operations come into production, the group will workforce and the group’s land and concession rights. similarly seek production cost efficiencies in those operations by increasing volumes and focusing on Objectives productivity. The group’s objectives are to provide attractive overall As a financial strategy, the group aims to enhance returns returns to investors in the group from the operation and to equity investors in the company by procuring that a expansion of the group’s existing businesses, to honour prudent proportion of the group’s funding requirements is the group’s social obligations to facilitate economic met with prior charge capital in the form of fixed return progress in the localities of the group's activities and to permanent preferred capital and debt with a maturity develop the group's operations in accordance with best profile appropriate to the group's projected future cash corporate social responsibility and sustainability flows. standards. Achievement of these objectives is dependent upon, among other things, the group’s ability to generate Diversification the operating profits that are needed to finance their realisation. The group recognises that its agricultural operations, which represent the major part of the group’s assets and, CPO and coal are primary commodities and as such must in 2009, contributed all of the group’s profits, lie within a be sold at prices that are determined by world supply and single locality and rely on a single crop. This permits demand. Such prices may, and do, fluctuate in ways that significant economies of scale but brings with it risks. The are difficult to predict and which the group cannot control. directors hope that the coal operations now being The group’s operational strategy is therefore to established will, if successful and further expanded, concentrate on minimising unit production costs with the provide the group with some offset against such risks. expectation that the lower cost producer of any primary The directors have no plans for further diversification and commodity is better placed to weather any downturn in believe that, for the foreseeable future, the group’s price than less efficient competitor producers of the same interests will be best served by growing the existing commodity. agricultural and coal operations. In the agricultural operations, the group adopts a two Strategic direction and succession pronged approach in seeking production cost efficiencies. First, the group aims to capitalise on its available In recent years, the size and range of the group’s activities resources by developing the group’s land bank as rapidly has expanded. The area under oil palm has been as logistical, financial and regulatory constraints permit extended, infrastructure and oil mill capacity have been with a view to utilising the group’s existing agricultural increased and a new venture in coal has been initiated. At management capacity to manage a larger business. the same time, the group has increased its assistance to Secondly, the group strives to manage its established the local communities in the group’s areas of operation agricultural operations as productively as possible. and has established a new department dedicated to conservation activities. 16 These changes have been accompanied by a major The directors have previously expressed concern as to reorganisation of the group’s Indonesian agricultural whether the current situation in which Indonesian management. A new departmental structure has been businesses are owned through a UK listed company, with implemented, additional staff have been recruited and the UK overheads that this entails, is an appropriate long reporting lines have been clarified. Work is continuing on term structure for the group. Recent years have seen an upgrading the group’s personnel administration to cope increase in the number of plantation companies listed on with a workforce now approaching 7,000 and on the London Stock Exchange and with this has come integrating the group’s data recording systems to increased investment research coverage of the plantation enhance management’s ability to identify and analyse sector. This is improving the company’s access to areas of underperformance. investors and the directors are pleased with the company’s existing base of shareholders. The directors The directors hope that the group will continue to grow also believe that the company’s continued UK listing has and appreciate that growth will make new demands on facilitated the several bond issues that the group has management. The directors believe that the Indonesian made in recent years (which have been an important management structures now in place provide a good base source of medium term funding for the group) and that for further expansion. In the agricultural operations, the such issues would have been harder had the group been group’s established programme of regularly recruiting and listed in, for example, Singapore or Jakarta. In these training a number of university graduates and then circumstances, the directors have concluded that, for the offering management positions to those who successfully time being at least, the group should retain its current complete the training course has provided the group with structure. an expanding cadre of younger staff. The group can therefore hope to fill new staff positions resulting from Nevertheless, the directors believe that better value will agricultural expansion by internal promotion. If the coal be obtained from additions to senior management if new activities prove successful and grow, the group will aim to staff recruited can not only provide support for the put in place appropriate arrangements for management functions currently undertaken in London but are also succession in those activities also. close enough to the group's operations to provide assistance on a day to day basis to the group's In responding to the management challenges created by management in Indonesia. Accordingly, the group has the group’s growth, the directors have given priority to decided to work towards opening a small regional office enhancing operational management capacity. With the in Singapore. The immediate function of the new office staffing capacity and the local independent non executive will be to provide greater capacity to handle the support that are available to the group in Indonesia, they increasing workload falling on existing senior believe that the group has achieved reasonable management but the group plans that new staff put in operational resilience in the event of local staff place for this purpose should ultimately provide options retirements or resignations. However, the directors for succession to existing top management (although the recognise that there is now a requirement also to existing group managing director and the chairman have enhance senior management capacity outside Indonesia indicated their willingness to continue working as a team and are turning their attention to meeting this for several more years). requirement. 17 Review of the group continued The group aims during 2010 to recruit an experienced The main Indonesian political event of 2009 was the and commercial manager to head the proposed new Presidential election which saw the incumbent president, regional office. It is envisaged that the individual recruited Susilo Bambang Yudhoyono, re-elected by a comfortable would spend an initial induction period in the group's margin following a wholly peaceful electoral campaign. London office and would then operate from Singapore However, the broadly concurrent parliamentary elections where it is intended that the new office should be fully left the president’s party in a minority. This resulted in the functional by the end of 2011. formation of a coalition government in which the president was able to reappoint his core economists to The new Singapore office will have the advantage that it key positions in the Trade and Finance Ministries but had will preserve flexibility as respects the possibility that the to accept that several important other ministerial group may one day, after all, decide to reconstitute itself appointments be filled by candidates of the coalition as a wholly South East Asian based group. It will also partners. This is expected to place some constraints on provide capacity to handle the possible eventuality that, if the president’s legislative agenda. the coal operations prove successful, those operations may be detached from the group and developed as a The decline in the Indonesian rupiah seen in the last separate listed group (a not unlikely development given quarter of 2008 continued into the first quarter of 2009 an Indonesian legal requirement that the group in due with the rate against the US dollar falling from Rp 10,950 course divest a minority interest in the coal operations, a = $1 at 31 December 2008 to Rp 11,575 = $1 at the requirement that may best be met by combining the end of March 2009. The rate then improved progressively operations under an Indonesian holding company and to close 2009 at Rp 9,400 = $1. No doubt assisted by making a public offering of shares in that company). the strengthening currency, the reported Indonesian inflation rate for 2009 was 3 per cent as compared with The directors recognise the need for succession planning 11 per cent for 2008. in relation not only to executive management but also to non executive directors. The board intends to continue as The province of East Kalimantan remained stable during currently constituted pending full implementation of their 2009 and its economy continued to grow. Growth is plans for the establishment of the new Singapore office placing pressure on the province’s supplies of electricity but has agreed that thereafter the composition of the and infrastructural facilities but the provincial government board should be reconstituted. The Indonesian context is making efforts to address this. Land availability is becoming more constrained and it appears that the central and regional authorities, prompted by environmental concerns, are making a concerted effort to During 2009, the Indonesian economy grew by 4.5 per establish more transparent processes for the granting of cent per annum helped by improved prices for the land and mining concessions and ensuring subsequent country’s main export commodities and comfortably compliance by concessionaires with applicable ahead of the 3.4 per cent per annum predicted by the government regulations. Whilst this is likely to complicate World Bank after the onset of the 2008 world economic further the licensing and titling processes, it may be crisis. Inward foreign direct investment improved slightly hoped that it will reduce the improper activities of some as compared with 2008, while Indonesia’s access to the plantation and mining operators that are detrimental to international bond markets continued unimpaired. the standing of the plantation and mining industries as a whole. 18 Evaluation of performance Quantifications of the above indicators for 2009 and comparable quantifications for 2008 (in both cases as In seeking to meet its objectives, the group sets operating sourced from the group's internal management reports) standards and targets for most aspects of its activities are provided under “Land development” and “Crops and and regularly monitors performance against those extraction rates” in “Operations” below together with standards and targets. In many aspects of the group's targets for 2010. activities, there is no single standard or target that, in isolation from other standards and targets, can be taken Key indicators used by the directors in evaluating the as providing an accurate continuing indicator of progress. group's financial performance for any given period Rather a collection of measures have to be evaluated and comprise: a qualitative conclusion reached. The directors do, however, rely on regular reporting of certain operational progress items that are comparable from one year to the next and may be regarded as key indicators of operating performance. These indicators for • 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 any given period comprise: • net debt to total equity which is measured as • 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; • 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 • the CPO, palm kernel and crude palm kernel oil (“CPKO”) extraction rates achieved; the first two of these are measured as the percentage by weight of CPO or palm kernels extracted from FFB processed and the third is measured as the percentage by weight of CPKO extracted from palm kernels crushed. 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. borrowings and other indebtedness (other than intra group indebtedness) less cash and cash equivalents expressed as a percentage of total equity. Because of the group's material dependence on CPO prices, which have a direct impact on revenues and on periodic revaluations of biological assets, in targeting return on total equity the directors set a norm that they hope will represent an average of the annual returns achieved over a period of seven years. Percentages for the above two indicators for 2009 and comparable figures for 2008 (derived from figures extracted from the audited consolidated financial statements of the company) are provided under “Group results” and “Financing policies” in “Finances” below, together with target percentages. The directors have hitherto relied mainly on qualitative rather than quantitative assessments in relation to environmental and social matters. With the increasing scale of the group’s operations, the directors consider that it is appropriate to begin providing some quantitative 19 Review of the group continued indicators to assist evaluation of the group’s performance response to failures. Independent verification of the in these areas. Accordingly the qualitative commentary group’s performance in these areas is dealt with as under “Employees”, “Community development”, described under “Accreditation and verification” in “Smallholders”, “Conservation” and “Sustainable practices” “Agricultural operations” below. in “Agricultural operations” below has this year been augmented with quantitative data on examination results Agricultural operations in the group’s primary schools, incidence of vector borne diseases, serious accidents sustained, waste water Structure management and use of diesel oil and fertilisers. All of the group's agricultural operations are located in Industry discussions, under the auspices of the East Kalimantan and have been established pursuant to Roundtable on Sustainable Palm Oil, are being conducted an understanding dating from 1991 whereby the East with a view to establishing agreed principles for the Kalimantan authorities undertook to support the group in calculation of oil palm plantation carbon footprints but acquiring, for its own account and in co-operation with there remain areas of disagreement still to be resolved, local interests, substantial areas of land in East most notably as respects how the carbon cost of Kalimantan for planting with oil palms. displacement of vegetation that existed prior to planting of oil palms should be taken into account. Pending The oldest planted areas, which represent the core of the availability of such principles, the group is taking steps to group’s operations, are owned through PT REA Kaltim build its own model for calculating its carbon footprint and Plantations (“REA Kaltim”) in which a group company will aim to publish carbon footprint data in due course. holds a 100 per cent economic interest. With the REA Kaltim land areas approaching full utilisation, over the four The directors recognise the significance of environmental, year period from 2005 to 2008 the company established social and governance matters to the business of the or acquired several additional Indonesian subsidiaries, group. Identification, assessment, management and each potentially bringing with it a substantial allocation of mitigation of the risks associated with such matters forms land in the vicinity of the REA Kaltim estates. These part of the group’s system of internal control for which the additional subsidiaries comprise PT Cipta Davia Mandiri board of the company has ultimate responsibility. The (“CDM”), PT Kartanegara Kumala Sakti (“KKS”), PT Kutai board discharges that responsibility as described in the Mitra Sejahtera (“KMS”), PT Putra Bongan Jaya (“PBJ”) “Corporate governance” section of this annual report. and PT Sasana Yudha Bhakti (“SYB”). Each of these Material risks and related policies regarding subsidiaries is, or will on completion of necessary legal environmental, social and governance matters are formalities be, owned as to 95 per cent by group described under “Risks and uncertainties” below and companies and 5 per cent by Indonesian local investors. under “Employees”, “Community development”, “Smallholders”, “Conservation” and “Sustainable practices” Land areas in “Agricultural operations” below. The latter sections also detail descriptively, and through certain of the Although the 1991 understanding established a basis for quantitative performance indicators added this year, the the provision of land for development by or in cooperation group’s successes and failures in environmental, social with the group, all applications to develop previously and governance areas and the measures taken in undeveloped land areas have to be agreed by the 20 Indonesian Ministry of Forestry and to go through a permit The process of titling land allocations may be expected to and titling process. This process begins with the grant of result in exclusion of areas the subject of conflicting land a land allocation. This is followed by environmental and claims and having special environmental value. In the other assessments to delineate those areas within the case of the CDM land allocation particularly, the areas to allocation that are suitable for development, settlement of be excluded may be quite substantial. Accordingly, the compensation claims from local communities, other group is likely to be granted full hgu land titles in respect necessary legal procedures that vary from case to case of only a part of the land allocations referred to in the and the issue (often in stages) of development permits preceding paragraph. Moreover, not all of the areas in and land clearing licences. The process is completed by respect of which full hgu titles are issued can be planted a cadastral survey (during which boundary markers are with oil palms. Some fully titled land may be unsuitable for inserted) and the issue of a formal registered land title certificate (an “hak guna usaha” or “hgu” certificate). planting or subject to zoning or similar restrictions (such as areas potentially available for mining), a proportion has to be set aside for conservation and a further proportion In the group’s experience, the process, which was never is required for roads, buildings and other infrastructural straightforward, has become more complicated in recent facilities. This means that the prospective maximum area years. This has followed the devolution of significant that the group could plant with oil palms on the fully titled authority in relation to land matters from the Indonesian and allocated agricultural land areas currently held must central government to Indonesian provincial and district be expected to be considerably less than the gross authorities which has resulted in an increase in the hectarage that those areas comprise. number of official bodies involved in the titling process. A further echelon of complication has recently been added The operations of REA Kaltim are located some 140 by new Ministry of Forestry procedures to provide extra kilometres north west of Samarinda, the capital of East checks on plantation development licences. These are Kalimantan, and lie either side of the Belayan river, a designed to stop plantation development improperly tributary of the Mahakam, one of the major river systems encroaching on land that has been zoned for retention as of South East Asia. The SYB area and the area sought by forest. KKS are contiguous with the REA Kaltim areas so that the three areas together form a single site. All of these The group made good progress with its land titling during areas fall within the Kutai Kartanegara district of East 2009 and increased its overall area of fully titled Kalimantan. The PBJ area lies some 70 kilometres to the agricultural land to 52,029 hectares, comprising 30,106 south of the REA Kaltim areas in the West Kutai district of hectares held by REA Kaltim, 10,321 hectares held by East Kalimantan while the CDM and KMS areas are SYB and 11,602 hectares held by PBJ. located in close proximity of each other in the East Kutai district of East Kalimantan less than 30 kilometres to the Land allocations still subject to titling comprise some east of the REA Kaltim areas. 6,000 hectares held by SYB, 20,000 hectares held by CDM and 17,000 hectares held by KMS. In addition, KKS At present, access to the REA Kaltim, SYB, KKS, CDM continues to seek title to a 20,000 hectare land area as and KMS areas can be obtained only by river and by air respects which progress remains, as previously reported, although the completion in 2005 of a road bridge over the subject to the issue of a decree by the Ministry of Forestry Mahakam at Kota Bangun may eventually permit road to allow implementation of a new development plan for access as well. The PBJ area is already accessible by the province of East Kalimantan. 21 Review of the group continued road. The CDM and KMS areas can be accessed from the afforded to improve the pipeline of land areas immediately REA Kaltim area by way of abandoned logging roads. available for planting. The group continues to look at acquiring further areas In consequence, the group is now well placed to proceed suitable for planting with oil palms within the general with its plans for planting in total a further 8,000 hectares vicinity of its existing land allocations but land is much of oil palms over the two year period to the end of 2011. less available for oil palm development than was formerly Nevertheless, it does remain the case that achievement of the case. Land development this planting target is critically dependent upon land becoming available for development as needed. New regulations recently announced by the MInistry of Forestry mean that planting of the planned further 8,000 Areas planted and in course of development as at 31 hectares will require permits additional to those that have December 2009 amounted in total to 30,990 hectares. already been obtained. The directors have no reason to Of this total, mature plantings comprised 18,736 believe that such permits will not be forthcoming within hectares. A further 3,333 hectares planted in 2006 came the time frame in which they will be needed. to maturity at the start of 2010. At current cost levels and CPO prices, extension planting Following the onset of the international financial crisis in areas adjacent to the existing developed areas still and the sharp falls in commodity prices that accompanied offers the prospect of attractive returns. Accordingly, it it, the directors decided in October 2008 to suspend all remains the policy of the directors that, subject to new plantation development until the world economic financial and logistical constraints, the group should outlook became clearer. With the recovery in CPO prices continue its expansion and should aim over time to plant seen in the early months of 2009 and a seeming with oil palms all suitable undeveloped land available to improvement in the world economic outlook, it was the group (other than areas set aside by the group for decided in April 2009 to resume development. As a result conservation). Such expansion will, however, involve a of this decision, an area of 2,690 hectares was cleared series of discrete annual decisions as to the area to be and planted out or prepared for planting out during 2009. planted in each forthcoming year and the rate of planting may be accelerated or scaled back in the light of Reserve land held by the group only becomes available prevailing circumstances. Moreover, the group’s capacity for development when the titling process has proceeded for extension development beyond 2011 will be to a point at which the group has been granted necessary dependent upon the rate at which the group can make development and land clearing licences and additional land areas available for planting. compensation agreements have been reached with local villagers who have claims in respect of their previous use Processing and transport facilities of the land. In the past, delays in making available land areas for development have been a serious impediment to The group operates two oil mills in which the FFB crops achievement of target extension planting programmes. harvested from the mature oil palm areas are processed The group therefore sought during the period that the into CPO and palm kernels. The first mill, which dates development programme was temporarily suspended to from 1998, has been developed to give an intended take maximum advantage of the opportunity that this capacity of 80 tonnes per hour. The second mill, which 22 was brought into production in 2006, has an existing Palm kernel cake, a by-product of the CPKO extraction capacity 60 tonnes per hour but is currently being process is applied as an organic fertiliser. Sales of palm expanded to a capacity of 80 tonnes per hour. kernel cake as an animal feed are not remunerative given the remote location of the group’s kernel crushing plant. Some problems were experienced during 2009 with the older mill. Deterioration in one of the two boilers reduced The group operates a fleet of barges for transport of CPO available power and this, combined with inefficiencies in and CPKO. The fleet is used in conjunction with tank other ageing mill machinery, made it difficult to operate storage adjacent to the oil mills and a transhipment the mill at the intended capacity of 80 tonnes per hour terminal owned by the group downstream of the port of over any extended period. Steps have been taken to Samarinda. The fleet comprises one barge of 3,000 address this problem. The deteriorating boiler will be tonnes, which the group time charters, and a number of replaced as soon as possible and the mill processing lines smaller barges, ranging between 750 and 2,000 tonnes, will be upgraded to provide greater resilience. which are owned by the group. The smaller barges are used for transporting palm products from the upriver The upgrading of the older mill and the expansion of the operations to the transhipment terminal for collection newer mill to 80 tonnes per hour should provide the group from that terminal by buyers. The 3,000 tonne barge is with sufficient capacity to meet the expected FFB used for sea voyages to Malaysia and other parts of processing requirements of 2010 and 2011. By 2012 Indonesia. the group will require a third mill. Work is already in hand on the planning of this third mill and it is expected that The directors believe that flexibility of delivery options is construction of the mill will start during 2010. helpful to the group in its efforts to optimise the net prices, FOB port of Samarinda, that it is able to realise for The group's newer oil mill incorporates, within the overall its produce. Moreover the group’s ability itself to deliver facility, a palm kernel crushing plant in which palm kernels CPO and CPKO allows the group to make sales without can be further processed to extract the CPKO that the the collection delays sometimes experienced with FOB palm kernels contain. The kernel crushing plant is buyers. Currently, a significant proportion of the group's economic to run because the oil mill in which the plant is CPO is sold for delivery to ports in Sabah in East Malaysia. located is able to generate sufficient power, from the As a result, the 3,000 tonne barge is employed almost combustion of waste products from the mill’s processing exclusively in sailing between Samarinda and Sabah. of FFB, to operate the kernel crushing plant and to meet Because of the relatively short distance involved, this is the other power requirements of the mill. Moreover, proving very efficient in minimising transformation costs. processing kernels into CPKO avoids the material logistical difficulties and cost associated with the A trial made in 2005 established that it is both feasible transport and sale of kernels. The kernel crushing plant and economic to use the barge fleet to transfer CPO from has a capacity of 150 tonnes of kernels per day which is the Samarinda transhipment terminal to ships anchored sufficient to process all kernel output from the group’s offshore outside the port of Samarinda. This potentially two existing oil mills. Further kernel crushing capacity will provides access to vessels of much greater tonnage than be needed when the planned third group oil mill comes the vessels that can be loaded within the port of into production and this new mill will therefore incorporate Samarinda (which are effectively limited to 6,000 tonnes). its own kernel crushing plant. Moreover, the recent construction of bulking facilities in 23 Review of the group continued the major sea port of Balikpapan means that larger Rainfall across the group's estates averaged 3,123 mm vessels may now also be accessed by barging from the for 2009, compared with 3,504 mm for the previous year. upstream oil storage tanks to Balikpapan and Rainfall of in excess of 3,000 mm per annum is more than transhipping there rather than in Samarinda. Access to sufficient for oil palm cultivation provided that the rainfall larger vessels would permit the group to ship palm is distributed reasonably evenly over the year as oil palm products to Europe when differentials between European estate soil has limited capacity to retain water. During and South East Asian prices for CPO and CPKO make it 2009, there was an extended drier period between worthwhile to do so. This is not currently the case but the August and October, probably reflecting the reported El situation may change when the group becomes able to Nino effect. Although this was of some concern to the deliver palm products that have been certified as group, an analysis of the rainfall received during this drier sustainably produced. period suggests that the rainfall was just sufficient to avoid deficits in the moisture required by the group's During periods of lower rainfall (which normally occur for palms for optimal development. If correct, this would short periods during the drier months of May to August of mean that the reduced levels of rainfall between August each year), river levels on the upper part of the Belayan and October should not have a negative impact on become volatile and palm products at times have to be cropping in 2010. On that basis, the group is budgeting transferred by road from the mills to a point some 70 an FFB crop of 561,000 tonnes for 2010. kilometres downstream where year round loading of barges of up to 2,000 tonnes is possible. Some years The FFB crop to end March 2010 was some 16,000 ago, the group acquired a riverside site in this tonnes short of budget. The shortfall is attributed by the downstream location but the original road access to this directors to a combination of the particular weather site was washed away in 2005. A new government road pattern experienced during the first quarter of 2010 and completed during 2009 has, at long last, restored access to some oil palms entering a cyclical depression or rest and the group will now consider developing its own phase during this quarter. Variations from year to year in permanent loading facilities on the site for use during dry the monthly phasing of each year's crops are normal and periods. The group is also exploring alternative means of the directors do not believe that any conclusions should transferring palm products during drier periods to ensure be drawn as to the likelihood of the group achieving its that, as volumes increase, the group can continue during budgeted crop for 2010. such periods promptly to evacuate all palm product output. Crops and extraction rates Processing of the group's own FFB production and the externally purchased FFB, together totalling 503,426 tonnes (2008: 457,366 tonnes), produced 118,357 tonnes of CPO (2008: 105,957 tonnes) and 23,740 FFB crops for the years from 2005 to 2009 are shown in tonnes of palm kernels (2008: 20,847 tonnes), reflecting the “Key statistics” section of this annual report. The crop extraction rates of 23.51 per cent for CPO (2008: 23.17 out-turn for 2009 amounted to 490,178 tonnes, slightly per cent) and 4.72 per cent for kernels (2008: 4.56 per ahead of the budgeted crop of 486,000 tonnes and an cent). Production of CPKO amounted to 9,636 tonnes increase of 8.6 per cent on the FFB crop for 2008 of (2008: 8,190 tonnes) representing an extraction rate of 450,906 tonnes. External purchases of FFB from 40.04 per cent (2008: 40.11 per cent). smallholders in 2009 totalled 13,248 tonnes (2008: 6,460 tonnes). 24 The group’s target extraction rates for 2009 were 24.0 mean at which adequate returns are obtained from per cent for CPO, 4.0 per cent for palm kernels and 42 growing the annual oilseed crops. per cent for CPKO. These target rates are being retained for 2010 with the exception of the target palm kernel Since the oil yield per hectare from oil palms (at between extraction rate, which has been increased to 4.75 per 4 and 7 tonnes) is much greater than that of the principal cent. Markets and revenues annual oilseeds (less than 1 tonne), CPO can be produced more economically than the principal competitor oils and this provides CPO with a natural competitive advantage within the vegetable oil and animal According to Oil World, worldwide consumption of the 17 fat complex. Within those markets, CPO should also major vegetable and animal oils and fats increased by 3.1 continue to benefit from health concerns in relation to per cent to 162.9 million tonnes in the year to 30 trans-fatty acids. Such acids are formed when vegetable September 2009. The increased consumption was oils are artificially hardened by hydrogenation. Poly- reflected in increased world production during the same unsaturated oils, such as soybean oil, rape oil and period of 162.8 million tonnes with CPO accounting for sunflower oil, require hydrogenation before they can be 44.4 million tonnes of this (27.3 per cent of the total). used for shortening or other solid fat applications but CPO does not. Vegetable and animal oils and fats have conventionally been used principally for the production of cooking oil, Bio-fuel has become an important factor in the vegetable margarine and soap. Consumption of these basic and animal oil and fat markets, not so much because of commodities correlates with population growth and, in the oil and fats that it currently consumes, although this is less developed areas, with per capita incomes and not insignificant, but because the size of the energy economic growth. Demand is thus being driven by the market means that bio-fuel can provide a ready outlet for increasing world population and economic growth in the large volumes of oils and fats over a short period when key markets of India and China. Vegetable and animal oils surpluses in supply depress prices to levels at which bio- and fats can also be used to provide bio-fuels and, in fuel can be produced at a cost that is competitive with particular, bio-diesel. According to Oil World, bio-fuel use prevailing petroleum oil prices. This should provide a floor during the year to 30 September 2009 accounted for for vegetable and animal oil and fat prices. 10.1 per cent of all vegetable and animal oil and fat consumption. The directors believe that demand for, supply of and consequent pricing of, vegetable and animal oils and fats The principal competitors of CPO are the oils from the will ultimately be driven by fundamental market factors. It annual oilseed crops, the most significant of which are is however possible that normal market mechanisms may, soybean, oilseed rape and sunflower. Because these for a time at least, be affected by government intervention. oilseeds are sown annually, their production can be rapidly It has long been the case that some areas (such as the adjusted to meet prevailing economic circumstances with EU) have provided subsidies to encourage the growing of high vegetable oil prices encouraging increased planting oilseeds and that such subsidies have distorted the and low prices producing a converse effect. Accordingly, natural economics of producing oilseed crops. More in the absence of special factors, pricing within the oils recently there have been actions by governments and fats complex can be expected to oscillate about a attempting to reduce dependence on fossil fuels. These 25 Review of the group continued have included steps to enforce mandatory blending of but heavy rains in some key soybean growing areas and bio-fuel as a fixed minimum percentage of all fuels and fungus problems with the Brazilian crop, coupled with subsidies to support the cultivation of crops capable of some indications that the negative impact on current CPO being used to produce bio-fuel. Subsequent concerns as production of the recent El Nino weather phenomenon is to the side effect of such actions in reducing food proving greater than forecast, may mean that the supply availability and in encouraging despoliation of forest lands demand balance in the second half of 2010 will be tighter may limit further measures to encourage the production than had been predicted and that CPO prices may remain of bio-fuel but it appears likely that measures already in at good levels. place will remain in force for some time to come. In 2009, approximately 48 per cent of the group's CPO A graph of CIF Rotterdam spot CPO prices for the last ten production was sold in the local Indonesian market and years, as derived from prices published by Oil World, is the balance of 52 per cent was exported. FOB prices shown in the “Key statistics” section of this annual report. realised for CPO in the local market during 2009 were for The monthly average price over the ten years has moved the most part broadly in line with those available in the between a high of $1,249 per tonne and a low of $234 export market but, with production volumes increasing, per tonne. The monthly average price over the ten years the group wishes to ensure that it can access both as a whole has been $505 per tonne. domestic and international CPO markets. Sales continued to be made to a small number of buyers with The modest recovery in CPO prices seen in the last two export sales concentrated within the South East Asian months of 2008 continued into 2009 with the price rising region with the vast majority of exports going to refineries from an opening level of $525 per tonne, spot CIF in East Malaysia owned by one customer (a major Rotterdam, to a high of $830 per tonne in May 2009. The company of international standing). During 2009, CPKO price then fell back to consolidate at a little over $600 per was again sold entirely in the local Indonesian market. tonne in July 2009 but gradually recovered to close 2009 at just above $800 per tonne, a level at which it has Sales are made on contract terms that are comprehensive broadly remained during the early months of 2010. and standard for each of the markets into which the group sells. The group therefore has no current need to develop Although stocks in CPO producing countries reached its own policies for terms of dealing with customers. The quite high levels in January 2010, subsequent offtake has group will give consideration to separate marketing of been good and stock levels have moderated. Moreover, segregated sustainable oil once it has obtained the recovery in crude petroleum oil prices has meant that accreditation from the Roundtable on Sustainable Palm the floor for vegetable and animal oil and fat prices that Oil as referred to under “Accreditation and verification” crude petroleum oil prices provide has been rising. Whilst below. professional forecasters have generally been in agreement that CPO prices would probably stay at around The Indonesian regulations imposing sliding scales of current levels at least until mid 2010, there had been duty on exports of CPO and CPKO remain in place. The concerns that, after that, the harvests from the latest rate of duty payable on CPO currently rises from nil per soybean plantings in Brazil and Argentina (which are cent on sales at prices of up to the equivalent of $700 per reported to have been at record levels) might lead to tonne, CIF Rotterdam, to 25 per cent on sales at prices some fallback in prices. This may still prove to be the case above the equivalent of $1,250 per tonne. 26 As a general rule, all CPO and CPKO produced by the endeavours to capitalise on this advantage by constantly group is sold on the basis of prices prevailing immediately striving to improve its agricultural practices. In particular, ahead of delivery but, on occasions when market careful attention is given to ensuring that new oil palm conditions appear favourable, the group may consider areas are planted with high quality seed from proven seed making forward sales at fixed prices. The fact that export gardens and that all oil palm areas receive the upkeep duty is levied on prices prevailing at date of delivery, not on prices realised, does act as a disincentive to making forward fixed price sales since a rise in CPO prices prior and fertiliser that they need. The group has been an early user of macuna bracteata as a cover crop in oil palm areas with encouraging results in keeping down noxious weeds to delivery of such sales will mean that the group will not and generating vegetative matter that provides a natural only forego the benefit of a higher price but will also pay mulch and promotes oil palm growth. Steps were taken export duty on, and at a rate calculated by reference to, a during 2009 to extend the group’s use of natural higher price than it has obtained. When making forward fertilisers by the use of composted empty fruit bunches fixed price sales, the group would not normally commit a and oil mill effluent, both being residues of the CPO volume equivalent to more than 60 per cent of its production process. projected CPO or CPKO production for a forthcoming period of twelve months. No deliveries were made The group has always recycled empty fruit bunches and against forward fixed price sales of CPO or CPKO during oil mill effluent but prior to the introduction of composting, 2009 and the group currently has no sales outstanding these residues were distributed in the oil palm areas on this basis. without processing (apart from treatment of effluent in effluent ponds to reduce its biological and chemical The average US dollar prices per tonne realised by the oxygen demand). Under the new composting process, group in respect of 2009 sales of CPO and CPKO, the residues (in the case of effluent, again after treatment adjusted to FOB, Samarinda, were, respectively, $591 in effluent ponds) are delivered to a composting (2008: $664) and $579 (2008: $820). contractor at sites adjacent to the group’s oil mills. The Costs contractor takes title to the residues, manages the composting process (which takes 45 days and involves seeding the residues with an accelerant of micro- The group's revenue costs principally comprise: direct organisms (which the contractor supplies), mixing the costs of harvesting, processing and despatch; direct costs residues and macerating the mix to encourage of upkeep of mature areas; estate and central overheads biodegradation) and then sells back the resultant in Indonesia; the overheads of the UK head office; and compost to the group at an agreed price with a financing costs. The group’s strategy in seeking to guaranteed nutrient content. The composted residues minimise unit costs of production is to maximise yields per provide greater substitution for inorganic fertilisers than hectare, to seek efficiencies in the overall costs and to did the previous recycling of uncomposted residues and spread central overheads over as large a cultivated the overall effect is a reduction in cost. hectarage as possible. The level of rainfall in the areas of the agricultural were concentrated on FFB collection and transport operations provides the group with some natural arrangements and on road maintenance. In the former advantage in relation to crop yields. The group case, steps were taken to increase mechanical handling Other efforts to achieve cost efficiencies during 2009 27 Review of the group continued of FFB and to improve the efficiency of transfer of FFB Employees from field to factory. In the latter case, it was decided to reduce the use of contractors and to assume much The workforce in the group’s agricultural operations greater direct responsibility for road maintenance. In both continued to expand in line with the growth in the cases, a significant investment was made in additional operations so that, by the end of 2009, the workforce vehicles and equipment. Some teething troubles were numbered over 6,900 (2008 – 6,000). experienced but by year end good progress had been made in resolving these and the directors remain Following an external review, steps were taken during optimistic that the changes made will prove themselves 2009 to enhance the human resources department to during 2010. provide the additional administrative capacity that the increasing number of employees requires and to improve The group is continuing to invest in the development of a communication across the workforce. New management new management information system and accounting was appointed and separate teams, each under the data base. This remains on schedule to become supervision of a dedicated senior staff member, were operational in phases during 2010 and fully operational deployed to pursue a number of strategic initiatives to for 2011. The new database should facilitate analysis by improve employee facilities and amenities; to encourage a reference to much smaller units than has hitherto been team mentality; to enhance operational management possible and should thus permit management to identify practices; to inculcate principles of ethical conduct; and to and remedy underperformance on a more focused basis. make the human resource department itself more Although costs continued to rise during 2009 on a year to effective. year basis, the year did see a welcome respite from the The revamped human resource department is introducing accelerating rates of cost inflation that have been a new defined indicators for evaluating performance and is regular feature of oil palm cultivation in recent years. establishing objective criteria for determining the relative Fertiliser prices fell from the high peaks that they had importance of different management and supervisory seen in 2008 and diesel oil prices reduced along with positions within the agricultural operations. A new petroleum oil prices. Local cost inflation was kept in remuneration structure is being put in place to ensure that check by a strengthening of the Indonesian rupiah remuneration is competitive and fair and appropriately against the US dollar. Unfortunately, the inflation reflects the new grading of positions and industry prospects for 2010 are less promising with fertiliser and benchmarks. The performance management system and diesel oil prices again going up. The group has, however, new remuneration structure are being phased in gradually already fixed prices for the majority of its 2010 fertiliser and are expected to be implemented fully during 2011. requirements at good levels and the resumed expansion programme and increasing crops from the areas already Almost all members of the workforce and their under cultivation should moderate the inflationary impact dependants are housed in group housing in a network of on unit costs. 28 villages across the group estates. All villages are equipped with potable water and electricity and provided with a range of amenity buildings including mosques, churches, shops, schools and crèches. A trust funded by the group operates a network of primary schools across the group's estates and the group provides financial Wherever possible, the group fills available staff positions assistance to state secondary schools serving the by internal promotion. The continuing expansion of the children of the group's employees. In 2009, 88 pupils agricultural operations gives the group the ability to offer from the group’s primary schools sat examinations for graduates the prospect of an attractive career path. Until entry to state secondary schools and a 100 per cent pass recently, the graduate intake was limited to graduates rate was achieved. holding agricultural qualifications but this was broadened in 2009 to include engineering graduates. It is planned The group runs its own health service with a medical clinic that future graduate recruitment should be further in each estate village and a central hospital. The clinics broadened to include a wider spectrum of graduates with and hospital are open not only to the group's employees the aim of providing the group with a pool of staff qualified and their dependents but also to members of the local to manage all aspects of the group’s agricultural activities. communities. The group actively supports measures to control endemic diseases and to further the education of Continued training is provided for staff at all levels. its workforce in hygiene and similar health matters. No Regular programmes are constructed by, and operated incidents of vector borne diseases (such as dengue fever out of, the group's own training school. These are and malaria) were reported on the group’s agricultural supplemented by external management development estates during 2009. courses and attendance at industry conferences. A wide variety of topics is covered including health and safety The group has health and safety policies that are clearly and sustainability. New programmes introduced during communicated to all employees and are managed 2009 included communication skills and English through regular meetings on each operating unit attended language courses. by management and employee representatives. The minutes from all such meetings are reviewed by senior The group promotes a policy for the creation of equal and management ultimately accountable to the group ethnically diverse employment opportunities and managing director and appropriate action is taken to encourages the establishment of forums in which remedy any deficiencies identified. There were no serious employees or their representatives can have free and accidents to members of the group’s agricultural open dialogue with the group’s management. workforce during 2009. Community development Having available staff in the numbers and with the skills and commitment that are required is vital to the group in The group believes that maintenance of good relations its efforts to establish best practice in all aspects of its with, and encouraging the development of, local agricultural activities. In most years, graduates from communities in its areas of operation is an essential Indonesian universities are recruited to join a twelve component of its agricultural operations. To this end, the month cadet training programme organised by the group provides assistance to adjacent villages by helping group’s training school and providing a grounding in oil with road building and other infrastructural requirements palm estate management. Those successfully completing and encourages joint social and cultural activities the programme are offered management positions. between its employees and local villagers. Infrastructural projects planned for 2010 include provision of electricity generating sets to five local villages, replacement of a 29 Review of the group continued village bridge and drilling of tube wells in two villages to the group provides support by way of agreements to provide drinking water. purchase produce and financial and technical assistance. Such projects have included chicken and duck rearing, The group has established a separate department to fish farming, fruit, vegetable and rice cultivation and bee liaise with the local communities and to formulate and keeping. To date, projects of this type have been manage the group's community development initiatives. organised by small groups of individual villagers. Going Staffed with a manager and four assistants, the forward, the group hopes to encourage projects department is the primary interface between the group organised by village cooperatives so as to permit projects and the local communities. In addition, a liaison on a slightly larger scale and to widen the opportunity for committee established in 2009 and made up of members of each village to participate in such projects if representatives of the group and the local communities they so wish. now meets regularly and provides a forum in which concerns of any of the parties represented can be aired Smallholder programmes formally. The community development department plays an areas adjacent to the group's agricultural operations in important role in the titling of new agricultural land areas establishing their own smallholdings of oil palm. The group continues to support the local communities in allocated to the group. It oversees the production by external consultants of the community needs assessment that the group now commissions in all new areas prior to any development of such areas. It explains to the local communities the implications of oil palm development and Until 2009, this support was provided to individual smallholders pursuant to a scheme known as “Program Pengembang Masyarakyat Desa” or “PPMD”. Under this scheme, each individual smallholder cultivates oil palm on it seeks to identify and meet local concerns so that the his own two hectare plot. The group provides technical free, prior and informed consent of local people is advice and supplies each smallholder with fertilisers and obtained for new developments. chemicals on deferred terms on the basis that when the smallholder’s oil palm plantings reach maturity, all FFB The department is also responsible for assisting the local produced will be sold to the group for processing and the communities in establishing self help programmes that group will, on an agreed basis, recover from the amounts will assist with their economic development. Such payable for the FFB, the deferred amounts owed to the programmes fall into two categories: first, smallholder oil group. At 31 December 2009, some 1,560 hectares of palm plantings (which are made viable by the nearby smallholder plantings had been established following this availability of group oil mills able to process the FFB crops model across 14 local villages. that the plantings will produce); and, secondly, community projects that can take advantage of the readily accessible Although interest from the local village communities in the local market for produce that the proximate group cultivation of oil palm has been increasing year by year, workforce provides. over recent years it has become progressively clearer that the logistical constraints of dealing with a large number More detailed information regarding smallholder oil palm of individuals, each of whom operates on a relatively small plantings is given under “Smallholder programmes” below. area, will inevitably limit the rate at which the group can As respects the other community development projects, expand the smallholdings that it supports under the 30 PPMD scheme. Accordingly, in order to accelerate the supplemented to the extent necessary by funds advanced rate of smallholder development by local village by the group. The group aims to initiate further plasma communities, the group decided that, while it would schemes during 2010 on land areas totalling 3,000 continue to support established smallholdings under the hectares provided by cooperatives formed by a number of PPMD scheme, it would concentrate its future efforts on villages. It is intended that these schemes will be supporting local village cooperatives in developing oil organised on a basis similar to that adopted for the initial palm on larger areas pursuant to what are known as scheme. “plasma schemes” (such terminology reflecting an analogy with elementary particle physics in which a Whilst the group views its support for smallholder oil palm company’s estates represent a “nucleus” and the plantings in the local communities adjacent to its associated smallholders a “plasma” of linked particles). operations as part of its social obligations to those communities, the discharge of those obligations will be Under the plasma scheme model, the land areas for mutually beneficial to the communities and the group. development are provided by village cooperatives but the The communities will benefit from the economic development is managed by the group for a fee with the development generated as a result of the plantings while advantage that development and production standards the group will benefit from the additional throughput in its similar to those of the group can be established in the oil mills that will result from the processing of FFB from plasma areas. The costs of development are borne by the the plantings. cooperatives but with funding from external sources provided on terms that FFB produced by the cooperatives Conservation will be sold to the group and that the group will ensure that, out of the proceeds of such sale, the cooperatives From the outset, the group has planned the development meet their debt service obligations in respect of the of its agricultural operations on the basis of environmental external funding. impact assessments and advice provided by independent experts. It continues to do so. Within the areas already 2009 saw the establishment by the group of its first developed, approximately 6,000 hectares have been plasma scheme. Out of an initial gross area of 1,500 retained as conservation reserves with the aim of hectares provided by a cooperative of three local villages, conserving flora and fauna and enhancing the biodiversity 1,300 hectares were cleared and a total of 770 hectares of the landscape. Areas identified as requiring had been planted by year end. The balance of the 1,300 conservation and set aside as part of the planning hectares cleared area will be planted during 2010. process for each new development area will be added to Cooperative members form the core labour force for the the conservation reserves as the group expands. scheme but are supplemented when necessary by labour from the group’s estates for which the group renders an As with community development, the group has appropriate charge. Financing for the scheme has been established a separate department (“REA Kon”) to agreed with a local development bank in the form of a implement the group’s conservation objectives. Led by an fifteen year loan secured on the land and assets of the experienced local manager with a staff of eight and scheme and guaranteed by a member of the group. It is advised by an international conservation expert, the expected that the loan will finance most of the initial department has established a long term development development costs of the scheme but will be plan for the period 2010 to 2015 with the following objectives: 31 Review of the group continued • within the locality of the group’s agricultural 2009. REA Kon is monitoring the health of this promising operations, compiling a detailed record of the orang-utan population and will consider enrichment physical attributes of the landscape, of its bio- planting in the conservation reserves if it appears that the diversity resources and of the status and value of naturally available food resources need to be enhanced. those resources in a local, national and international context; • minimising or eliminating adverse human impacts from the group’s plantation operations on soil, water and biological communities; achieving biodiversity conservation through education and cooperation with local communities to promote both protection and sustainable use; and • • seeking conservation outcomes that provide long term benefits to species, local communities and the plantings. Quarterly monitoring of water quality in all rivers in the conservation reserves on the north of the Belayan was initiated during 2009 and this will be extended to the tributaries in the conservation reserves on the south bank during 2010. Mapping of pest outbreaks in selected group estates has also started and REA Kon intends during 2010 and 2011 to study the contribution that forest predators can make to pest control within oil palm group. A number of conservation education camps for children in the group’s primary schools were organised by REA Kon REA Kon augments its effectiveness through during 2009. It is planned to continue this programme in partnerships with local bodies and international non 2010 and to invite children in local village schools to join governmental organisations. Since commencing the camps. Conservation for added value schemes have operations in 2008, the department has organised clear been started whereby local villages are provided with physical demarcation of all existing conservation reserves seedlings of rattan and fruit trees to be planted in, and at and has established a permanent database on flora and the periphery of, the group’s conservation reserves. fauna that are found within the reserves and neighbouring These schemes are intended to enhance sustainable use watercourses. Up to the end of 2009, a total of 38 and deter destruction of the areas by local slash and burn species of mammals, 143 species of birds and 71 species farming. of cold-blooded vertebrates (such as frogs, snakes and lizards) had been logged on land. In addition, The directors believe that there is scope to extend the collaboration in studies of aquatic fauna conducted with REA Kon activities beyond the immediate areas of the the Indonesian Institute for Sciences and Dr Maurice group's agricultural operations into the wider Belayan Kottelat, a leading ichthyologist, had recorded in total over river basin and that to do so would increase the 100 species of fish and described several previously unknown species (including Leiocassis sp, Pangio sp and Rasbora sp). conservation gains that can be delivered. To this end the group has established a charitable foundation, the Yayasan Ulin (“YU”) or Ironwood Foundation, which the group supports but which is also in a position to accept Camera trapping and walking surveys within the donations from, and work with, third parties. YU will focus conservation reserves and adjacent estate areas have on promoting conservation of areas external to the detected a number of orang-utans (estimated at between group’s plantations. YU is assisted by a board of 11 and 15). At least two baby orang-utans are known to respected international and local scientific advisers and is have been born on the conservation reserves during managed on the ground by senior REA Kon staff. In 32 addition to the group, donors to date have included a reduction in the annual use of inorganic fertiliser per number of zoological and conservation organisations as mature hectare from 1.1 tonnes to 0.9 tonnes. It is well as private individuals. Sustainable practices estimated that the conversion to composting will result in a further reduction of 0.2 tonnes per hectare. There is evidence to suggest that when natural fertiliser is substituted for inorganic fertiliser of an equivalent nutrient The group recognises its social obligations as respects content there is an effectiveness gain because the natural pollution and energy efficiency. The group operates a fertiliser enhances soil structure and thereby improves zero burning policy in relation to land development and, in plant uptake of nutrients. dry periods, maintains active fire patrols in an effort to limit the risks of accidental fires. Corridors are used to Handling arrangements are designed to ensure that no separate all plantings from water courses and the latter CPO, CPKO or effluent passes into water courses. are regularly monitored to ensure that they are not Regrettably during 2009, one accidental spillage contaminated by leaching of fertilisers and chemicals. occurred during the transfer of CPO from a riverside The group actively promotes integrated pest loading point to a barge. Back pressure caused by a kink management throughout its operations. Wherever in a flexible pipe leading from a pump at the loading point possible, natural predators are preferred to pesticides for to the barge led the flexible pipe to detach from the pump pest control. Selective varieties of flowering plants have and for a few minutes, until pumping was stopped, CPO been planted throughout the group’s estates to promote was discharged into the Belayan river. Compensation the population of wasps, the natural predators of was paid to the affected villagers and urgent steps were bagworm and caterpillars. taken to prevent a recurrence, including improved bunding at pumping points and better supervision of CPO All processing waste is recycled. As noted under “Costs” loading. in “Operations” above, this has always been the case but changes were made during 2009 to increase the Fibre extracted during the milling of oil palm fruit is used efficiency of the recycling process and thereby reduce the to fuel oil mill boilers from which steam is generated. The group’s dependence on inorganic fertilisers. Oil mill steam is then used to drive steam turbines for generating effluent continues to be treated in effluent ponds but, electricity. This electricity is sufficient to power not only whereas previously the treated effluent and empty fruit the group’s oil mills but also to provide power to several bunches were simply distributed in the oil palm areas, estate villages. However, the power is not sufficient for all these residues are now combined into a compost which is villages and power can anyway only be provided by this also applied in the oil palm areas but results in a greater means when the mills are running. The agricultural reduction in the requirement for inorganic fertiliser than operations are therefore heavily dependent on diesel the previous recycling of untreated residues permitted. generated power and this, coupled with diesel use in The residue from palm kernel milling, which is less vehicles, results in a currently estimated consumption of suitable for composting, continues to be recycled directly 90 litres of diesel oil per tonne of CPO produced. back to the oil palm areas. The group estimates that, prior to the introduction of efficiency in its use of diesel oil by capturing methane composting, recycling of processing waste resulted in a released during the digestion of mill effluent and then The group is considering a project to achieve greater 33 Review of the group continued utilising such methane to drive gas powered generators. required systems and controls. This process is now This would not only materially reduce the group's use of substantially complete and the group has therefore diesel for power generation but would also substantially applied for RSPO accreditation audits (conducted by eliminate current methane emissions from effluent ponds. RSPO approved independent certifiers) to be initiated Preliminary estimates suggest that such a project would during 2010 with a view to obtaining final certification provide additional power capacity of between 2 to 3 during 2011. Compliance with RSPO procedures and megawatts per oil mill but would involve investment of up standards is exacting but the group remains committed to to $4 million per mill (more than originally thought) in long term sustainable development and eventual establishing the methane capture facilities, gas powered production of certified sustainable palm oil. generating capacity and additional electrical reticulation that would be required. The group has now, with the Once obtained both ISO 14001 and RSPO accreditations assistance of the Danish Ministry of Climate and Energy, are subject to periodic independent recertification. pre-registered the contemplated project under the United Nations Framework Convention on Climate Change and Both ISO 14001 rules and RSPO principles and criteria hopes to be accepted for full registration during 2010. include requirements relating to environmental and social This would permit the group, upon completion of the conduct. As a substantial Indonesian plantation operator, project, to obtain carbon credits under the Clean REA Kaltim is also subject to periodic appraisal of its Development Mechanism which would make it easier to governance in relation to environmental and social justify the capital commitment that is involved. matters pursuant to a programme managed by the Accreditation and verification Indonesian Ministry of Environment and known as “PROPER”. PROPER evaluations are conducted by both the East Kalimantan provincial authorities and by the The group has obtained ISO 14001 certification in central government authorities and the results of the respect of both of its mills, the kernel crushing plant and evaluations are marked by the presentation of coloured two of the REA Kaltim estate units. It is hoped that flags ranging from black for the poorest assessment to certification of the balance of REA Kaltim’s estate units gold for the best. In 2009, REA Kaltim was again and of the SYB estate units will be completed during awarded a green flag following the provincial PROPER 2010. assessment but, regrettably, was downgraded from the preceding year’s green flag to a blue flag by the central The group is a member of the Roundtable on Sustainable government assessment. The downgrade reflected the Palm Oil (“RSPO”) which has produced a set of eight inspection team’s finding of sub-optimal exhaust principles and 39 criteria for the sustainable production of emissions from the deteriorating boiler in the group’s palm oil. Whilst the directors believe that the group's older oil mill (as referred to under “Processing and operational practices already meet the requirements of transport facilities” in “Operations” above). These will be RSPO, accreditation will require that such operational eliminated by replacement of this boiler which is in hand. practices are embedded in formal systems and are In the meanwhile, efforts are being made to improve boiler subject to controls that are auditable. Over the past two combustion by better monitoring of moisture in, and mix years, in tandem with the ISO 14001 certification of, the processing residues that fuel the boiler. process, the group has, with assistance from external consultants, taken steps to ensure that it has in place the In line with its policy of continuous improvement, the group employs an international firm of consultants to 34 conduct periodic reviews of management performance in which are wholly owned by the group's local partners and relation to production and environmental practices and which in turn own the company holding the Kota Bangun social responsibility. Conclusions and recommendations concession. A fourth company, PT KCC Mining Services are carefully reviewed by senior operating management Indonesia, incorporated under the Indonesian foreign and the group’s managing director. Material concerns are investment law and owned 95 per cent by KCC discussed by the board of the company and appropriate Resources Limited (“KCC”) (a wholly owned subsidiary of responsive action is taken. Coal operations the company incorporated in England and Wales that acts as a co-ordinating company for the group's coal operations) and 5 per cent by the local partners, has been established by KCC to spearhead the group's coal Concessions and structure operations. Following its acquisition of interests in the Liburdinding The three coal mining concession holding companies are and Muser coal mining concessions located near Tanah being financed by loan funding from the group. KCC will Grogot in the southern part of East Kalimantan in the have the right to acquire the concession holding second half of 2008, the group further extended its coal companies at original cost as soon as Indonesian law operations in December 2009 with the acquisition of an allows this on a basis that will give the group (through interest in a third coal mining concession located near KCC) 95 per cent ownership with the balance of 5 per Kota Bangun in the central part of East Kalimantan which cent remaining owned by the local partners. In the was purchased for a cash consideration of $4,500,000. interim, the group will receive appropriate remuneration The Liburdinding and Muser concessions cover areas of, for the funding and services that it provides to the respectively, 1,000 hectares and 2,100 hectares and the concession holding companies and no dividends or other Kota Bangun concession an area of 4,400 hectares. distributions or payments may be paid or made by the concession holding companies to the local partners Until recently, Indonesian law restricted foreign direct without the prior agreement of KCC. ownership of Indonesian companies holding coal mining concessions but a new Indonesian mining law enacted in The rights held by the concession holding companies in December 2008 permits such ownership (subject to a respect of the Liburdinding and Kota Bangun provision that foreign controlled mining companies must concessions are in the form of exploitation licences. be owned locally to the extent of not less than 20 per cent These licences are valid for terms expiring, respectively, in within a prescribed period after such companies 2013 and 2016, but are renewable on expiry. Currently, commence commercial mining operations). Muser is held on an exploration licence but this will be converted into an exploitation licence which will be for an Pending clarification of how the new mining law will be initial term of five years and will also be renewable on applied in practice (which will reflect regulations expiry. Royalties based on coal sales are payable in implementing the law that have only recently been respect of Liburdinding and Muser at the rates of 13 and published), the group has entered into arrangements with 5 per cent, respectively, and will be payable in respect of a local investor and members of his family (together the Kota Bangun at the rate of 13 per cent. All three group's “local partners”) whereby the Liburdinding and concession holding companies will be required to Muser concessions are currently held by two companies reconstitute the areas mined when coal extraction has been completed. 35 Review of the group continued Geological surveys conducted to date suggest that the Java to facilitate deliveries to industrial users of coal in concessions contain commercial deposits of coal that area (a large coal consuming district) and to permit accessible by open cast mining and having typical gross blending with other coal to meet specific buyer calorific values of between 5,800 and 6,200 kilocalories requirements. The Semarang depot is now in operation per kilogramme (“kcal/kg”) air dried basis (“ADB”) in the and sales of Liburdinding coal are being made through it. case of Liburdinding, between 7,000 and 7,200 kcal/kg Additionally, with the recovery in coal prices of recent ADB in the case of Muser and between 8,500 and 9,500 months, export demand has improved and some export kcal/kg ADB in the case of Kota Bangun. Inferred coal shipments of Liburdinding coal are in prospect. For 2010, reserves are estimated at 14.7 million tonnes for the group is budgeting for output from Liburdinding of Liburdinding, 17.6 million tonnes for Muser and not less 150,000 tonnes with a maximum stripping ratio (being than 2 million tonnes for Kota Bangun. Geological the amount of earth and rock (or “overburden”) required to surveys to delineate more precisely the available reserves be removed to gain access to the coal, expressed as the are continuing. number of cubic metres of overburden in situ to be removed to extract one tonne of coal) of 7 to 1. The group is investigating the possibility of one of the coal mining concession holding companies obtaining a licence The group also intends that the newly acquired Kota to quarry stone from an area near to the group's Bangun concession should be brought into production agricultural estates with a view to selling crushed stone to during 2010 with a view to achieving, by December 2010, the group's agricultural operations and to third parties an output of 16,000 tonnes per month. Mining plans for operating in the vicinity of those operations. the concession were completed in the early part of 2010 Mine development a mining contractor has been appointed and initial removal of overburden should start in the near future. The Kota Bangun concession is projected to involve a During 2009, the group's development focus was on stripping ratio of in excess of 20 to 1 and will require bringing the Liburdinding concession into production. A blasting of the overburden. However, the Kota Bangun mining plan had been completed, and the necessary concession is well located, being approximately 5 infrastructural facilities (principally a port facility and a 38 kilometres from the Mahakam river and the high calorific kilometre road to the port) were substantially complete, by value coal that the concession contains is very suitable for June 2009. However, the group withdrew from its export. original plan to establish, as rapidly as possible, a production level of 30,000 tonnes per month when it Continuing geological assessments of the Muser became clear that the sulphur content of the Liburdinding concession indicate that the Muser coal deposits are coal was such that, in what had become a buyer's market complex and that the overburden includes rock that for export coal, it would be necessary either to blend the cannot easily be removed without blasting which may coal mined with purchased coal having a lower sulphur pose problems given that there are villages located in content or to accept a significant price penalty. quite close proximity to the concession. Moreover, the Muser coal has a higher sulphur content than the The group concluded that it was important to be able to Liburdinding coal. The group therefore intends to market Liburdinding coal within Indonesia and steps were continue geological exploration at Muser during 2010 but taken to establish a coal depot at Semarang in Central to defer bringing the concession into production until 36 commercial levels of output are being obtained from The group aims to augment the basic mining revenues Liburdinding and Kota Bangun. Markets, revenues and costs from the Liburdinding and Kota Bangun concessions in two respects during 2010. First, it intends to make available the port facility established for the Liburdinding concession for use by third parties for an appropriate Within the Asia Pacific region, China and India are large charge. Secondly, the group intends to take advantage of coal producers but their internal production is inadequate the acceptance of one of the concession holding to meet their energy requirements. The shortfall is made companies as one of a limited number of approved up by imports primarily from Indonesia and Australia. A suppliers to PLN to establish a limited coal trading activity number of other Asian Pacific countries also have in which the group will source coal from third parties, demand for imported coal. Because coal is bulky, either by outright purchase or by mining third party economic availability is constrained by logistics. The concessions against payment of an agreed royalty, and directors consider that this offers excellent opportunities will then sell the coal so sourced to PLN and others. As for Indonesian coal producers because Indonesia is both of these proposed additions to the coal operations geographically well located for the main Asia Pacific will be new, there can be no certainty as to how fast and markets and much of its coal (particularly in East in what volumes they can be added. However, the Kalimantan) is located adjacent to rivers which provide an directors consider it reasonable to aim over time to economic method of evacuation Furthermore, in addition achieve levels of 20,000 tonnes per month of third party to the potential of an expanding export market driven by throughput through the Liburdinding port and of 50,000 increasing demand for coal generated power, Indonesia tonnes per month of traded coal sales (sourced by a can expect significant growth in internal demand as the combination of outright purchases and mining of third Indonesian state electricity company (“PLN”) implements party concessions under royalty arrangements). plans to expand generating capacity from an existing 25,000 megawatts to 44,000 megawatts with the The group is budgeting the overheads of its coal addition of 10,000 megawatts during 2010 and the operations for 2010 (excluding head office costs in the balance of 9,000 megawatts by 2014. UK, interest, depreciation and amortisation) at $100,000 per month. Once commercial levels of production are The directors believe that the published Newcastle being achieved, production costs per tonne are projected globalCOAL weekly index, when adjusted for differences in the ranges $64 to $78 per tonne for Kota Bangun coal in calorific values (the index being based on coal of net and $23 to $29 per tonne for Liburdinding coal. Net calorific value of 6,000 kcal/kg), has over time provided a contribution from third party coal throughput in the reasonable indicator of prevailing East Kalimantan coal Liburdinding port is projected at $2.50 per tonne and the prices. This index opened 2009 at $79 per tonne, rose to contribution margins achievable on traded coal sales at a high of $88 during January, then, in the wake of the between $5 and $10 per tonne (depending on the mix of world economic downturn, fell to a low during April of coal sourced by outright purchase and coal sourced by under $60 before recovering gradually to close the year mining third party concessions). The overall results of the at $85. The index recovered further during January 2010 coal operations will be critically dependent upon sales to a high of just over $100 and currently stands at $98. volumes and prevailing coal prices. 37 Review of the group continued Sustainable practices expected to be harvested from the group's oil palms over the full remaining productive lives of the palms and to an In developing its mining activities, the group remains estimated profit margin per tonne of FFB so harvested. committed to observing international standards of best This estimated unit profit margin is based on current costs environmental practice. Steps are being taken to establish and an estimated produce value for transfer to mill health and safety procedures to protect and safeguard derived from a 20 year average of historic CPO prices but the welfare of all persons involved with the mining is buffered to restrict any implied change in margin in operations, to ensure the proper management of waste contradiction of the trend in current margins. The 20 year water and to provide for the reinstatement, in so far as average CPO price, FOB port of Samarinda and net of reasonably practicable, of land areas affected by mining Indonesian export duty, to 31 December 2009 amounted to their original condition upon completion of mining to $446 per tonne which is higher than the 20 year operations. Finances Accounting policies average to 31 December 2008 of $431 per tonne. However, because of inflation, the unit profit margin per tonne of FFB harvested implied by the average price of $446 and the current unit cost of production would be lower than the unit profit margin assumed at 31 December 2008 although the unit profit margin that is The group continues to report in accordance with currently being achieved is, in reality, greater than that International Financial Reporting Standards (“IFRS”) and margin. Accordingly, the same unit profit margin as that to present its financial statements in US dollars. The assumed as at 31 December 2008 (namely $50 per company continues to prepare its individual financial tonne of FFB) has been applied in valuing the biological statements in sterling and in accordance with UK assets as at 31 December 2009. Generally Accepted Accounting Practice; accordingly the company’s individual financial statements are presented The discount rates used for the purposes of the biological separately from the consolidated financial statements. asset revaluation at 31 December 2009 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 2008: the “Accounting policies (group)” section of this annual respectively, 16 per cent and 19 per cent). The directors report. The accounting policy relating to biological assets believe that the risks of successfully harvesting FFB (comprising oil palm plantings and nurseries) is of projected to be produced from newly developed areas are particular importance. Such assets are not depreciated significantly greater than those of harvesting the but are instead restated at fair value at each reporting 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 2009 has been derived by the directors December 2009 and 31 December 2008 were derived on a discounted cash flow basis by reference to the FFB accordingly. 38 The directors recognise that the IFRS accounting policy in higher than the comparable figure for 2008 of $27.7 relation to biological assets does have theoretical merits million. Other significant movements in the components in charging each year to income a proper measure of of operating profit between 2008 and 2009 comprised a capital consumed (so that, for example, a fair distinction is positive swing in the aggregate IFRS fair value drawn each year between the cost of the shortening life adjustments of $18.2 million (reflecting gains of $11.3 expectancy of younger plantings still capable of many million in 2009 against losses of $6.9 million in 2008) years of cropping and that of older plantings nearing the and an increase in administrative expenses ($7.2 million end of their productive lives). It does, nevertheless, in 2009 against $3.5 million in 2008). concern the directors that no estimate of fair value can ever be completely accurate (particularly in a business in The 2009 gains on IFRS fair value adjustments which selling prices and costs are subject to very material comprised a gain of $1.5 million on the revaluation of fluctuations). Moreover, in the case of the group’s agricultural produce inventory and a gain of $9.8 million biological assets, small differences in valuation on the revaluation of biological assets (2008: losses of, assumptions can have a quite disproportionate effect on respectively, $4.2 million and $2.7 million). The gain on results. The biological assets are recorded in the group revaluation of agricultural produce inventory reflected a balance sheet at 31 December 2009 at $204 million. An higher CPO price at 31 December 2009 than at 31 increase or reduction of $5 per tonne in the estimated December 2008 partly offset by a reduction in inventory profit margin used for the purpose of the valuation of $50 volumes, while the gain on revaluation of biological assets per tonne of FFB would increase or reduce the valuation resulted mainly from the reinstatement of the group's by approximately $22 million. extension planting programme and the resultant increase in planted hectarage during 2009. Sales of coal made during 2009 were minimal and the gross assets of the group’s coal operations at 31 An apparently marked increase in administrative December 2009 represented only some 3 per cent of the expenses from $3.5 million in 2008 to $7.2 million in group’s gross assets. Accordingly, no separate segmental 2009 was almost entirely accounted for by a reduction report in respect of the coal operations has been provided from 2008 to 2009 in net exchange gains of $2.1 million, in the notes to the consolidated financial statements. a swing of $1.0 million on movements on accruals in Group results respect of the company's prospective liability for employer national insurance contributions on exercise of a director's option (which reflected movements in the Group operating profit for 2009 amounted to $47.7 market price of the company's ordinary shares) and a million and profit before tax to $41.7 million against the swing of $0.8 million on movements in the accrued comparable figures of the preceding year of $40.6 million liability for pension funding which was adjusted during and $36.3 million. 2009 to reflect the latest triennial actuarial valuation of the group's pension scheme. With increased sales volumes and despite lower selling prices, revenue for 2009 at $78.9 million was only Group profit before tax for 2009 amounted to $41.7 marginally below that of 2008 ($79.6 million). The million against $36.3 million in 2008. The increase was increased volumes coupled with inflation did, however, substantially in line with the increase in operating profit mean, that cost of sales for 2009 at $34.0 million was but did reflect higher finance costs ($6.8 million against 39 Review of the group continued $5.4 million). These were largely the result of a lower As noted under “Land development” above, the group capitalisation rate than in 2008. retains ambitious plans for continued extension planting of oil palms. These plans will require substantial Before deduction of the interest component added to investment by the group and the need to fund this biological assets, interest payable in 2009 amounted to investment will inevitably constrain the rates at which the $10.4 million (2008 - $10.0 million). Interest cover for directors feel that they can prudently declare, or 2009 (measured as the ratio of earnings before interest, recommend the payment of, future ordinary dividends. tax, depreciation and amortisation, and biological gain to The directors appreciate that many shareholders invest interest payable) was 4.0 (2008 - 4.7). not only for capital growth but also for income and that the payment of dividends is important. They do believe The group has previously provided in full against a that, with the crop increases in prospect over the next few disputed Indonesian assessment of tax on the 2006 years, it should be possible, notwithstanding the profits of REA Kaltim. An appeal is continuing against constraints of the development programme, to maintain a this assessment but no credit has been taken in 2009 for progressive dividend policy albeit that the rate of the recovery of tax that would result from the appeal progression may have to be modest. The directors retain proving successful. their previously stated intention that any new level of dividends set in respect of any given year should be At the after tax level, profit for the year for 2009 was sustainable in future years. $29.9 million against $25.8 million in 2008 while profit attributable to ordinary shareholders was $27.1 million The directors continue to believe that capitalisation issues against $23.8 million. Fully diluted earnings per share of new preference shares to ordinary shareholders, such amounted to US 81.4 cents (2008 - US 71.5 cents). as were made on several previous occasions, provide a useful mechanism for augmenting returns to ordinary The group's target long term average annual return on shareholders in periods in which good profits are adjusted equity is 20 per cent. The return achieved for achieved but demands on cash resources limit the scope 2009 was 26 per cent (2008: 26 per cent). for payment of cash dividends. Because of the then state Dividends of markets for fixed return securities of smaller listed companies, the directors did not propose any such capitalisation issue during 2009 but they hope that the The fixed semi-annual dividends on the 9 per cent current indications of economic recovery may make cumulative preference shares that fell due on 30 June possible a further capitalisation issue of new preference and 31 December 2009 were duly paid. Dividends shares during 2010. totalling 4p per ordinary share have been paid in respect of 2009 (2008 – 3p per ordinary share). These Capital structure comprised a first interim dividend of 2p per ordinary share paid on 4 September 2009 and a second interim dividend The group is financed by a combination of debt and equity in lieu of final of 2p per ordinary share paid on 29 January (which under IFRS includes minority interests and the 2010. 40 company's preference capital). Total equity less minority interests at 31 December 2009 amounted to $193.4 million as compared with $162.0 million at 31 December 2008. Minority interests amounted at those dates to, under the facility at 31 December 2009 was repayable as respectively, $1,314,000 and $580,000. follows: 2010: $1.5 million; 2011: $2.1 million; 2012: $2.7 million; 2013: $3.6 million and 2014: $0.3 million. No new debt securities were issued by the group during 2009 but, in November 2009, the company issued The group has entered into long term sterling US dollar 1,490,000 new 9 per cent cumulative preference shares debt swaps to hedge against US dollars the sterling for cash by way of a placing at a price of 103.18p per liability for principal and interest payable in respect of the share (3.18p being an amount equal to the accrued entire issue of the sterling notes (but in the case of dividend attaching to each such share at the date of interest only as respects interest payments falling due up allotment). The net proceeds of the placing were utilised to 31 December 2015). to increase the cash available to the group as a cushion against possible additional cash requirements for the In February 2010, the company issued an additional $15 group's development programmes. million nominal of dollar notes at $90 per $100 nominal of notes in conjunction with the issue by KCC of 150,000 Group indebtedness and related engagements at 31 redeemable participating preference shares of $10 each December 2009 amounted to $82.5 million, made up of at par. The monies raised, totalling $15 million before US dollar denominated bank indebtedness under an issue expenses, have been deployed in the group’s coal Indonesian consortium loan facility of $10.2 million, £37 operations save to the extent of $4.5 million which has million nominal of 9.5 per cent guaranteed sterling notes been applied in repaying short term advances of an 2015/17 (“sterling notes”) (carrying value: $57.0 million), equivalent amount that had previously been made to the $7.7 million in respect of the hedge of the principal coal operations from elsewhere in the group. amount of the sterling notes as described below and $30 million nominal of 7.5 per cent dollar notes 2012/14 The KCC participating preference shares will provide a (“dollar notes”) (carrying value: $29.7 million). Against limited interest in the group's coal operations such that if these obligations, at 31 December 2009 the group held those operations achieve an average annual level of cash and cash equivalents of $22.1 million. earnings before interest, tax, depreciation and amortisation of $8 million over the four and a half year The sterling notes are issued by REA Finance B.V. (“REA period from 1 January 2010 to 30 June 2014 (equivalent Finance”), a wholly owned subsidiary of the company. to $36 million for the full period), the combined return to They are secured principally on unsecured loans made by persons who subscribed the additional dollar notes and REA Finance to REA Kaltim and SYB, are guaranteed by KCC participating preference shares and who retain their the company and are repayable by three equal annual notes and shares until redeemed will be 15 per cent per instalments commencing 31 December 2015. The dollar annum. If the required level of earnings is not achieved, notes are unsecured obligations of the company and are then, except in certain limited circumstances (such as repayable by three equal annual instalments commencing divestment of all or a significant part of the coal 31 December 2012. operations or a change in control of the company), no dividends or other distributions will be paid or made on the Borrowings under the Indonesian consortium loan facility KCC participating preference shares and after 31 are secured on the assets of REA Kaltim and are December 2014 those shares will be converted into guaranteed by the company. The outstanding balance valueless deferred shares. 41 Review of the group continued Group cash flow and development of coal concession rights of $7.5 million (2008: $5.4 million). Group cash inflows and outflows are analysed in the consolidated cash flow statement. Cash and cash The net cash outflow on financing activities of $4.3 million equivalents reduced over 2009 from $30.3 million to (2008, inflow: $19.9 million) was made up of a net inflow $22.1 million. The reduction of $9.4 million (adding back from the issue of new preference shares of $2.5 million $1.2 million benefit from the effect of exchange rate (2008, issue of sterling notes: $26.9 million), net changes) represented $5.1 million utilised in funding that repayments of bank debt and finance lease obligations of element of investing activities not met by net cash from $2.8 million (2008: $3.1 million) and an outflow in respect operating activities and in meeting a net outflow on of dividend payments of $4.0 million (2008: $3.9 million). financing activities of $4.3 million. Liquidity and financing adequacy Net cash from operating activities for 2009 amounted to $29.6 million against $32.3 million in 2008, a reduction As noted under “Group cash flows” above, at 31 of $2.7 million. There were some significant movements December 2009, the group held cash and cash in the component elements of this reduction. Operating equivalents of $22.1 million These balances have been profit increased by $6.1 million but, after reversal of non subsequently increased by the net proceeds (being $15 cash items, operating cash flows before working capital million less estimated expenses of $430,000) of the showed a reduction of $10.1 million Working capital in recent issue of additional dollar notes and KCC 2009 absorbed cash of $1.3 million against a release of participating preference shares referred to under “Capital $0.7 million in 2008 while finance charges were higher in structure” above. In addition, the group had at 31 2009 than in 2008 by $1.3 million. Counterbalancing December 2009 and retains an undrawn working capital these negative movements was a large positive line of $4.75 million that is subject to annual renewal. movement of $10.8 million on taxes paid ($2.3 million against $13.1 million). This reflected timing differences The planned planting of a further 8,000 hectares of oil in settling tax liabilities and a non recurring payment in palm during 2010 and 2011 and the concomitant 2008 of additional tax demanded by the Indonesian tax requirement for continuing investment in estate buildings, authorities in respect of REA Kaltim's profits for 2006 oil palm processing facilities and other estate plant and (which had to be settled before the group could appeal equipment will involve the group in continuing major against the demand). capital expenditure over the next two years. Given the group's existing cash resources and provided that the Investing activities for 2009 involved a net outflow of CPO price remains at reasonable levels, the directors $34.8 million (2008: $48.3 million). This represented expect that such capital expenditure can be funded from new investment totalling $35.8 million (2008: $49.5 internally generated cash flow. Because of the volatility of million), offset by inflows from interest and other items of commodity markets, the directors cannot rely on this $1.0 million (2008: $1.3 million). The new investment expectation and, whilst the expansion programme can, in comprised expenditure on further development of the extremity, be rapidly scaled back to align with available group's plantations of $27.0 million (2008: $39.8 million), cash resources, once areas have been planted with oil on land rights and titling of $1.3 million (2008, including palms, some or all of the benefits of investment thereby the purchase of PBJ: $4.4 million) and on the acquisition made will be lost if the areas are not maintained and the 42 milling capacity needed to process the resultant FFB is Financing policies not installed. Accordingly, the directors believe that it is essential that the group holds some cash cushion to meet The directors believe that, in order to maximise returns to possible calls for additional cash to fund the oil palm holders of the company's ordinary shares, it is essential expansion programme. To this end, the group is currently that a proportion of the group's funding needs are met seeking to arrange further fixed term bank facilities in with prior charge capital (comprising borrowings and Indonesia. preference share capital). During 2010, capital will be required by the coal The directors consider that the company’s preference operations to fund the development of the Kota Bangun shares (which entitle the holders to a cumulative annual concession and to meet the working capital requirements dividend of 9 per cent of the nominal value of the shares, that will arise if the coal operations develop as envisaged. being £1 per share) represent a valuable component of It is expected that the funds provided to the coal the group's prior charge capital in that these provide operations from the recent issue of additional dollar notes relatively low risk permanent capital. The directors also and KCC participating preference shares will be sufficient believe that the company can comfortably support for these purposes. In addition, the coal operations preference capital at the level at which the issued should shortly have available to them an undrawn working preference capital currently stands and that, if capital line of $3 million that is subject to annual renewal. circumstances permit, the company should be prepared to raise additional capital by issuing further preference The group's financing is materially dependent upon the shares (to an extent that the company can still well contracts governing the sterling and dollar notes. There support) and apply the proceeds in reducing group are no restrictions under those contracts, or otherwise, on borrowings. the use of group cash resources or existing borrowings and facilities that the directors would expect materially to As respects borrowings, the directors believe that the impact the planned development of the group. Under the group’s interests are best served if its borrowings are terms of the Indonesian consortium loan facility, REA structured to fit the maturity profile of the assets that the Kaltim is restricted to an extent in the payment of interest borrowings are financing. Since oil palm plantings take on borrowings from, and on the payment of dividends to, nearly four years from nursery planting to maturity and other group companies but the directors do not believe then a further period of three to four years to full yield, the that the applicable covenants will affect the ability of the directors aim to structure borrowings for the group’s company to meet its cash obligations. agricultural operations so that shorter term bank debt is used only to finance working capital requirements, while The group's oil palms fruit continuously throughout the debt funding for the group's extension planting year and there is therefore no material seasonality in the programme is sourced from issues of medium term listed funding requirements of the agricultural operations in debt securities and borrowings from development their ordinary course of business. It is not expected that institutions. the development of the coal operations will introduce any material swings in the group’s utilisation of cash for the The directors believe that new projects within the coal funding of its routine activities. operations can be brought into commercial production more rapidly than new oil palm plantings and that the coal 43 Review of the group continued operations can therefore justify borrowing on a shorter borrowing policy the group should not borrow to an extent term basis than the agricultural operations. However, that would increase its net debt plus related swap given recent events in the banking sector, the directors liabilities to above 100 per cent of its total equity. In believe that no operations of the group should allow practice, net debt plus related swap liabilities have been themselves to become reliant on bank finance. running at levels considerably below 100 per cent. The Accordingly, the directors intend that the coal operations level at 31 December 2009 was 42 per cent against a should also be financed principally by issues of listed debt target of 60 per cent and a level of 48 per cent at 31 securities. December 2008. The target for 31 December 2010 is The directors believe that the group’s existing capital structure is consistent with the group’s financing policy Other treasury policies objectives but recognise that the planned further 60 per cent. development of the group and the inevitable shortening of The sterling notes and the dollar notes carry interest at the maturity profile of the group’s current indebtedness fixed rates of, respectively, 9.5 and 7.5 per cent per that will result from the passage of time will mean that annum. Interest at 31 December 2009 was payable on action will be required to ensure that the group’s capital drawings under the Indonesian consortium loan facility at structure continues to meet the objectives. a floating rate equal to Singapore Inter Bank Offered Rate (“SIBOR”) plus a margin which, for so long as inter-bank The directors have no immediate plans for the group to markets remain disrupted, includes a liquidity premium issue further listed debt securities but they are aware that reflecting the differences between SIBOR and the the Indonesian tax authorities have recently announced lending banks' costs of funds. The margin currently revisions to the rates of withholding tax to be applied to amounts to 6.25 per cent per annum. payments of interest from Indonesia to the Netherlands as well as changes to the basis upon which such As a policy, the group does not hedge its exposure to authorities will accept that a foreign company is eligible floating rates but, where possible, borrows at fixed rates. for the concessionary tax treatment provided for in any A one per cent increase in the floating rate of interest double tax agreement between the applicable company's payable on the drawings under the Indonesian consortium country of domicile and Indonesia. This development loan facility at 31 December 2009 would have resulted in appears likely to result in the rate of withholding tax an annual cost to the group of approximately $102,000. applicable to payments of interest (the aggregate gross amount of which in 2009 was $8.9 million) on loans to The group regards the US dollar as the functional Indonesian subsidiaries of the company from REA currency of most of its operations and seeks to ensure Finance increasing from 10 per cent to 20 per cent. The that, as respects that proportion of its investment in the directors are investigating the possibility of reorganising operations that is met by borrowings, it has no material the sterling notes to mitigate this adverse fiscal currency exposure against the US dollar. Accordingly, development. where borrowings are incurred in a currency other than the US dollar, the group endeavours to cover the resultant The directors retain their previously stated view that, currency exposure by way of a debt swap or other although the group should retain flexibility as to the extent appropriate currency hedge. The group does not cover to which it funds itself with borrowed monies, as a general the currency exposure in respect of the component of the 44 investment in its operations that is financed with sterling Low levels of rainfall can also disrupt and, in an extreme denominated equity. The group's policy is to maintain a situation (not to date experienced by the group), could cash balance in sterling sufficient to meet its projected bring to a standstill the river transport upon which the sterling expenditure for a period of up to twelve months group is critically dependent for estate supplies and the and a cash balance in Indonesian rupiahs sufficient for its evacuation of CPO and CPKO. immediate Indonesian rupiah requirements but, otherwise, to keep all cash balances in US dollars. Cultivation risks Risks and uncertainties As in any agricultural business, there are risks that crops from the group's estate operations may be affected by The group’s business involves risks and uncertainties. pests and diseases. Agricultural best practice can to Those risks and uncertainties that the directors currently some extent mitigate these risks but they cannot be consider to be material are described below. There are or entirely eliminated. may be other risks and uncertainties faced by the group that the directors currently deem immaterial, or of which Other operational factors they are unaware, that may have a material adverse impact on the group. Agricultural operations Climatic factors The group’s agricultural productivity is dependent upon necessary inputs, including, in particular, fertiliser and fuel. Whilst the directors have no reason to anticipate shortages in the availability of such inputs, should such shortages occur over any extended period, the group’s operations could be materially disrupted. Equally, Although the group's agricultural operations are located increases in input costs are likely to reduce profit margins. in an area of high rainfall with sunlight hours well suited to the cultivation of oil palm, climatic conditions vary from After harvesting, FFB crops become rotten if not year to year and setbacks are possible. processed within a short period. Any hiatus in FFB collection or processing may therefore lead to a loss of Unusually high levels of rainfall can disrupt estate crop. The group endeavours to maintain resilience in its operations and result in harvesting delays with loss of oil palm oil mills with two mills operating separately and palm fruit or deterioration in fruit quality. Unusually low some ability within each factory to switch from steam levels of rainfall that lead to a water availability below the based to diesel based electricity generation. Such minimum required for the normal development of the oil resilience is however limited and would be inadequate to palm may lead to a reduction in subsequent crop levels. compensate for any material loss of processing capacity Such reduction is likely to be broadly proportional to the for anything other than a short time period. size of the cumulative water deficit. Over a long period, crop levels should be reasonably predictable but there The group has bulk storage facilities within its main area can be material variations from the norm in individual of agricultural operations and at its transhipment terminal years. downstream of the port of Samarinda. Such facilities and the further storage facilities afforded by the group’s fleet of barges have hitherto always proved adequate to meet 45 Review of the group continued the group’s requirements for CPO and CPKO storage. either restrictions on the export of CPO and CPKO or very Nevertheless, disruptions to river transport between the high duties on export sales of such oil. The directors main areas of operations and the port of Samarinda, or believe that when such measures materially reduce the delays in collection of CPO and CPKO from the profitability of oil palm cultivation, they are damaging not transhipment terminal, could result in a group requirement only to large plantation groups but also to the large for CPO and CPKO storage exceeding the available number of smallholder farmers growing oil palm in capacity. This would be likely to force a temporary Indonesia and to the Indonesian economy as a whole cessation in FFB processing with a resultant loss of crop. (because CPO is an important component of Indonesia's US dollar earning exports). The directors are thus hopeful The group maintains insurance for the agricultural that future measures affecting sales of CPO and CPKO operations to cover those risks against which the will not seriously diminish profit margins. directors consider that it is economic to insure. Certain risks (including the risk of fire in planted areas on the The directors were encouraged that the significant rise in group's estates), for which insurance cover is either not CPO and CPKO prices during 2007 and the early months available or would, in the opinion of the directors, be of 2008 did not lead to a re-imposition of export disproportionately expensive, are not insured. Occurrence restrictions. Instead, the Indonesian government of an adverse uninsured event could result in the group continued to allow the free export of CPO and CPKO but sustaining material losses. Produce prices introduced a sliding scale of duties on CPO and CPKO exports. Furthermore, the starting point for this sliding scale was set at a level such that when CPO and CPKO prices fell back in the last quarter of 2008, the rate of The profitability and cash flow of the agricultural export duty payable was reduced to nil. Against this, the operations depend both upon world prices of CPO and directors note that there have been recent reports in the CPKO and upon the group's ability to sell its produce at Indonesian press that the Indonesian government may price levels comparable with such world prices. again take steps to encourage domestic downstream processing of CPO and CPKO and may impose domestic CPO and CPKO are primary commodities and as such are sale obligations on oil palm growers from 2015. affected by levels of world economic activity and factors affecting the world economy, including levels of inflation World markets for CPO and CPKO may be distorted by and interest rates. This may lead to significant price the imposition of import controls or taxes in consuming swings although, as noted under “Revenues and markets” countries. The directors believe that the imposition of in “Agricultural operations” above, the directors believe such controls or taxes on CPO or CPKO will normally that such swings should be moderated by the fact that the result in greater consumption of alternative vegetable oils annual oilseed crops account for the major proportion of within the area in which the controls or taxes have been world vegetable oil production and producers of such imposed and the substitution outside that area of CPO crops can reduce or increase their production within a and CPKO for other vegetable oils. Should such arbitrage relatively short time frame. fail to occur or prove insufficient to compensate for the market distortion created by the applicable import In the past, in times of very high CPO prices, the controls or taxes, selling prices for the group’s CPO and Indonesian authorities have for short periods imposed CPKO could be depressed. 46 Expansion pays particular attention to the manner in which the group has discharged its corporate social responsibilities. The group is planning further extension planting of oil palm. The directors hope that unplanted land held by or The group's existing agricultural operations and the allocated to the group will become available for planting planned expansion of those operations are based on land ahead of the land becoming needed for development and areas that have been previously logged and zoned by the that the development programme can be funded from Indonesian authorities as appropriate for agricultural available group cash resources and future operational development on the basis that, regrettable as it may be cash flows, appropriately supplemented with further prior from an environmental viewpoint, the logging has been so charge funding. Should, however, land or cash availability extensive that primary forest is unlikely to regenerate. fall short of expectations and the group be unable to Such land areas fall within a region that elsewhere secure alternative land or funding, the extension planting includes substantial areas of unspoilt primary rain forest programme, upon which the group's continued growth will inhabited by diverse flora and fauna. As such, the group, in part depend, may be delayed or curtailed. in common with other oil palm growers in Kalimantan, must expect scrutiny from conservation groups and could Any shortfall in achieving planned extensions of the suffer adverse consequences if its environmental policies group's planted areas would be likely to impact negatively were to be singled out for criticism by such groups. the annual revaluation of the group's biological assets, the movements upon which are taken to the group's income An environmental impact assessment and master plan statement. Whilst this would not affect the group's was constructed using independent environmental underlying cash flow, it could adversely affect market experts when the group first commenced agricultural perceptions as to the value of the company's securities. operations in East Kalimantan and this plan is updated regularly with further advice from independent experts to Environmental, social and governance practices reflect modern practice and to take account of changes in circumstances (including planned additions to the areas The group recognises that the agricultural operations are to be developed by the group). Substantial conservation both a large employer and have significant economic reserves have been established in areas already importance for local communities in the areas of the developed by the group and further reserves will be added group’s operations. This imposes environmental, social as new areas are developed. The group actively manages and governance obligations which bring with them risks these reserves and endeavours to use them to conserve that any failure by the group to meet the standards landscape level biodiversity as detailed under expected of it may result in reputational and financial “Conservation” in “Agricultural operations” above. damage. The group seeks to mitigate such risks by establishing standard procedures to ensure that it meets The group is committed to sustainable oil palm its obligations, to monitor performance against those development and adopts the measures described under standards and to investigate thoroughly and take action to “Sustainable practices” in “Agricultural operations” above prevent recurrence in respect of any failures identified. In to mitigate the risk of its operations causing damage to addition, the group commissions independent consultants the environment or to its neighbours. The group supports to undertake periodic reviews of its management and aims to comply with the principles and criteria performance in relation to various matters and this review established by RSPO and is seeking RSPO accreditation. 47 Review of the group continued Local relations Operational risks The agricultural operations of the group could be Delivery volumes will be dependent upon efficiency of seriously disrupted if there were to be a material production and of transport of extracted coal from mines breakdown in relations between the group and the host to points of sale. Both production and transport can be population in the area of its agricultural operations. The disrupted by heavy rains, such as are common in East group endeavours to mitigate this risk by liaising regularly Kalimantan, and heavy seas can cause delays to the with representatives of surrounding villages and by barging of coal to its point of sale. Failure to load export seeking to improve local living standards through mutually shipments to an agreed schedule may result in beneficial economic and social interaction between the demurrage claims which may be material. local villages and the agricultural operations. In particular, the group, when possible, gives priority to applications for Although mining plans are based on geological employment from members of the local population and assessments, such assessments are extrapolations based supports specific initiatives (as described under on statistical sampling and may prove inaccurate to an “Community development” and “Smallholders” in extent. Unforeseen extraction complications can occur “Agricultural operations” above) to encourage local and may cause cost overruns and delays. farmers and tradesmen to act as suppliers to the group, its employees and their dependents and to promote Although the group maintains insurance for the coal smallholder development of oil palm plantings. operations to cover those risks against which the Coal operations directors consider that it is economic to insure, not all risks are insured. Under some circumstances spontaneous combustion may occur in stored coal and Development of the group’s coal operations is still at an this could cause material loss to the group if it were held early stage. The gross assets of the operations at 31 to have been negligent in its measures to prevent such December 2009 represented only some 3 per cent of the spontaneous combustion. group’s gross assets and the operations did not contribute to group revenues during 2009. The directors Price risk therefore believe that the most material risk attaching to the coal operations is the risk that the directors, with no The profitability and cash flow of the coal operations will prior experience of mining, may have misjudged the depend both upon world prices of coal and upon the potential of the operations and that the operations do not group's ability to sell its coal at price levels comparable become commercially viable. In that event some or all of with such world prices. Coal is a primary commodity and the group capital invested in the operations may be lost as such is affected by levels of world economic activity (although the directors believe that the group could and factors affecting the world economy, including levels recover monies from a resale of the concession rights so of inflation and interest rates. This may lead to significant far acquired so that a total loss of invested capital is price swings. unlikely). If the coal operations do become commercially viable, the aspects of its chemical composition. Supply and demand material risks specific to coal that the directors currently for specific grades of coal and consequent pricing may Coal is sold on the basis of its calorific value and other foresee are as described below. 48 not necessarily reflect overall coal market trends and the denominated or linked. Accordingly, the principal group may be adversely affected if it is unable to supply currency risk faced by the group is that those components coal within the specifications that are at any particular of group costs that arise in Indonesian rupiahs and time in demand. sterling may, if such currencies strengthen against the US dollar, negatively impact margins in US dollar terms. The The Indonesian government has stated that it intends to directors consider that this risk is inherent in the group's impose obligations on coal concession holders to sell business and capital structure and the group does not domestically a proportion of the coal that they mine. If therefore normally hedge against such risk. domestic sales of coal have to be made at prices that are below world market prices (and it is not yet known Counterparty risk whether this will be the case) the group’s prospective revenues from coal sales will be reduced. Export sales of CPO and CPKO are made either against Environmental practices letters of credit or on the basis of cash against documents. Export sales of coal are likely to be made on a similar basis. Credit risks for the group on such sales Open cast coal mining, such as will be conducted on the are therefore limited. However, domestic sales of CPO, coal concessions in which the group has invested, CPKO and coal generally require (or will require) the involves the removal of substantial volumes of overburden group to provide some credit to buyers. The group seeks to obtain access to the coal deposits. The prospective to limit the counterparty risk that this entails by effective areas to be mined by the group do not, however, cover a credit controls. Such controls include regular reviews of large area and the group is committed to international buyer creditworthiness and limits on the term and amount standards of best environmental practice and, in of credit that may be extended to any one buyer and in particular, to proper management of waste water and total. reinstatement of mined areas on completion of mining operations. Nevertheless, the group could be adversely Regulatory exposure affected by environmental criticisms of the coal mining industry as a whole. General Currency Changes in existing, and adoption of new, laws and regulations affecting the group (including, in particular, laws and regulations relating to land tenure and mining concessions, work permits for expatriate staff and taxation) could have a negative impact on the group’s activities. CPO, CPKO and coal are essentially US dollar based commodities. Accordingly, the group's revenues and the Many of the licences, permits and approvals held by the underlying value of the group's operations are effectively group are subject to periodic renewal. Renewals are US dollar denominated. All of the group's borrowings often subject to delays and there is always a risk that a other than the sterling notes are also US dollar renewal may be refused or made subject to new denominated and the group has entered into sterling US conditions. Moreover, agricultural land and mining rights dollar debt swaps to hedge the sterling notes. A held by the group are subject to the satisfaction by the substantial component of the group's costs are US dollar group of various continuing conditions, including, as 49 Review of the group continued respects agricultural land, conditions requiring the group impose exchange controls or otherwise seek to restrict to promote smallholder developments of oil palm. the group's freedom to manage its operations. Although the group endeavours to ensure that its Miscellaneous relationships activities are conducted only on the land areas, and within the terms of the licences, that it holds, licensing rules The group is materially dependent upon its staff and change frequently and boundaries of large land areas are employees and endeavours to manage this dependence not always clearly demarcated. There is therefore always as detailed under “Employees” in “Agricultural operations” a risk that the group may inadvertently, and to a limited and under “Sustainable practices” in “Coal operations” extent, conduct operations for which it does not hold all above. necessary licences or operate on land for the use of which it does not have all necessary permits. Relationships with shareholders in Indonesian group Country exposure companies are also important to the group and especially so as respects the mining concessions in which the group holds interests which are at the moment legally owned by All of the group's operations are located in Indonesia and the group’s local partners. The group endeavours to the group is therefore significantly dependent on maintain cordial relations with its local investors by economic and political conditions in Indonesia. In the late seeking their support for decisions affecting their 1990’s, in common with other parts of South East Asia, interests and responding constructively to any concerns Indonesia experienced severe economic turbulence. In that they may have. By order of the board R.E.A. SERVICES LIMITED Secretary 27 April 2010 recent years, there have been occasional instances of civil unrest, often attributed to ethnic tensions, in certain parts of Indonesia. However, as noted under “The Indonesian context” in “Overview” above, during 2009 Indonesia remained stable and the Indonesian economy continued to grow. Whilst freedom to operate in a stable and secure environment is critical to the group and the existence of security risks should never be underestimated, the group has always sought to mitigate those risks and has never, since the inception of its current operations in East Kalimantan, been adversely affected by security problems. Although there can never be certainty as to such matters, under current political conditions, the directors have no reason to believe that any government authority would revoke the registered land titles or mining rights in which the group has invested or that any such authority would 50 Directors Richard Robinow Chairman (64) John Green-Armytage Independent non-executive director (64) Mr Robinow was appointed a director in 1978 and has been chairman since 1984. After early investment banking experience, he has been involved for over 35 years in the plantation industry. He is 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. He is a non-executive director of M P Evans Group plc, a UK plantation company of which the shares are admitted to trading on the Alternative Investment Market of the London Stock Exchange, and of two overseas listed plantations companies: Sipef NV, Belgium, and REA Vipingo Plantations Limited, Kenya. John Oakley Managing director (61) After early experience in investment banking and general management, Mr Oakley joined the group in 1983 as divisional managing director of the group's then horticultural operations. He was appointed to the main board in 1985 and subsequently 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 agricultural operations. He was appointed managing director in January 2002. As the sole executive director, he has overall responsibility for operational control of the group. David Blackett Senior independent non-executive director (59) Mr Blackett was appointed a non-executive director in July 2008 and was subsequently appointed chairman of the audit and remuneration committees and, more recently, as a member of the nomination committee. After qualifying as a chartered accountant in Scotland, he worked for over 25 years in South East Asia, where he concluded his career as chairman of AT&T Capital Inc. Prior to joining that company, he was a director of an international investment bank with responsibility for the bank’s South East Asian operations. He is a non-executive director of South China Holdings Limited, a company listed on the Hong Kong Stock Exchange. Mr Green-Armytage was a non-executive director from 1984 to 1994. He rejoined the board as a non-executive director in 1997 and subsequently for several years served as chairman of the audit and remuneration committees. After a career in investment banking, he moved to become managing director of a UK listed company with South East Asian involvement. He has subsequently held directorships of a number of companies in both executive and non- include the executive capacities. chairmanship of AMEC PLC. These currently John Keatley Independent non-executive director (76) Mr Keatley was a non-executive director from 1975 to 1983 and chairman from 1978 to 1983. He rejoined the board as a non-executive director in 1985 and is a member of the nomination committee. After a background in the fertiliser industry, he is now involved in a family business investing in property in the UK and elsewhere. David Killick, FCIS Independent non-executive director (72) Mr Killick was appointed a non-executive director in 2006. He is a member of the audit and remuneration committees. He has also recently been appointed as chairman of the nomination committee. After qualifying as a barrister, he became a Fellow of the Institute of Chartered Secretaries and Administrators. He worked for over 28 years for the Commonwealth Development Corporation, serving as a member of its management board from 1980 to 1994. Thereafter, he has held a number of directorships. He is currently a director of Reallyenglish.com Limited and the council of management of Slough Council for Voluntary Service. 51 Directors continued Charles Letts Independent non-executive director (91) Mr Letts was appointed a non-executive director in 1989. After serving in the British Armed Forces in World War II and thereafter in the British Foreign Office, he 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, he has held directorships and advisory posts in companies covering a wide range of activities in various countries, with particular emphasis on the plantation industry. His present directorships include The China Club Limited and China Investment Fund. Chan Lok Lim Independent non-executive director (68) Mr Lim was appointed a non-executive director in 2002. He 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. He is chairman of SPC Power Corporation, a public company listed on the Philippines Stock Exchange, and a director of Agusan Plantations Inc, Philippines, Agumil Philippines Inc and Pan Abrasives (Private) Limited, Singapore. 52 Directors’ report The directors present their annual report on the affairs of The fixed annual dividends on the 9 per cent cumulative the group, together with the financial statements and preference shares that fell due on 30 June and 31 auditors’ reports, for the year ended 31 December 2009. December 2009 were duly paid. A first interim dividend Principal activities and business review ordinary shares on 25 September 2009 and a second in respect of 2009 of 2p per share was paid on the interim dividend in lieu of final of a further 2p per share The group is principally engaged in the cultivation of oil was paid on those shares on 29 January 2010. The palms in the Indonesian province of East Kalimantan and in directors do not recommend the payment of any further the production of crude palm oil (“CPO”) and by-products ordinary dividends in respect of 2009. from fruit harvested from its oil palms. In addition, since 2008 the group has acquired interests in three coal Going concern basis concessions in East Kalimantan and is endeavouring to establish an open cast coal mining operation and coal The group's business activities, together with the factors trading activity based on these concessions. likely to affect its future development, performance and position are described in the “Review of the group” A review of the activities and planned future development of section of this annual report which also provides (under the group together with the principal risks and uncertainties the heading “Finance”) a description of the group's cash facing the group is provided in the accompanying flow, liquidity and financing adequacy, and treasury “Chairman’s statement” and “Review of the group” sections policies. In addition, note 21 to the consolidated financial of this annual report which are incorporated by reference in statements includes information as to the group's policy, this “Directors’ report”. In particular, the “Review of the objectives, and processes for managing its capital; its group” includes information as to group policy and financial risk management objectives; details of its objectives regarding the use of financial instruments. financial instruments and hedging activities; and its Information as to such policy and objectives and the risk exposures to credit risk and liquidity risk. exposures arising is also included in note 21 to the consolidated financial statements. Although the group has indebtedness, that indebtedness is medium term and the group is not materially reliant on The group does not undertake significant research and short term borrowing facilities. Moreover, the group has development activities. considerable cash resources. As a consequence, the directors believe that the group is well placed to manage Details of significant events since 31 December 2009 are its business risks successfully. contained in note 40 to the consolidated financial statements. Results and dividends After making enquiries, the directors have a reasonable expectation that the company and the group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to The results are presented in the consolidated income adopt the going concern basis in preparing the financial statement and notes thereto. statements. 53 Directors’ report continued Previously published unaudited financial information meeting and, being eligible, offers himself for re-election, such retirement being in compliance with the company’s A registration document published by the company on 28 articles of association providing for rotation of directors. January 2010 contained unaudited financial information. Messrs Robinow, Green-Armytage, Keatley and Letts That information was that: the group’s then indebtedness retire at the forthcoming annual general meeting and, comprised £37 million nominal of sterling notes, hedged being eligible, offer themselves for re-election, such against dollars at an average rate of $1.854 = £1, $30 retirements being in compliance with the provisions of the million nominal of dollar notes and bank borrowings and Combined Code on Corporate Governance requiring the leasing commitments in Indonesia which totalled $10.3 annual re-election of non-executive directors who have million at 31 December 2009; that, against this served as such for more than nine years. indebtedness, the group had cash balances at 31 December 2009 totalling $20.8 million; and that, at 31 For the reasons given under “Board of directors” in the December 2009, the group had invested some $14 “Corporate governance” section of this annual report million in its coal operations. Such information does not (which section is incorporated by reference in this differ materially from the corresponding figures shown in Directors’ report), the directors believe that the board of or derived from the accompanying audited financial the company is effective as currently constituted and that statements. The only difference relates to cash balances its current composition should be maintained at least until at 31 December 2009 ($20.1 million actual against the group’s plans for establishment of a new regional $20.8 million). Charitable and political donations office in Singapore have matured. The board therefore recommends (each affected director abstaining from such conclusion as it applies to himself) the re-election of all of the directors offering themselves for re-election. During the year the group made no charitable donations The senior independent non-executive director and the to persons ordinarily resident in the United Kingdom and chairman have confirmed as regards, respectively, the no political donations. The group provided support for chairman and the other non-executive directors offering conservation activities in East Kalimantan. themselves for re-election that, following formal Supplier payment policy performance evaluations, each such individual's performance continues to be effective and to demonstrate commitment to the role assumed, including It is the company’s policy to establish appropriate commitment of time for board and committee meetings payment terms and conditions for dealings with suppliers and, where applicable, other assigned duties. and to comply with such terms and conditions. The holding company itself does not have trade creditors. Directors’ interests Directors At 31 December 2009, the interests of directors (including interests of connected persons as defined in The directors are listed in the “Directors” section of this section 96B (2) of the Financial Services and Markets Act annual report which is incorporated by reference in this 2000 of which the company is, or ought upon reasonable Directors’ report. All the directors served throughout enquiry to become, aware) in the 9 per cent cumulative 2009. Mr Killick retires at the forthcoming annual general preference shares of £1 each and the ordinary shares of 25p each of the company were as follows: 54 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 from the following persons of voting rights held by them as shareholders through the holdings of ordinary shares 78,643 10,030,000 indicated: 250,000 8,447 51,669 - - 80,704 680,878 20,000 15,000 108,008 - 513 - 1,804 Emba Holdings Limited Number % 9,957,500 29.80 Alcatel Bell Pensioenfonds VZW 4,007,049 11.99 Prudential plc and certain subsidiaries 4,760,229 14.24 Artemis UK Smaller Companies 1,919,400 5.74 The 78,643 preference shares in which Mr Robinow was interest of Prudential plc group of companies includes interested at 31 December 2009 were held by persons 4,030,792 ordinary shares (12.06 per cent) in which connected with Mr Robinow who sold the shares in M&G Investment Funds 3, an Open Ended Investment In addition, the company had been notified that the above question on 2 February 2010. As a result, Mr Robinow Company, is also interested. had no interest in preference shares at the date of this report. Details of an option held by Mr Oakley at 31 December 2009 to subscribe for ordinary shares of 25p each of the company are provided in the “Directors’ remuneration report” section of this report. The option was exercised by Mr Oakley on 1 February 2010 when he subscribed 840,689 ordinary shares pursuant to the option and sold 400,000 of such shares. As a result, Mr Oakley is interested in 442,493 ordinary shares as at the date of this report. Directors’ indemnities The shares held by Emba Holdings Limited (“Emba”) are included as part of the interest of Mr R M Robinow shown under “Directors’ interests” above. By deeds dated 24 November 1998 and 10 April 2001, Emba has agreed that it will not undertake activities in conflict with those of the group and that it will deal with the group only on a basis that is appropriate between a listed company and its subsidiaries, on the one hand, and a significant shareholder in a listed company, on the other hand. Control and structure of capital Details of the company’s share capital and changes in Qualifying third party indemnity provisions (as defined in share capital during 2009 are detailed in note (vii) to the section 234 of the Companies Act 2006) were in force company’s financial statements. At 31 December 2009, for the benefit of directors of the company and of other the preference share capital and the ordinary share members of the group throughout 2009 and remain in capital represented, respectively, 66.8 and 33.2 per cent force at the date of this report. of the total issued share capital. Substantial shareholders The rights and obligations attaching to the ordinary and preference shares are governed by the company’s articles As at the date of this report, the company had received of association and prevailing legislation. A copy of the notifications required by The Disclosure Rules and articles of association is available on the company’s Transparency Rules of the Financial Services Authority website at www.rea.co.uk. Rights to income and capital 55 Directors’ report continued are summarised in note (vii) to the company’s financial pursuant to section 793 of the Companies Act 2006. The statements. directors are not aware of any agreements between shareholders that may result in restrictions on the transfer On a show of hands at a general meeting of the company, of securities or on voting rights. every holder of shares and every duly appointed proxy of a holder of shares, in each case being a holder entitled to No person holds securities carrying special rights with vote on the resolution before the meeting, shall have one regard to control of the company and there are no vote. On a poll, every holder of shares present in person arrangements in which the company co-operates by or by proxy and entitled to vote on the resolution the which financial rights carried by shares are held by a subject of the poll shall have one vote for each share held. person other than the holder of the shares. Holders of preference shares are not entitled to vote on a resolution proposed at a general meeting unless, at the The appointment and replacement of directors is date of notice of the meeting, the dividend on the governed by the company’s articles of association and preference shares is more than six months in arrears or prevailing legislation, augmented by the principles laid the resolution is for the winding up of the company or is a down in the Combined Code on Corporate Governance resolution directly and adversely affecting any of the which the company seeks to apply in a manner rights and privileges attaching to the preference shares. proportionate to its size as further detailed in the Deadlines for the exercise of voting rights and for the “Corporate governance” section of this annual report. appointment of a proxy or proxies to vote in relation to any resolution to be proposed at a general meeting are The articles of association provide that the business of governed by the company’s articles of association and the company is to be managed by the directors and prevailing legislation and will normally be as detailed in empower the directors to exercise all powers of the the notes accompanying the notice of the meeting at company, subject to the provisions of such articles (which which the resolution is to be proposed. include a provision specifically limiting the borrowing powers of the group) and prevailing legislation and There are no restrictions on the size of any holding of subject to such directions as may be given by the shares in the company. Shares may be transferred either company in general meeting by special resolution. The through the CREST system (being the relevant system as articles of association may be amended only by a special defined in the Uncertificated Securities Regulations 2001 resolution of the company in general meeting and, where of which CRESTCo Limited is the operator) where held in such amendment would modify, abrogate or vary the class uncertificated form or by instrument of transfer in any rights of any class of shares, with the consent of that usual or common form duly executed and stamped, class given in accordance with the company’s articles of subject to provisions of the company’s articles of association and prevailing legislation. association empowering the directors under certain circumstances to refuse to register any transfer of shares The 7.5 per cent dollar notes 2012/14 of the company where the shares are not fully paid, the shares are to be (“dollar notes”) and the 9.5 per cent guaranteed sterling transferred into a joint holding of more than four persons, notes 2015/17 of REA Finance B.V. (“sterling notes”) the transfer is not appropriately supported by evidence of (which are guaranteed by the company) are transferable the right of the transferor to make the transfer or the either through the CREST system where held in transferor is in default in compliance with a notice served uncertificated form or by instrument of transfer in any 56 usual or common form duly executed in amounts and Awards to senior group executives under the company’s multiples, in the former case, of $1 and, in the latter case, long term incentive plans will vest and may be encashed of £1,000. There is no maximum limit on the size of any within one month of a change of control as detailed under holding in either case. “Long term incentive plans” in the “Directors’ remuneration report” section of this annual report. The Significant holdings of preference shares, dollar notes directors are not aware of any agreements between the and sterling notes shown by the register of members and company and its directors or between any member of the registers of dollar and sterling noteholders at 31 group and a group employee that provides for December 2009 were as follows: compensation for loss of office or employment that Preference shares Dollar notes Sterling notes ‘000 $’000 £’000 Bank of New York (Nominees) Limited HSBC Global Custody Nominee (UK) Limited 641898 Account HSBC Global Custody Nominee (UK) Limited 993791 Account Rulegale Nominees Limited JAMSCLT Account Vidacos Nominees Limited CLRLUX Account Morris Edward Zukerman Morris Edward Zukerman ZFT Account – – 2,598 2,623 – – – – – – – 3,315 9,500 9,500 17,800 4,000 – – – – – occurs because of a takeover bid. Treasury shares and power to repurchase shares No shares of the company are at present held in treasury. The company’s articles of association permit the purchase by the company of its own shares subject to prevailing legislation which requires that any such purchase, if a market purchase, has been previously authorised by the company in general meeting and, if not, is made pursuant to a contract of which the terms have been authorised by a special resolution of the company in general meeting. A change of control of the company would entitle holders There is no authority extant for the purchase by the of the sterling notes and certain holders of the dollar company of its own shares. notes to require repayment of the notes held by them as detailed in notes 23 and 24 to the consolidated financial statements. A change in control of the company on or prior to 31 December 2014 would also entitle the holders of the redeemable participating preference shares of the company’s subsidiary KCC Resources Limited (“KCC”) to redemption of their shares on the next following 31 December (or, if KCC is prohibited by law from effecting such redemption, to require the company to purchase or procure the purchase of such shares). As referred to under “Directors’ interests” above, an option held by Mr J C Oakley to subscribe for ordinary shares of 25p each of the company was exercised on 1 February 2010. At the date of this report, there are no outstanding share options held by directors or employees. Increase in share capital At the forthcoming annual general meeting, a resolution will be proposed (resolution 10 set out in the notice of annual general meeting at the end of this document) to increase the authorised share capital of the company (being the maximum amount of shares in the capital of the company that the company may allot) from £27,750,000 to £37,750,000 by the creation of 10,000,000 9 per cent cumulative preference shares of £1 each ranking pari passu in all respects with the existing preference shares and representing 57.1 per cent of the existing authorised preference share capital. 57 Directors’ report continued As indicated in the “Review of the group” section of this into, 9 per cent cumulative preference shares in the annual report, the directors believe that, if circumstances capital of the company up to an aggregate nominal permit, the company should consider issuing additional amount of £11,107,046 (being all of the unissued preference shares and applying the proceeds in reducing preference share capital of the company at the date of group borrowings. Moreover, the directors believe that this report and the additional preference share capital capitalisation issues of new preference shares to ordinary proposed to be created at the forthcoming annual general shareholders, such as were made on several previous meeting and representing 67.8 per cent of the issued occasions, provide a useful mechanism for augmenting preference share capital of the company at the date of returns to ordinary shareholders in periods in which good this report). profits are achieved but demands on cash resources limit the scope for payment of cash dividends. The proposed The new authorities, if provided, will expire on the date of creation of additional preference shares is designed to the annual general meeting to be held in 2011 or on 30 give the company sufficient authorised but unissued June 2011 (whichever is the earlier). Save in relation to preference capital to permit the directors to issue the preference shares as indicated under “Increase in preference shares for these purposes without further share capital” above, the directors have no present approval (other than shareholder authority to allot such intention of exercising these authorities. shares, which authority will be sought at the forthcoming annual general meeting as noted under “Authorities to Power to issue share capital issue share capital” below). Authorities to issue share capital Powers are also being sought at the forthcoming annual general meeting under the provisions of sections 571 and 573 of the Companies Act 2006 (replacing the previous At the annual general meeting held on 4 June 2009, sections of the Companies Act 1985 that provided for shareholders authorised the directors under the statutory pre-emption rights) to enable the board to make provisions of section 80 of the Companies Act 1985 to a rights issue or open offer of ordinary shares to existing allot relevant securities within specified limits. Section 80 ordinary shareholders without being obliged to comply of the Companies Act 1985 has now been replaced by with certain technical requirements of the Companies Act sections 549 and 551 of the Companies Act 2006. 2006 which can create problems with regard to fractions Replacements of the current section 80 authorities are and overseas shareholders. being sought at the forthcoming annual general meeting (resolutions 11 and 12 set out in the notice of annual In addition, the resolution to provide these powers general meeting at the end of this document). The (resolution 13 set out in the notice of annual general replacement authorities will authorise the directors (a) to meeting at the end of this document) will, if passed, allot and to grant rights to subscribe for, or to convert any empower the directors to make issues of ordinary shares security into, shares in the capital of the company (other for cash other than by way of a rights issue or open offer than 9 per cent cumulative preference shares) up to an up to a maximum nominal amount of £417,681 aggregate nominal amount of £2,784,545 (representing (representing 5 per cent of the issued ordinary share 33.3 per cent. of the issued ordinary share capital of the capital of the company at the date of this report). The company at the date of this report), and (b) to allot and to company has not issued any ordinary shares for cash, grant rights to subscribe for, or to convert any security relying on the annual general disapplication of statutory 58 pre-emption rights pursuant to section 571 of the capital” and “Powers to issue share capital” and the Companies Act 2006 (or the predecessor sections of the proposal to permit general meetings (other than annual Companies Act 1985), since 9 May 2007. general meetings) to be held on just 14 clear days' notice as detailed under “General meeting notice periods” above The foregoing powers (if granted) will expire on the date are all in the best interests of the company and of the annual general meeting to be held in 2011 or on shareholders as a whole and recommends that 30 June 2011 (whichever is the earlier). shareholders vote in favour of the resolutions 10 to 14 as set out in the notice of the forthcoming annual general General meeting notice period meeting. At the forthcoming annual general meeting, a resolution Auditors (resolution 14 set out in the notice of annual general meeting at the end of this document) will be proposed to Each director of the company at the date of approval of authorise the directors to convene a general meeting this report has confirmed that, so far as he is aware, there (other than an annual general meeting) on 14 clear days' is no relevant audit information of which the company's notice (subject to due compliance with requirements for auditors are unaware; and that he has taken all the steps electronic voting). The authority will be effective until the that he ought to have taken as a director in order to make date of the annual general meeting to be held in 2011 or himself aware of any relevant audit information and to on 30 June 2011 (whichever is the earlier). This establish that the company's auditors are aware of that resolution is proposed following legislation which, information. notwithstanding the provisions of the company's articles of association and in the absence of specific shareholder This confirmation is given and should be interpreted in approval of shorter notice, has increased the required accordance with the provisions of section 489 of the notice period for general meetings of the company to 21 Companies Act 2006. clear days. While the directors believe that it is sensible to have the flexibility that the proposed resolution will Deloitte LLP have expressed their willingness to continue offer, to enable general meetings to be convened on in office as auditors and resolutions to re-appoint them shorter notice than 21 days, this flexibility will not be used and to authorise the directors to fix their remuneration will as a matter of routine for such meetings, but only where be proposed at the forthcoming annual general meeting. the flexibility is merited by the business of the meeting and is thought to be to the advantage of shareholders as a whole. Recommendation The board considers that increasing the authorised share capital of the company by the creation of the additional preference shares proposed as detailed under “Increase in share capital”, granting the directors the authorities and powers as detailed under “Authorities to issue share By order of the board R.E.A. SERVICES LIMITED Secretary 27 April 2010 59 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 2008 by the Financial Reporting Council (“the Code”) provide a widely endorsed model for achieving this. The directors are also aware of the current review of the Code which will be revised during 2010. The Code and information regarding its review are available from the Financial Reporting Council’s website at “www.frc.org.uk”. The directors seek to apply the Code principles in a manner proportionate to the group’s size but, as the Code permits, reserving the right, 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 2009, 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 variety of backgrounds brought to the board by its members provides perspective and facilitates balanced and effective decision making. In particular, the board believes that the skills and experience of its different members complement each other and are of specific relevance to the group’s operations, the geographical location of its business and compliance by the company with its obligations as a UK listed company. The chairman and managing director (being the chief executive) have defined separate responsibilities under the overall direction of the board. 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 of the non-executive directors whom the board regards as independent would not be treated as such. The Code states 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 considered by the board to be independent 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 these long serving independent non-executive directors is not affected by their length of service. Nevertheless, the board’s plans for refreshment of its composition, as referred to under “Perfomance evaluation” below, will, in due course, mean that all independent non-executive directors will retire after nine years. In any event, three independent non-executive directors have served on the board of the company for less than nine years and, accordingly, the company would satisfy the Code requirement that at least two members of the board be independent non-executive directors even if all longer serving non-executive directors were 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- 60 executive directors. Following recent changes to the composition of the nomination committee and the appointment of Mr D J Blackett as senior non-executive director in place of Mr J R M Keatley, the board considers that the company would now be compliant with these Code requirements even if the more restrictive view of independence of longer serving directors was accepted. 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 director is subject to re-election at least once every three years. In addition, in compliance 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. Board responsibilities on matters of a non routine nature and by prompt provision of such other information as the board periodically decides that it should have to facilitate the discharge of its responsibilities. 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 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 was in place throughout 2009 in compliance with the Code requirement to carry such insurance. 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 (which is incorporated by reference in this “Corporate governance” report) together with details of the basis upon which such remuneration is determined. An executive committee of the board comprising Mr R M Robinow and Mr J C Oakley has been appointed to deal with various matters of a routine or executory nature. Performance evaluation 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 A formal internal evaluation of the performance of the board, the committees and individual directors is undertaken annually. Balance of powers, contribution to strategy, monitoring efficacy and accountability to stakeholders are reviewed by the board as a whole and the performance of the chairman is appraised by the 61 Corporate governance continued take independent professional advice at the expense of the company if necessary. Steps are taken to ensure that newly appointed directors become fully informed as to the group’s activities. Board proceedings Four meetings of the board are scheduled 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. All proceedings of committee meetings are reported to the full board. The attendance of individual directors at the regular and “ad hoc” board meetings held during 2009 was as follows: 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 Regular Ad hoc meeting meeting 4 4 4 4 4 4 2 2 2 2 2 2 - 1 1 1 In addition, during 2009, there were three meetings of the audit committee and two meetings of the remuneration committee. There were no meetings of the nomination committee during 2009. All committee meetings were attended by all of the committee members appointed at the time of each meeting. independent non-executive directors led by the senior independent director. The appraisal process includes assessments against a detailed set of criteria covering a variety of matters from the contribution of the board in enforcing disciplined risk management and setting appropriate social responsibility objectives to the adequacy and timeliness of information made available to the board. the board recognised Whilst the most recent performance evaluation concluded that the board was performing effectively as currently the need for constituted, succession planning in relation not only to executive management but also to non executive directors. The board considered that it should continue as currently constituted pending full implementation of the plans for the addition of senior executive management and the establishment of a new regional office in Singapore (as detailed under “Strategic direction and succession” in the “Review of the group” section of this annual report). Thereafter, the board agreed that its composition should be reconstituted, and in the future refreshed, on the basis of a policy that length of service by independent non executive directors be limited to nine years. Professional development and advice 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 its operations, finances and obligations affecting (including environmental, social and governance responsibilities). Whilst there are no formal training programmes, the board regularly reviews its own competences, receives periodic briefings on legal 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 62 Whilst all formal decisions are taken at board meetings, the directors have frequent informal discussions between themselves and with management and most decisions at board meetings reflect a consensus that has been reached ahead of the meetings. Some directors reside permanently, or for part of each year, in the Asia Pacific region and most of the UK based directors travel extensively. This complicates the organisation of board meetings. Since the regular board meetings are fixed to fit in with the company's budgeting and reporting cycle and ad hoc meetings normally have to be held at short notice to discuss specific matters, the company is reluctant to change meeting dates when some directors are unable to attend. Instead, when a director is unable to be at a meeting, he makes his views known to other directors ahead of time and his views are reported to, and taken into account, at the meeting. Nomination committee The nomination committee comprises Mr D H R Killick (chairman), Mr D J Blackett and Mr J R M Keatley. Messrs Blackett and Killick were appointed to the committee upon Messrs Letts and Robinow stepping down in January 2010 and Mr Killick was subsequently appointed as chairman in succession to Mr Keatley. The submitting responsible committee recommendations for the appointment of directors for approval by the full board. for is 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. The audit committee is responsible for: • monitoring the integrity of the financial statements and reviewing formal announcements of financial performance and the significant reporting issues and judgements announcements contain; that such statements and • reviewing the effectiveness of the internal control functions (including the internal financial controls, the internal audit function and arrangements whereby internally raised staff concerns as to financial reporting and other relevant matters are considered); • making recommendations to the board in relation to the appointment, reappointment and removal of the external auditors, their remuneration and terms of engagement; and • 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 2009, the only non-audit work undertaken by the auditors was, as in the previous year, routine compliance reporting in connection with covenant obligations applicable to certain group loans (as respects which the governing instruments require that such compliance reporting is carried out by the auditors). 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 responsibilities by informal discussions between themselves, by meetings with the external auditors, the internal auditors in Indonesia and management and 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. The audit committee has recommended to the board of the company that it should seek the approval of the company's shareholders for the reappointment of the company's current auditors. That recommendation reflected an assessment of the qualifications, expertise, resources and independence of the auditors based upon 63 Corporate governance continued feedback reports produced by the auditors, the committee's own dealings with from the auditors and management. The committee took into account the likelihood of withdrawal of the auditor from the market and noted that there were no contractual obligations to restrict the choice of external auditors. Given the current level of audit fees and the costs that a change would be likely to entail, the committee did not recommend that the company's audit be put out to tender. 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 informed as to progress in the operational activities and financial affairs of the group. In addition, within imposed by considerations of confidentiality, the company engages with institutional and other major shareholders through regular meetings and other contact 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. limits the All ordinary shareholders may attend the company’s annual and other general meetings and put questions to 64 the board. Some directors reside permanently, or for part of each year, in the Asia Pacific region 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 made available to shareholders at least twenty working days ahead of the meeting. The company maintains a corporate website at “www.rea.co.uk”. This provides information regarding the company, including annual and half yearly reports and photographs illustrating various 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. Internal control The board is responsible for the group’s system of internal control and for reviewing its effectiveness. Such a system 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 has established a continuous process for identifying, evaluating and managing any significant risks which the group faces (including risks arising from environmental, social and governance matters). The board regularly reviews the process, which has been in place from the start of the year to the date of approval of this report and which is in accordance with the revised guidance on internal control published in October 2005. The board attaches importance not only to the process established for controlling risks but also to promoting an internal culture in which all group staff are conscious of the risks arising in their particular areas of activity, are open with each other in their disclosure of such risks and combine together in seeking to mitigate risk. The board, assisted by the audit committee, 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 (providing such information as the board requires) and considering 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 detailed review of the system of internal control in November 2009 (including the group’s internal audit arrangements) and, during the course of this review, the board did not identify, nor was it advised of, any failings or weaknesses which it determined to be significant. A confirmation, therefore, in respect of the necessary actions to be taken was not considered appropriate. This review has been reconfirmed for the purpose of this annual report. Internal audit and reporting The group’s Indonesian operations have a fully staffed in- house internal audit function supplemented where necessary by the use of external consultants. The function issues a full report on each internal audit topic and a summary of the report is issued to the audit committee. In addition, follow-up audits are undertaken to ensure that the necessary remedial action has been taken. 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. budgets and management Management reports to the board on a regular basis by way of the circulation of progress reports, management reports, 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 four supervisory visits each year are undertaken to the overseas operations by the managing 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. Control and capital structure regarding substantial shareholders, Information significant interests in the securities of the company and other matters pertaining to the control and rights attaching to the company’s capital is provided under “Substantial shareholders” and “Control and structure of capital” in the “Directors’ report” section of this annual report. Approved by the board on 27 April 2010 RICHARD M ROBINOW Chairman 65 Directors’ remuneration report Introduction Remuneration policy This report has been prepared in accordance with The committee sets the remuneration and benefits of the Schedule 8 to the Accounting Regulations made chairman and the managing director. The latter is pursuant to the Companies Act 2006 (the “Act”). The currently the only executive director but the committee report also meets the relevant requirements of the Listing would set the remuneration and benefits of any other Rules of the Financial Services Authority and describes executive directors who might in future be appointed. how the board has applied the principles relating to directors’ remuneration set out in the Combined Code In setting remuneration and benefits, the committee (the “Code”). As required by the Act, a resolution to considers the achievement of each individual in attaining approve the report will be proposed at the annual general the objectives set for that individual (including objectives meeting at which the accompanying financial statements relating to corporate performance on environmental, are laid before the company’s members. social and governance matters), the responsibilities assumed by the individual and, where the role is part time, The Act requires the auditors to report to the company’s the time commitment involved. The committee draws on members on certain parts of this report and to state data of the remuneration of others performing similar whether in their opinion those parts of the report have functions in similarly sized organisations and takes been properly prepared in accordance with the account of the remuneration of senior employees of the Accounting Regulations. The report has therefore been group who are not directors but with due allowance for divided into separate sections for audited and unaudited differences in remuneration applicable to different information. Unaudited information The remuneration committee geographical locations. The committee aims to set performance related remuneration on a basis that encourages responsible behaviour in relation to environmental, social and governance matters. The key objective of the remuneration policy (which The company has established a remuneration committee. applies for 2010 and subsequent years) is to attract, With effect from 23 April 2009 the members of the motivate, retain and fairly reward individuals of a high remuneration committee were Mr D J Blackett (chairman) calibre, while ensuring that the remuneration of each and Mr D H R Killick. Prior to 23 April 2009 and, in individual is consistent with the best interests of the particular, when directors’ remuneration for 2009 was company and its shareholders. In framing its policy on considered, the members of the committee were Mr J M performance related remuneration (which is payable only Green-Armytage (chairman), Mr D H R Killick and Mr R M to executive directors) the committee follows the Robinow. While Mr Robinow was a member of the provisions of schedule A to the Code. committee, any matter concerning Mr Robinow was discussed without Mr Robinow being present. The committee considers all proposals for executive directors to hold outside directorships. Such directorships The committee does not use independent consultants but are normally permitted only if considered to be of value to takes into account the views of the chairman and the group and on terms that any remuneration payable will managing director. be accounted for to the group. 66 Remuneration of execuitve directors years, thereafter determinable by either party by giving notice to the other party of not less than six months. At The policy on remuneration of executive directors is that 31 December 2009 the unexpired term remained as six basic remuneration of each executive director should months. There are no provisions for compensation for comprise an annual salary, part of which may be early termination save that Mr Oakley would be entitled to pensionable, and certain benefits-in-kind, principally a a payment in lieu of notice if due notice had not been company car. In addition an executive director should be given. paid non-pensionable performance related bonuses. These are to be awarded annually in arrears on a Performance graph discretionary basis taking into account the performance of the group during the relevant year and the contribution A performance graph is shown in the “Key statistics” to performance that a director is assessed by the section of this annual report. This compares the committee to have made. Bonuses should not normally performance of the company’s ordinary shares (measured exceed 50 per cent of salary and are paid in cash. There by total shareholder return) with that of the FTSE all share is no separate pension scheme for executive directors index for the period from January 2005 to December and the only current executive director (the managing 2009. The FTSE all share index has been selected as director) was an ordinary member of the R.E.A. Pension there is no index available that is specific to the activities Scheme until 31 July 2009 after which he became a of the company. pensioner member. Long term incentive plans Remuneration of non-executive directors A first long term incentive plan (the “first plan”) was The remuneration of non-executive directors other than established in 2007 and a second similar plan (the the chairman is determined by the board within the limits “second plan”) was put in place in 2009. The first and set by the articles of association, no director taking part in second plans (together the “plans”) are designed to the determination of his own remuneration. The level of provide incentives, linked to the market price performance remuneration is determined having regard to that paid by of ordinary shares in the company, to a small number of comparable organisations and to the time commitments key senior executives in Indonesia with a view to their expected. No non-executive director has any entitlement participating over the long term in value created for the to remuneration on a basis related to performance. group. No director may participate. The first plan period Service contracts commenced on 1 January 2007 and ends on 31 December 2010 and the second plan period commenced on 1 January 2009 and ends on 31 December 2012 (the The company’s current policy on service contracts is that “performance periods”). contracts should have a notice period of not more than one year and a maximum termination payment not Under the plans, participants are awarded potential exceeding one year’s salary. No director has a service entitlements over notional ordinary shares of the contract that is not fully compliant with this policy. company. These potential entitlements then vest to an The group entered into a service contract with Mr J C A vested entitlement may be exercised in whole or part at Oakley on 16 December 1988 initially for a period of two extent that is dependent upon the achievement of targets. 67 Directors’ remuneration report continued any time from 1 January 2011 until 31 December 2016 remuneration committee exercises a discretion to decide under the first plan and from 1 January 2013 to 31 that his potential entitlement should not lapse. Where the December 2018 under the second plan. On exercising a potential entitlement does not lapse, it will vest on a basis vested entitlement, a participant will receive a cash that reflects achievement of performance targets up to amount for each ordinary share over which the the end of the financial year last ended before the date entitlement is exercised, equal to the excess (if any) of the (the “cessation date”) that the affected participant ceases market price of an ordinary share on the date of exercise employment with the group (as determined by the over 433.5p in the case of the first plan and 231.5p in remuneration committee) and time apportioned for the case of the second plan, being the market prices of an elapsed portion of the applicable performance period up ordinary share on the dates with effect from which the to the cessation date expressed as a fraction of the full plans were agreed. applicable performance period. The resultant vested entitlement will be exercisable for a period of twelve The extent to which a participant's potential entitlement to months from the cessation date. If a participant leaves notional ordinary shares under a plan will vest will be after the end of the applicable performance period, the determined by key performance targets. In the case of participant may exercise a vested entitlement within six the first plan, there are three key performance targets months of leaving. which relate to total shareholder return, cost per tonne of crude palm oil produced and annual planting rate In the event of a change in control of the company as a achieved. In the case of the second plan, there are two result of a takeover offer or similar corporate event, key performance targets which relate to total shareholder potential entitlements will vest on a basis that reflects return and cost per tonne of crude palm oil produced. achievement of performance targets up to the date (the Each performance target is measured on a cumulative “applicable date”) of change of control or other relevant basis over the applicable performance period. Each event (as determined by the remuneration committee) performance target governs the vesting, in the case of the and time apportioned for the elapsed portion of the first plan, of one third, and, in the case of the second plan, applicable performance period up to the applicable date of one half, of each potential entitlement and for each expressed as a fraction of the full applicable performance performance target there are threshold, target and period. The resultant vested entitlements will be maximum levels of performance which determine the exercisable for a period of one month following the exact number of notional ordinary shares that vest in applicable date. relation to that target. The remuneration committee has discretion to adjust targets if it considers that actual At 31 December 2009, the total numbers of notional performance warrants this. ordinary shares over which awards of potential entitlements had been made amounted to 195,000 under The vesting of potential entitlements and the exercise of the first plan ad 65,000 under the second plan. On the vested entitlements is dependent on continued basis of the market price of the ordinary shares on 31 employment with the group. If a participant under a plan December 2009 of 414p per share, the total gain to ceases employment with the group before the end of the participants in respect of the potential entitlements performance period applicable to that plan, his potential awarded would, if such entitlements had vested in full, entitlement will lapse unless he leaves by reason of death, have been £119,000. injury, disability, redundancy or retirement or the 68 Audited information Directors’ remuneration Director’s pension arrangements - Mr J C Oakley Mr Oakley (who was aged 61 at 31 December 2009) was an ordinary member of the R.E.A. Pension Scheme until The following table shows details of the remuneration of 31 July 2009. This is a defined benefit scheme of which individual directors holding office during the year ended details are shown in note 37 to the consolidated financial 31 December 2009 (with comparative totals for 2008): statements. Mr Oakley elected to become a pensioner Salary and fees Other* 2009 Total £’000 £’000 £’000 168 234 17 17 17 17 17 17 4 54 172 288 - - - - - - 17 17 17 17 17 17 2008 Total £’000 176 239 9 17 17 17 17 17 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 member of the scheme on 31 July 2009. In recognition of Mr Oakley’s withdrawal from ordinary membership of the scheme ahead of attaining the age of 65, the company is paying Mr Oakley an amount in lieu of the pension contributions that the company would otherwise have paid to the pension scheme. The amount in lieu payable in 2009 was £22,000 (2008: £nil). Director’s pension entitlement - Mr J C Oakley 504 58 562 509 Details of the pension entitlement are set out below. * comprises benefits and, in the case of Mr Oakley a bonus of £2,000 and payments in lieu of pension contributions of £22,000. ** appointed 1 July 2008. In the above table, amounts payable in respect of Mr Green-Armytage, Mr Letts and Mr Lim were to companies Accrued annual pension at beginning of year Increase in annual pension in period to 31 July 2009 Annual pension at end of year * £ 88,425 4,100 92,525 Pension transfer value at beginning of year 1,933,814 in which such directors were interested. Contributions made by the director during the 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 £178,000. 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 2009, the non- pensionable salary ordinarily payable was reduced by £21,500 (2008: £42,500) and the bonus that would normally have been paid by £49,320 (2008: £50,000). period to 31 July 2009 6,198 Reduction in pension transfer value during the period (104,757) Notional transfer value at end of year * 1,835,255 * before any commutation The reduction in transfer value is due to different rates for transfer of pension and commutation of pension to provide a pension commencement lump sum. No part of the increase in pension, or of the movment in transfer value, during 2009 related to inflation. 69 Directors’ remuneration report continued 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 was granted. As a result, at the beginning and end of 2009 the number of ordinary shares the subject of the option was 840,689 and the exercise price was 43.753p per share. The market price of the ordinary shares at 31 December 2009 was 414p and the market price range during 2009 was 195p to 480p. Since the end of 2009, Mr Oakley has exercised his option (which was due to expire on 21 May 2012) in respect of 840,689 shares after which there were no options outstanding. The market price on the date that the options were exercised was 405p and the gain on the exercise of options was £3,036,963. No other options have been granted by the company. Approved by the board on 27 April 2010 RICHARD M ROBINOW Chairman 70 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 • select suitable accounting policies and then apply statements for each financial year. The directors are them consistently; 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 2006 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 • • • • make judgements and estimates that are reasonable and prudent; • state whether applicable United Kingdom Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on the going concern basis unless it is inappropriate to 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 2006. 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 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. 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 71 Directors’ confirmation The directors are responsible for the preparation of this annual report. To the best of the knowledge of each of the directors: • 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 • the “Directors' report” section of this annual report including the “Chairman’s statement” and “Review of the group” sections 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 2010 72 Auditors’ report (group) Independent auditors’ report to the members of R.E.A. Holdings plc Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts We have audited the group financial statements of R.E.A. and disclosures in the financial statements sufficient to give Holdings plc for the year ended 31 December 2009 reasonable assurance that the financial statements are free which comprise the consolidated income statement, the from material misstatement, whether caused by fraud or consolidated balance sheet, the consolidated statement error. This includes an assessment of: whether the of comprehensive income, the consolidated statement of accounting policies are appropriate to the group’s changes in equity, the consolidated cash flow statement, circumstances and have been consistently applied and the accounting policies and the related notes 1 to 42. adequately disclosed; the reasonableness of significant The financial reporting framework that has been applied accounting estimates made by the directors; and the overall in their preparation is applicable law and International presentation of the financial statements. Financial Reporting Standards (IFRSs) as adopted by the European Union. Opinion on financial statements This report is made solely to the company’s members, as In our opinion the group financial statements: a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors As explained more fully in the statement of Directors’ responsibilities, the directors are responsible for the preparation of the group financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the group financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors. • • • give a true and fair view of the state of the group’s affairs as at 31 December 2009 and of its profit for the year then ended; have been properly prepared in accordance with IFRSs as adopted by the European Union; and have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the IAS Regulation. Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Directors’ report for the financial year for which the financial statements are prepared is consistent with the group financial statements. 73 Auditors’ report (group) continued Matters on which we are required to report by exception We have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: • • certain disclosures of directors’ remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit. Under the Listing Rules we are required to review: • • the directors’ statement contained within the Directors’ confirmation in relation to going concern; and the part of the Corporate governance statement relating to the company’s compliance with the nine provisions of the June 2008 Combined Code specified for our review. Other matter We have reported separately on the parent company financial statements of R.E.A. Holdings plc for the year ended 31 December 2009 and on the information in the Directors’ remuneration report that is described as having been audited. Clive Bouch (Senior Statutory Auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditors London, England 27 April 2010 74 Consolidated income statement for the year ended 31 December 2009 Revenue Net gain / (loss) arising from changes in fair value of agricultural produce inventory Cost of sales Gross profit Net gain / (loss) 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 Note 2009 $’000 2008 $’000 2 4 13 2 5 2, 7 8 5 9 10 34 11 78,885 1,556 (33,951) 46,490 9,765 – (1,303) (7,234) 47,718 827 (6,828) 79,630 (4,214) (27,682) 47,734 (2,660) 4 (1,049) (3,466) 40,563 1,185 (5,439) 41,717 (11,861) 36,309 (10,536) 29,856 25,773 27,119 2,219 518 29,856 23,833 2,360 (420) 25,773 83.3 cents 81.4 cents 73.2 cents 71.5 cents 75 Consolidated balance sheet as at 31 December 2009 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 2009 $’000 12,578 204,087 72,258 14,117 12,859 5,037 1,276 2008 $’000 12,578 179,745 63,069 13,088 5,386 2,444 1,917 322,212 278,227 13,376 14,340 22,050 49,766 12,795 8,872 30,316 51,983 371,978 330,210 (13,169) (9,016) (64) (1,500) (412) (24,161) (8,719) (56,965) (29,677) (13,609) (39,478) – (4,701) (12,113) (904) (53) (10,750) (380) (24,200) (2,167) (50,234) (29,632) (26,517) (31,478) (61) (3,310) (153,149) (143,399) (177,310) (167,599) 194,668 162,611 43,188 27,297 (13,630) 136,499 193,354 1,314 194,668 40,714 27,322 (16,388) 110,383 162,031 580 162,611 Non-current assets Goodwill Biological assets Property, plant and equipment Prepaid operating lease rentals Indonesian coal interests 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 2010 and signed on behalf of the board. RICHARD M ROBINOW Chairman 76 Consolidated statement of comprehensive income for the year ended 31 December 2009 Profit for the year Other comprehensive income Exchange differences on translation of foreign operations Changes in fair value of cash flow hedges Tax relating to components of other comprehensive income Share based payment - deferred tax credit / (charge) Total comprehensive income for the year Attributable to: Ordinary shareholders Preference shareholders Minority interests Notes 2009 $’000 29,856 2008 $’000 25,773 9 9 (6,615) 12,981 (3,567) 743 3,542 14,428 (26,676) 5,633 (1,444) (8,059) 33,398 17,714 30,620 2,219 559 33,398 15,823 2,360 (469) 17,714 Consolidated statement of changes in equity for the year ended 31 December 2009 Share capital (note 30) $’000 Share Translation reserve (note 32) $’000 premium (note 31) $’000 Retained earnings (note 33) $’000 At 1 January 2008 Total comprehensive income Scrip issue of preference shares Dividends to preference shareholders Dividends to ordinary shareholders Minority in subsidiary acquired At 31 December 2008 Total comprehensive income Issue of new preference shares Dividends to preference shareholders Dividends to ordinary shareholders Changes in minority 38,299 – 2,415 – – – 40,714 – 2,474 – – – 29,787 – (2,465) – – – 27,322 – (25) – – – (9,822) (6,566) – – – – 89,492 24,749 – (2,360) (1,498) – (16,388) 110,383 30,081 – (2,219) (1,746) – 2,758 – – – – Sub total $’000 147,756 18,183 (50) (2,360) (1,498) – 162,031 32,839 2,449 (2,219) (1,746) – Minority interests (note 34) $’000 877 (469) – – – 172 580 559 – – – 175 Total equity $’000 148,633 17,714 (50) (2,360) (1,498) 172 162,611 33,398 2,449 (2,219) (1,746) 175 At 31 December 2009 43,188 27,297 (13,630) 136,499 193,354 1,314 194,668 77 Consolidated cash flow statement for the year ended 31 December 2009 Net cash from operating activities 35 29,644 32,300 Note 2009 $’000 2008 $’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 Changes in minority interests in subsidiaries Investment in Indonesian coal interests 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 Issue of sterling notes, net of expenses New bank borrowings drawn Net cash (used in) / from financing activities Cash and cash equivalents Net (decrease) / increase 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 827 – (10,382) (16,626) (1,303) – 175 1,185 103 (24,665) (15,126) (1,205) (3,158) – (7,473) (5,386) (34,782) (48,252) (2,219) (1,746) (13,817) (54) 2,449 (2,360) (1,498) (3,000) (90) (50) – 26,880 11,119 – (4,268) 19,882 (9,406) 30,316 1,140 3,930 34,216 (7,830) 22,050 30,316 78 Accounting policies (group) General information R.E.A. Holdings plc is a company incorporated in the United Kingdom under the Companies Act 2006. 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 set out on pages 75 to 108 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. 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 dollars, 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: • • IFRS 3 (revised): “Business combinations” IAS 27 (revised): “Consolidated and separate financial statements” • • • • • • • • • • • • • • • IAS 39 (revised): “Financial instruments: recognition and measurement: eligible hedged items” IAS 32 (revised): “Financial instruments: presentation: classification of rights issues” IFRS 9: “Financial instruments” IFRIC 9 and IAS39: “Embedded derivatives” IFRIC 17: “Distributions of non-cash assets to owners” IFRS 5 (revised): “Non-current assets held for sale and discontinued operations” IFRS 2 (revised): “Share-based payments” IAS 38 (revised): “Intangible assets” IFRIC 16: “Hedges of a net investment in a foreign operation” IFRIC 19: “Extinguishing financial liabilities with equity instruments” IFRS 31 (revised): “Additional exemptions for first- time adopters” IAS 24 (revised): “Related party disclosures” IFRS 1 (revised): “Limited exemption from comparative IFRS 7 disclosures for first-time adopters” IFRIC 18: “Transfers of assets from customers” IFRIC 14: “Prepayments of minimum funding requirements” interpretations come The directors anticipate that when the relevant standards and for periods commencing on or after 1 January 2010 their adoption will have no material impact on the consolidated financial statements, save for additional disclosures which may be required. into effect 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. 79 Accounting policies (group) continued 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 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 under “Basis of consolidation” above 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 80 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 assets and liabilities denominated in foreign currencies are retranslated at the rates of exchange prevailing at that date except that 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, 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. 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 payable 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 81 Accounting policies (group) continued 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 the end of 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. 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 82 charges and the costs of the Indonesian head office (including in both cases personnel costs and local fees) 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 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 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. Inventories Inventories of agricultural produce harvested from the biological assets are stated at the fair value 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 (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 assets 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 (including Indonesian coal interests), 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. Indonesian coal interests are classified as loans and receivables and measured at amortised cost. All other loans and receivables held by the group are non interest bearing and are stated at their nominal amount. All loans and receivables are reduced by appropriate allowances for irrecoverable amounts. Cash and cash equivalents 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. 83 Accounting policies (group) continued 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. Cash flow hedges 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. 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 classified as held for trading or designated as held at FVTPL. 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. 84 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. Such judgements, estimates and 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 estimates. The judgements, estimates and assumptions are reviewed on an ongoing basis. Revisions to estimates are recognised in the period in which the estimates are revised. Critical judgements in applying the group’s accounting policies The following are critical judgements not being judgements involving estimations (which are dealt with below) that the directors have made in the process of applying the group’s accounting policies. Biological assets IAS 41 “Agriculture” requires the determination of the fair value of biological assets. In the absence of an active market for such assets, similar in condition and location to those owned by the group, management must select an appropriate methodology to be used, together with suitable metrics, for determining fair value. The directors have applied a discounted cash flow method and have selected a discount rate that, in their opinion, reflects an appropriate rate of return on investment taking into account the cyclicity of commodity markets (see note 13). Capitalisation of interest and other costs As described under “Biological assets” in “Accounting policies (group)”, all expenditure on biological assets up to maturity, including interest, is treated as an addition to such assets. The directors have determined that normally such capitalisation will cease at the end of the third financial year following the year in which land clearing commenced. At this point, plantings should produce a commercial harvest and accordingly be treated as having been brought into use for the purposes of IAS16 “Property plant and equipment” and of IAS 23 “Borrowing costs”. However, crop yields at this point may vary depending on the time of year that land clearing commenced and on climatic conditions thereafter. In specific cases, the directors may elect to extend the period of capitalisation by a further year. Key sources of estimation uncertainty 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 Because of the inherent uncertainty associated with the valuation methodology used in determining the fair value of the group’s biological assets, and in particular the volatility of prices for the group’s agricultural produce and the absence of a liquid market for Indonesian 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. 85 Notes to the consolidated financial statements continued 1. Critical accounting judgements and key sources of estimation uncertainty - continued Income taxes The group is subject to income taxes in various jurisdictions. Significant judgement is required in determining the group’s liability to both current and deferred tax 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 2009 $’000 78,836 49 78,885 – 827 79,712 2008 $’000 79,107 523 79,630 4 1,185 80,819 In 2009 three customers accounted for respectively 43 per cent, 20 per cent and 13 per cent of the group’s sales of goods (2008: four customers, 38 per cent, 12 per cent, 11 per cent and 11 per cent). The crop of oil palm fresh fruit bunches for 2009 amounted to 490,178 tonnes (2008: 450,906 tonnes). The fair value of the crop of fresh fruit bunches was $44,698,000 (2008: $51,840,000), based on the price formula determined by the Indonesian government for purchases of fresh fruit bunches from smallholders. 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. The group operates in two segments, the cultivation of oil palms and the develpoment of coal operations. At this stage, the latter does not meet the quantitative thresholds set out in IFRS “Operating Segments” and, accordingly, no further analyses are provided by business segment. In 2008, the group had only one business segment. Sales by geographical destination: Indonesia Rest of Asia Carrying amount of segment net assets by geographical area of asset location: UK and Continental Europe Indonesia 2009 $’m 40.7 38.2 78.9 17.3 177.4 194.7 2008 $’m 45.8 33.3 79.1 25.3 137.3 162.6 86 3. Segment information - continued Additions to property, plant and equipment by geographical area of asset location: UK and Continental Europe Indonesia 2009 $’m – 13.7 13.7 2008 $’m – 24.7 24.7 4. Agricultural produce inventory movement The net gain / (loss) 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 Salient items charged / (credited) in arrriving at profit before tax Administrative expenses (see below) Movement in inventories (at historic cost) Operating lease rentals Depreciation of property, plant and equipment Amortisation of prepaid operating lease rentals Net foreign exchange gains Charge / (credit) for additional UK pension liability (see note 37) National insurance contributions on share options Indonesian operations Head office Fee payable to the company’s auditors 2009 $’000 2008 $’000 7,234 1,311 308 3,147 190 (859) 528 355 3,729 3,481 7,234 3,466 (509) 288 2,420 57 (2,935) (270) (660) 3,808 3,523 3,466 The amount payable to Deloitte LLP for the audit of the company’s financial statements was $118,000 (2008: $100,000). Amounts payable to Deloitte LLP for the audit of accounts of associates of the company pursuant to legislation were $16,000 (2008: $25,000). Amounts payable to Deloitte LLP for other services were $3,000 (2008: for other services - $2,000). Amounts payable to an associate of Deloitte LLP for the audit of a subsidiary’s financial statements were $10,000 (2008: $9,000). Earnings before interest, tax, depreciation and amortisation and net biological (gain) / loss Operating profit Depreciation and amortisation Net biological (gain) / loss 2009 $’000 47,718 3,337 (9,765) 41,290 2008 $’000 40,563 2,477 2,660 45,700 87 Notes to the consolidated financial statements continued 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 Other interest income 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 2009 Number 2008 Number 3,943 2,210 7 6,160 3,418 2,578 7 6,003 $’000 $’000 15,838 576 1,272 17,686 2009 $’000 430 397 827 2009 $’000 587 2,338 5,989 6 1,467 10,387 (3,559) 6,828 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 Amount included as additions to biological assets arose on borrowings applicable to the Indonesian operations and reflected a capitalisation rate of 30.4 per cent (2008: 35.5 per cent); there is no directly related tax relief. 88 9. Tax Current tax: UK corporation tax Foreign tax (includes prior years $69,000) (2008: $3,065,000) Total current tax Deferred tax: Current year (includes prior years $nil) (2008: $1,588,000) Attributable to a decrease in the rate of tax Total deferred tax Total tax 2009 $’000 – 6,858 6,858 5,003 – 5,003 2008 $’000 28 13,478 13,506 2,825 (5,795) (2,970) 11,861 10,536 Taxation is provided at the rates prevailing for the relevant jurisdiction. For Indonesia, the current taxation provision is based on a tax rate of 28 per cent (2008: 30 per cent) and the deferred tax provision reflects the reduction in the corporate taxation rate from 30 per cent to 25 per cent, effective from 2010. The effect of this reduction in the 2008 accounts is 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 for 2008 is also disclosed below and in note 26. Prior year adjustments in 2008 of $3,065,000 in respect of foreign tax and $1,588,000 in respect of deferred tax arose 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 per cent (2008: 28.5 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 tax rates below 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 Tax effect of change in rate on Indonesian deferred tax liabilities Additional tax provisions 2009 $’000 41,717 2008 $’000 36,309 11,681 10,348 142 – (88) – (672) 729 – – – 69 673 (61) (349) 531 – 625 22 (23) (5,773) 4,543 Tax expense at effective tax rate for the year 11,861 10,536 In addition to the amount charged to the income statement, the following amounts relating to tax have been recognised directly in other comprehensive income: 89 Notes to the consolidated financial statements continued 9. Tax - continued Current tax: Relating to cash flow hedges Deferred tax: Relating to cash flow hedges On share based payment On prior year loan relationship losses reversed Total tax recognised directly in other comprehensive income 10. Dividends Amounts recognised as distributions to equity holders: Preference dividends of 9p per share Ordinary dividends 2009 $’000 2008 $’000 4,179 (7,235) (612) (743) – (1,355) (595) 1,444 2,197 3,046 2,824 (4,189) 2009 $’000 2,219 1,746 3,965 2008 $’000 2,360 1,498 3,858 An interim dividend of 2p per ordinary share in lieu of final in respect of the year ended 31 December 2009 was paid on 29 January 2010. In accordance with IAS10 “Events after the reporting period”, this dividend, amounting in aggregate to $1,054,000, has not been included in the 2009 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 Beginning of year End of year 2009 $’000 27,119 ‘000 32,574 736 33,310 2009 $’000 12,578 12,578 2008 $’000 23,833 ‘000 32,574 761 33,335 2008 $’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 an 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. 90 13. Biological assets Beginning of year Reclassification from infrastructure (see note 14) 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 gain / (loss) End of year Net biological gain / (loss) comprises: Gain / (loss) arising from movement in fair value attributable to physical changes Gain arising from movement in fair value attributable to price changes 2009 $’000 179,745 773 13,866 140 (202) 9,765 204,087 2008 $’000 166,347 – 15,763 339 (44) (2,660) 179,745 9,765 – 9,765 (2,660) – (2,660) 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)”. Critical judgements in relation to these matters are detailed in note 1. The valuation assumed a discount rate of 16 per cent in the case of PT REA Kaltim Plantations (“REA Kaltim”) and 19 per cent in the case of all other group companies (2008: 16 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 crude palm oil (“CPO”) price of $446 per tonne, net of Indonesian export duties, FOB Samarinda (2008: twenty year average of $431 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 $11,260,000 (2008: $9,505,000) if the crops projected for the purposes of the valuation had been reduced by 5 per cent; by $10,660,000 (2008: $8,887,000) if the discount rates assumed had been increased by 1 per cent and by $22,490,000 (2008: $18,987,000) 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 at prices prevailing immediately prior to delivery but on occasions, when market conditions appear favourable, the group makes forward sales at fixed prices. 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 fixed price sales of 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 during 2008 by mutual agreement with the counterparty. At 31 December 2009, the group had outstanding forward sales of 6,000 tonnes of CPO per month for the five month period to May 2010, on terms that the sales price of each delivery be determined immediately ahead of delivery by reference to prevailing open market prices (31 December 2008: 3,000 tonnes per month for the five month period to 31 May 2009). At the balance sheet date, biological assets of $165,364,000 (2008: $161,452,000) had been charged as security for bank loans (see note 22) but there were otherwise no restrictions on titles to the biological assets (2008: none). Expenditure approved by the directors for the development of immature areas in 2010 amounts to $37,000,000 (prior year - $13,000,000). 91 Notes to the consolidated financial statements continued 14. Property, plant and equipment Buildings and structures Plant, Construction in progress Total Cost: At 1 January 2008 Additions Exchange differences Disposals Transfers (see note 13) At 31 December 2008 Reclassification as biological assets (see note 13) Additions Exchange differences Disposals Transfers (see note 13) At 31 December 2009 Accumulated depreciation: At 1 January 2008 Charge for year Exchange differences Eliminated on disposals At 31 December 2008 Charge for year Exchange differences Eliminated on disposals At 31 December 2009 Carrying amount: End of year Beginning of year equipment and vehicles $’000 $’000 18,002 10,227 – – 7,064 35,293 (773) 3,482 – – 7,705 45,707 1,167 637 – – 1,804 1,058 – – 2,862 $‘000 $‘000 29,590 3,135 (183) (268) 30 32,304 – 2,587 57 – 2,462 37,410 7,869 2,206 (102) (163) 9,810 2,554 33 – 12,397 3,216 11,303 – – (7,433) 7,086 – 7,621 – – (10,307) 4,400 – – – – – – – – – 50,808 24,665 (183) (268) (339) 74,683 (773) 13,690 57 – (140) 87,517 9,036 2,843 (102) (163) 11,614 3,612 33 – 15,259 42,845 33,489 25,013 22,494 4,400 7,086 72,258 63,069 The depreciation charge for the year includes $465,000 (2008: $423,000) 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 $139,000 (2008: $174,000). At the balance sheet date, the group had entered into contractual commitments for the acquisition of property, plant and equipment amounting to $360,000 (2008: $2,394,000). 92 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 2009 $‘000 13,723 1,304 15,027 635 275 910 2008 $‘000 9,188 4,535 13,723 365 270 635 14,117 13,088 13,088 8,823 The depreciation charge for the year includes $85,000 (2008: $212,000) which has been capitalised as part of the additions to biological assets. Additions in the year include $nil (2008: $3,330,000) in respect of a subsidiary acquired during the year. Land title certificates have been obtained in respect of areas covering 52,029 hectares (2008: 46,841 hectares). 16. Indonesian coal interests The balance of $12,859,000 (2008: $5,386,000) comprises interest bearing loans made to two Indonesian companies that, directly and through a further Indonesian company, own rights in respect of certain coal concessions in East Kalimantan Indonesia, together with related balances; such loans are repayable not later than 2020. Arrangements have been agreed whereby the group will have the right to acquire the concession holding companies at original cost as soon as Indonesian law allows this on a basis that will give the group 95 per cent ownership of those companies. In the interim, the group will receive appropriate remuneration for the funding and services that it provides to the concession holding companies and no dividends or other distributions or payments may be paid or made by the concession holding companies to the existing owners of the companies without the prior agreement of the group. The directors do not consider that any provision for impairment of the Indonesian coal interests is required. 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 2009 $’000 5,477 7,899 2008 $’000 4,879 7,916 13,376 12,795 93 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 2009 $’000 2,618 2,375 8,121 1,226 14,340 2008 $’000 712 1,200 6,199 761 8,872 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 6 days (2008: nil 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, development institutions and 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 2010 is 60 per cent (2009: 60 per cent). Net debt, equity and the net debt to equity ratio at the balance sheet date were as follows: Debt and related engagements * Cash and cash equivalents Net debt and related engagements * 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 2009 $’000 104,580 (22,050) 82,530 2008 $’000 108,264 (30,316) 77,948 194,668 42.4% 162,611 47.9% 94 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 2009 comprised loans and receivables (including Indonesian coal interests) and cash and cash equivalents amounting to $38,785,000 (2008: $37,834,000). Non-derivative financial liabilities as at 31 December 2009 comprised liabilities at amortised cost amounting to $106,714,000 (2008: $102,920,000). Derivative financial instruments at 31 December 2009 comprised instruments in designated hedge accounting relationships at fair value amounting to a liability of $13,609,000 (2008: a liability of $26,517,000). As explained in note 16 arrangements exist for the group to acquire at historic cost the shares in the Indonesian companies owning rights over certain coal concessions. The directors have attributed a fair value of zero to these rights in view of the prior claims of the loan financing, present stage of the operations and legislative uncertainty. Financial risk management objectives The group manages the financial risks relating to its operations 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”) (2008: 2.75 per cent). In addition, the interest rate formula includes an allowance for the bankers’ cost of funds (2008: $nil). 95 Notes to the consolidated financial statements continued 21. Financial instruments - continued 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 2009 (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 $118,000 (2008: pre-tax profit (and equity) increase of $174,000). 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 up to 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 $180,000 on the net sterling denominated non-derivative monetary items (excluding the sterling notes which are hedged) (2008: gain of $100,000). A 5 per cent strengthening of the Indonesian rupiah against the US dollar would have resulted in a gain dealt with in the consolidated income statement and equity of $188,000 on the net Indonesian rupiah denominated, non- derivative monetary items (2008: loss of $125,000). 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 2009, 78 per cent of bank deposits were held with banks with a Moody’s prime rating of P1, 18 per cent with a bank with a Moody’s prime rating of P3 and the balance with banks with no Moody’s prime rating. 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 2009 and 31 December 2008 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. 96 21. Financial instruments - continued 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. 2009 Bank loans US dollar notes Sterling notes Trade and other payables, and customer deposits Obligations under finance leases 2008 Bank loans US dollar notes Sterling notes Trade and other payables, and customer deposits Obligations under finance leases Weighted average interest rate 6.5% 8.0% 10.4% 10.0% Weighted average interest rate 5.8% 8.0% 10.4% 10.0% Under 1 year $’000 2,126 2,250 5,663 7,964 68 Between 1 and 2 years $’000 2,610 2,250 5,647 – – Over 2 years $’000 7,125 34,500 87,915 – – Total $’000 11,861 39,000 99,225 7,964 68 18,071 10,507 129,540 158,118 Under 1 year $’000 11,119 2,250 5,035 8,332 62 26,798 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 At 31 December 2009, the group’s non-derivative financial assets (other than receivables) comprised cash and deposits of $22,050,000 (2008: $30,316,000) carrying a weighted average interest rate of 1.9 per cent (2008: 3.1 per cent) all having a maturity of under one year, and Indonesian coal interests of $12,859,000 (2008: $5,386,000) details of which are given in note 16. 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 2009 At 31 December 2008 Under 1 year $’000 7,197 7,197 Between 1 and 2 years $’000 7,178 Over 2 years $’000 97,429 Total $’000 111,804 7,197 104,607 119,001 97 Notes to the consolidated financial statements continued 21. Financial instruments - continued Fair value of financial instruments The table below provides an analysis of the book values and fair values of financial instruments, excluding receivables and trade payables and Indonesian coal interests, as at the balance sheet date. All financial instruments are classified as level 1 in the fair value hierarchy prescribed by IFRS 7 “Financial instruments: disclosures” other than the cross currency interest rate swaps that are classified as level 2. No reclassifications between levels in the fair value hierarchy were made during 2009 (2008: none). 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 swaps - hedge against principal liabilities Net debt and related engagements Cross currency interest rate swaps - hedge against interest liabilities +bearing interest at floating rates o bearing interest at fixed rates 2009 Book value $’000 22,050 (1,500) (8,719) (64) (29,677) (56,965) (7,655) (82,530) (5,954) 2009 Fair value $’000 22,050 (1,500) (8,719) (64) (27,000) (57,066) (7,655) (79.954) (5,954) 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) (88,484) (85,908) (89,098) (75,520) The fair values of cash and deposits, bank debt and Indonesian coal interests approximate their carrying values since these carry interest at current market rates. The fair values of the US dollar notes and sterling notes are based on the latest prices at which those notes were traded prior to the balance sheet date, save that, at 31 December 2008, the fair value of the sterling notes 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 2009 at fair value resulted in a loss of $13,609,000 (2008: loss of $26,517,000) 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 $2,847,000 (2008: $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 98 2009 $‘000 10,219 1,500 2,100 6,619 10,219 2008 $‘000 12,917 10,750 2,167 – 12,917 22. Bank loans - continued Amount due for settlement within 12 months (shown under current liabilities) Amount due for settlement after 12 months 2009 $‘000 1,500 8,719 10,219 2008 $‘000 10,750 2,167 12,917 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 2009 was 5.5 per cent (2008: 5.8 per cent). Bank loans of $10,219,000 (2008: $12,917,000) are secured on substantially the whole of the assets and undertaking of PT REA Kaltim Plantations (“REA Kaltim”), amounting to $277 million (2008: $265 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. At the balance sheet date, the group had undrawn US dollar denominated bank facilities of $4.75 million (2008: $4.0 million). 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.. 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 ($59.8 million) is hedged by forward foreign exchange contracts 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. Details of a futher issue of the US dollar notes after the balance sheet date are given in note 40. 99 Notes to the consolidated financial statements continued 25. Hedging instruments At both 31 December 2009 and 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 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 CCIRS on the fifth anniversary of the initial trade date on the basis that, upon such termination, the CCIRS will be closed out at prevailing market value calculated by reference to mid market interest and sterling US dollar exchange rates with no adjustment for specific credit risk. 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. 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 2008 (Charge)/credit to income for the year Charge to equity for the year Exchange differences Effect of change in tax rates - income statement Transfers Property, plant and equipment $’000 (17,601) (3,847) – 3,209 3,318 – Income/ Share based payments expenses* $’000 $’000 2,304 (1,274) – 291 (1,444) (1,529) (322) (348) – (371) – 1,243 Biological assets $’000 (17,369) 798 – – 2,913 – (13,658) (2,979) – – At 31 December 2008 (Charge) / credit to income for the year Credit to equity for the year Exchange differences (14,921) (3,052) – (2,407) At 31 December 2009 (20,380) (16,637) Deferred tax assets Deferred tax liabilities At 31 December 2009 Deferred tax assets Deferred tax liabilities 318 (20,698) – (16,637) (20,380) (16,637) 7 (14,928) – (13,658) (1,988) 1,614 – 846 472 2,615 (2,143) 472 904 (2,892) At 31 December 2008 * includes income, gains or expenses recognised for reporting purposes, but not yet charged to or allowed for tax. (14,921) (13,658) (1,988) 538 – 743 92 1,373 1,373 – 1,373 538 – 538 Tax losses $’000 2,591 93 (2) (219) (225) (1,243) 995 (586) – 322 731 731 – 731 995 – 995 Total $’000 (31,349) (2,665) (2,975) 2,320 5,635 – (29,034) (5,003) 743 (1,147) (34,441) 5,037 (39,478) (34,441) 2,444 (31,478) (29,034) At the balance sheet date, the group had unused tax losses, including a share based payments provision, of $7.8 million (2008: $5.9 million) available to be applied against future profits. A deferred tax asset of $2,104,000 (2008: $1,533,000) has been recognised in respect of these losses made up of $1,373,000 in respect of the share based payment provision (2008: $538,000) and $731,000 in respect of other tax losses (2008: $995,000). 100 26. Deferred tax - continued 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 $6,150,000 (2008: $3,750,000). 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 forthcoming reduction in Indonesian corporation tax from 28 per cent to 25 per cent has reduced the net amount of Indonesian deferred tax liabilities by $nil (2008: $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 2009 $’000 2008 $’000 68 – 68 4 64 64 – 64 64 – 64 62 65 127 13 114 53 61 114 53 61 114 The group leases certain items of plant and equipment under finance leases. The average lease term is one year (2008: one to two years). Interest rates are fixed at the contract rate. The average borrowing rate for the year was 10.0 per cent (2008: 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. 101 Notes to the consolidated financial statements continued 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 Amounts of liabilities by currency: Sterling US dollar Indonesian rupiah 2009 $’000 4,573 540 5,113 2008 $’000 3,078 612 3,690 412 380 394 1,308 2,999 4,701 373 1,159 1,778 3,310 5,113 3,690 2,909 436 1,768 5,113 2,117 509 1,064 3,690 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 2008 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 (2008: 37 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 (2008: 17,500,000) 41,000,000 - ordinary shares of 25p each (2008: 41,000,000) 2009 $’000 5,517 1,288 2,098 3,107 1,159 2008 $’000 6,071 2,021 282 3,499 240 13,169 12,113 2009 £’000 17,500 10,250 27,750 2008 £’000 17,500 10,250 27,750 102 30. Share capital - continued Issued and fully paid (in US dollars): 16,392,954 - 9 per cent cumulative preference shares of £1 each (2008: 14,902,954) 32,573,856 - ordinary shares of 25p each (2008: 32,573,856) 2009 $’000 28,958 14,230 43,188 2008 $’000 26,484 14,230 40,714 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: • on 6 November 2009, 1,490,000 9 per cent cumulative preference shares were issued, credited as fully paid, by way of a placing at par plus an amount equal to the accrued but unpaid dividend entitlement of 3.18 pence relating to the period before issue. 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 2008 Capitalisation issue of new preference shares Expenses of issue At 31 December 2008 Expenses of issue of new preference shares At 31 December 2009 32. Translation reserve At 1 January 2008 Reclassification of balances brought forward Exchange translation differences arising during the year Fair value loss on cash flow hedge At 31 December 2008 Exchange translation differences arising during the year Fair value profit on cash flow hedge At 31 December 2009 Share premium account $’000 29,787 (2,415) (50) 27,322 (25) 27,297 Total $’000 (9,822) – 12,191 (18,757) (16,388) (6,571) 9,329 Hedging reserve $’000 (506) 414 18,443 (18,757) (406) (6,475) 9,329 Other reserve $’000 (9,316) (414) (6,252) – (15,982) (96) – 2,448 (16,078) (13,630) 103 Notes to the consolidated financial statements continued 33. Retained earnings Beginning of year Profit for the year Ordinary dividend paid Share based payment - deferred tax credit / (charge) End of year 34. Minority interest Beginning of year Share of profit / (loss) after taxation Share of items taken directly to equity Exchange translation differences Subscription to share capital of new subsidiary End of year 35. Reconciliation of operating profit to operating cash flows Operating profit Depreciation of property, plant and equipment (Increase) / decrease in fair value of agricultural produce inventory Amortisation of prepaid operating lease rentals Amortisation of sterling and US dollar note issue expenses Biological (gain) / loss Loss on disposal of property, plant and equipment Operating cash flows before movements in working capital Decrease / (increase) in inventories (excluding fair value movements) Increase in receivables (Decrease) / increase in payables Exchange translation differences Cash generated by operations Taxes paid Interest paid Net cash from operating activities 2009 $’000 110,383 27,119 (1,746) 743 2008 $’000 89,492 23,833 (1,498) (1,444) 136,499 110,383 2009 $’000 580 518 84 (43) 175 1,314 2009 $’000 47,718 3,148 (1,556) 190 344 (9,765) – 40,079 2,158 (2,670) (690) (48) 38,829 (2,284) (6,901) 29,644 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 No additions to property, plant and equipment during the year were financed by new finance leases (2008: $nil). 104 36. Movement in net borrowings Change in net borrowings resulting from cash flows: (Decrease) / increase 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 Currency translation differences Net borrowings at beginning of year Net borrowings at end of year 37. Pensions 2009 $’000 (9,406) 2,698 (6,708) (88) (256) 54 (6,998) (5,296) (62,581) 2008 $’000 3,930 3,000 6,930 (94) (27,073) 90 (20,147) 9,607 (52,041) (74,875) (62,581) 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 IAS19 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 2008. This method was adopted in the previous valuation as at 31 December 2005, as it was considered the appropriate method of calculating future service benefits as the Scheme is closed to new members. At 31 December 2008 the Scheme had an overall shortfall in assets (deficit), when measured against the Scheme’s technical provisions, of £3,579,000. The technical provisions were calculated using assumptions of an investment return of 5.85 per cent pre-retirement and 4.92 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 3.0 per cent. The rate of increase in the retail price index was assumed to be 3.0 per cent. It was further assumed that both non-retired and retired members’ mortality would reflect PNA00 Ic YOB tables, with males at min 0.75 per cent 110 percent and females at min 0.5 per cent 110 per cent and that members would take the maximum cash sums permitted from 1 January 2009. Had the Scheme been valued at 31 December 2008 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 participating employers covering normal contributions which are payable at a rate calculated to cover future service benefits under the Scheme. The Scheme has also agreed a recovery plan with participating employers which sets out the basis for recovery of the deficit shown by the 31 December 2008 valuation through the payment of quarterly additional contributions over the period from 1 January 2010 to 30 September 2018 after taking account of the additional contributions paid in 2009 under the 31 December 2005 valuation. 105 Notes to the consolidated financial statements continued 37. Pensions - continued The normal contributions paid by the group in 2009 were £47,000 - $72,000 (2008: £67,000 - $ 123,000) and represented 24.9 per cent (2008: 24.9 per cent) of pensionable salaries. The additional contribution applicable to the group for 2009 was £218,000 - $333,000 (2008: £212,000 - $390,000). Under the valuation as at 31 December 2008 the normal contributions will be payable at the rate of 23.4 per cent and the additional contribution for 2010 will rise to £219,000 - $354,000 and thereafter by 2.7 per cent per annum. A liability of £1,737,000 - $2,805,000 (2008: £1,399,000 - $2,014,000) for these additional contributions adjusted for the time value of money has been recognized under retirement benefit obligations (see note 28) with an equal charge to income. In the year to 31 December 2009 the market value of the investments held by the Scheme have increased by over £2 million, which, if the same assumptions had been applied to any valuation at that date, would have resulted in a significant decline 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”. 2009 $’000 877 48 – – – 925 2008 $’000 941 94 – – – 1,035 2009 Closing 2009 Average 9,400 1.615 10,356 1.56 2008 Closing 10,950 1.44 2008 Average 9,757 1.84 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 106 40. Events after the reporting period Dividends An interim dividend of 2p per ordinary share in lieu of final in respect of the year ended 31 December 2009 was paid on 29 January 2010. In accordance with IAS10 “Events after the reporting period” this dividend, amounting in aggregate to $1,054,000, has not been reflected in these financial statements. Financing of coal operations On 11 February 2010 the company issued $15 million nominal of further 7.5 per cent dollar notes 2012/14 (“additional dollar notes”) and KCC Resources Limited (“KCC”), its wholly owned subsidiary, issued 150,000 redeemable participating preference shares of $10 each (“KCC participating preference shares”). The additional dollar notes rank pari passu with and form a single issue with the $30,000,000 nominal of 7.5 per cent dollar notes 2012/14 that were already in issue. The KCC participating preference shares will provide a limited interest in certain defined coal operations of the group (the “relevant coal operations”) such that, if the earnings before interest, tax, depreciation and amortisation of the relevant coal operations over the four and a half year period from 1 January 2010 to 30 June 2014 amount, in aggregate, to $36 million or more, the KCC participating preference shares will be redeemable on 31 December 2014 at $44.70 per share. If the required level of earnings is not achieved, then, except in certain limited circumstances (such as divestment of all or a significant part of the relevant coal operations or a change of control of the company), no dividends or other distributions will be paid or made on the KCC participating preference shares and after 31 December 2014 those shares will be converted into valueless deferred shares. The $15 million gross proceeds of the issues are being applied by the group in funding its coal operations, with the coal operations bearing the costs of the issue and utilising $4.5 million of the proceeds in repaying $4.5 million that had been previously advanced to the coal operations by other group companies. Exercise of director’s share option On 1 February 2010 a director exercised an option to subscribe 840,689 ordinary shares in the company at a price of 43.753 pence, following which the number of ordinary shares in issue amounts to 33,414,545. 41. Contingent liabilities Guarantee given by a subsidiary company In furtherance of Indonesian government policy which requires the owners of oil palm plantations to develop smallholder plantations, during 2009 PT REA Kaltim Plantations (“REA Kaltim”), a wholly owned subsidiary of the company, entered into an agreement with Kopersai Perkebuman Kahad Bersatu (the “cooperative”) to develop and manage 1,500 hectares of land owned by the cooperative as an oil palm plantation. To assist with the funding of such development, the cooperative concluded on 14 October 2009 a long term loan agreement with Bank Pembanguan Daerah Kalimantan Timur (“Bank BPD”), a regional development bank, under which the cooperative may borrow up to Indonesian rupiah 86.6 billion ($9.2 million) with amounts borrowed repayable over 15 years and secured on the land to be developed (“the bank facility”). REA Kaltim has guaranteed the obligations of the cooperative as to payments of principal and interest under the bank facility and, in addition, has committed to lend to the cooperative any further funds required to complete the agreed development. REA Kaltim is entitled to a charge over the development when the bank facility has been repaid in full. 107 Notes to the consolidated financial statements continued 41. Contingent liabilities - continued On maturity of the development, the cooperative is required to sell all crops from the development to REA Kaltim and to permit repayment of indebtedness to Bank BPD and REA Kaltim out of the sales proceeds. As at 31 December 2009 the outstanding balance owing by the cooperative to Bank BPD amounted to Indonesian rupiah 29 billion ($3,085,000) (2008: nil) and the outstanding balance owing by REA Kaltim to the cooperative amounted to Indonesian rupiah 7.8 billion ($829,000) (2008: nil). The latter represented the unexpended balance of drawings to date under the facility to be applied for the purposes of the development. 42. Operating lease commitments The group leases office premises under operating leases in London, Jakarta and Samarinda. These leases, which are renewable, run for periods between 10 months and 26 months, and do not include contingent rentals, or options to purchase the properties. The future minimum lease payments under operating leases are as follows: Within one year In the second to fifth year inclusive After five years 2009 $’000 72 189 – 261 2008 $’000 72 233 – 305 108 Auditors’ report (company) Independent auditors’ report to the members of R.E.A. Holdings plc Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts We have audited the parent company financial statements and disclosures in the financial statements sufficient to of R.E.A. Holdings plc for the year ended 31 December give reasonable assurance that the financial statements 2009 which comprise the balance sheet, the movement in are free from material misstatement, whether caused by total shareholders’ funds, the statement of total fraud or error. This includes an assessment of: whether recognised gains and losses, the accounting policies and the accounting policies are appropriate to the parent the related notes (i) to (xiv). The financial reporting company’s circumstances and have been consistently framework that has been applied in their preparation is applied and adequately disclosed; the reasonableness of applicable law and United Kingdom Accounting significant accounting estimates made by the directors; Standards (United Kingdom Generally Accepted and the overall presentation of the financial statements. Accounting Practice). This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the In our opinion the parent company financial statements: Opinion on financial statements Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. • • • give a true and fair view of the state of the parent company’s affairs as at 31 December 2009; have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and have been prepared in accordance with the requirements of the Companies Act 2006. Respective responsibilities of directors and auditors As explained more fully in the statement of Directors’ responsibilities, the directors are responsible for the Opinion on other matters prescribed by Companies Act 2006 the preparation of the parent company financial statements In our opinion: and for being satisfied that they give a true and fair view. Our responsibility is to audit the parent company financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing • • the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006; and the information given in the Directors’ report for the Practices Board’s (APB’s) Ethical Standards for Auditors. financial year for which the financial statements are prepared is consistent with the parent company financial statements. 109 Auditors’ report (company) continued Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent company financial statements and the part of the Directors’ remuneration report to be audited are not in agreement with the accounting records and returns; or • • certain disclosures of directors’ remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit. Other matter We have reported separately on the group financial statements of R.E.A. Holdings plc for the year ended 31 December 2009. Clive Bouch (Senior Statutory Auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditors London, England 27 April 2010 110 Company balance sheet as at 31 December 2009 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 (liabilities) / assets Note (i) (ii) (vi) (iii) (iv) 2009 £’000 62,165 84 989 63,238 437 2,486 2,923 (4,737) (1,814) 2008 £’000 58,932 99 371 59,402 1,118 5,633 6,751 (1,213) 5,538 Total assets less current liabilities 61,424 64,940 Creditors: amounts falling due after more than one year US dollar notes Provision for liabilities and charges Net assets (v) (vi) (18,375) (77) (20,576) (75) 42,972 44,289 Capital and reserves Share capital Share premium account Exchange reserve Profit and loss account Total shareholders’ funds (vii) (viii) (viii) (viii) 24,536 14,659 181 3,596 42,972 23,046 14,675 181 6,387 44,289 Approved by the board on 27 April 2010 and signed on behalf of the board. RICHARD M ROBINOW Chairman 111 Movement in total shareholders’ funds for the year ended 31 December 2009 Total recognised (losses) / gains for the year Dividends to preference shareholders Dividends to ordinary shareholders Issue of new preference shares by way of placing Issue costs of ordinary shares, preference shares and debt securities Shareholders' funds at beginning of year Shareholders' funds at end of year 2009 £’000 2008 £’000 (290) (1,361) (1,140) 1,490 (16) 575 (1,283) (814) – (27) (1,317) (1,549) 44,289 42,972 45,838 44,289 Statement of total recognised gains and losses for the year ended 31 December 2009 (Loss)/profit for the year Share based payment - deferred tax credit / (charge) Currency translation loss taken direct to reserves 2009 £’000 (767) 477 – (290) 2008 £’000 1,392 (785) (32) 575 112 Accounting policies (company) Accounting convention Taxation Separate financial statements of R.E.A. Holdings plc (the “company”) are required by the Companies Act 2006; 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 408 of the Companies Act 2006, 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. Leases No assets are held under finance leases. Rentals under operating leases are charged to profit and loss account on a straight-line basis over the lease term. 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. 113 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 2009 £’000 26,446 35,719 62,165 2008 £’000 27,876 31,056 58,932 £’000 58,932 5,490 (2,257) 62,165 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 KCC Mining Services (Indonesia) PT Kutai Mitra Sejahtera (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 Coal mining 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 Ordinary Ordinary 100 95 95 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 114 Land and buildings Fixtures and fittings £‘000 (short leasehold) £’000 89 3 92 17 9 26 66 72 45 – 45 18 9 27 18 27 Total £‘000 134 3 137 35 18 53 84 99 (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 2009 £’000 1 398 31 7 437 2009 £’000 4,199 49 489 4,737 2009 £’000 18,375 – 18,375 2008 £’000 11 1,011 35 61 1,118 2008 £’000 810 62 341 1,213 2008 £’000 13,717 6,859 20,576 The US dollar notes comprise US$30 million (2008: 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. Details of a further issue of US dollar notes after the balance sheet date are given in note (xiv). 115 Notes to the company financial statements continued (vi) Deferred tax asset and provision for liabilities and charges Deferred tax: Beginning of year Net amount (credited) / debited to profit and loss account Net amount (credited) / debited to reserves End of year 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 2009 £’000 (296) (139) (477) (912) 77 (989) (912) 77 (989) (912) 2008 £’000 (1,720) 652 772 (296) 75 (371) (296) 75 (371) (296) At the balance sheet date, the company had unused tax losses available to be applied against future profits amounting to £3.5 million (2008: £1.3 million). A deferred tax asset of £989,000 (2008: £371,000) has been recognised in respect of these losses. (vii) Share capital Authorised: 17,500,000 - 9 per cent cumulative preference shares of £1 each (2008: 17,500,000) 41,000,000 - ordinary shares of 25p each (2008: 41,000,000) Called-up and fully paid: 16,392,954 - 9 per cent cumulative preference shares of £1 each (2007: 14,902,954) 32,573,856 - ordinary shares of 25p each (2008: 32,573,856) 2009 £’000 17,500 10,250 27,750 16,393 8,143 24,536 2008 £’000 17,500 10,250 27,750 14,903 8,143 23,046 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: • on 6 November 2009, 1,490,000 9 per cent cumulative preference shares were issued, credited as fully paid, by way of a placing at par plus an amount equal to the accrued but unpaid dividend entitlement of 3.18 pence relating to the period before issue. 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”. 116 (viii) Movement in reserves Beginning of year Dividends to preference shareholders Dividends to ordinary shareholders Expenses of issue Retained loss for the year End of year Share premium account £’000 14,675 – – (16) – 14,659 Exchange reserve £’000 181 – – – – 181 Profit and loss account £’000 6,387 (1,361) (1,140) – (290) 3,596 As permitted by section 408 of the Companies Act 2006, a separate profit and loss account dealing with the results of the company has not been presented. The loss before dividends recognised in the company's profit and loss account is £767,000 (2008: profit £1,392,000). (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 2009 Book value £’000 2,486 (18,375) 2009 Fair value £’000 2,486 (16,718) 2008 Book value £’000 5,633 (20,576) 2008 Fair value £’000 5,633 (15,104) (15,889) (14,232) (14,943) (9,471) The fair value of the US dollar notes reflects the mid market price at the reporting date (2008: the last price at which transactions in those notes were effected prior to 31 December 2008). 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. 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 2009, 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. 117 Notes to the company financial statements continued (ix) Financial instruments and risks - continued A limited degree of interest rate risk is accepted. A substantial proportion of the company’s financial instruments at 31 December 2009 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 £25,000 (2008: £52,000) in the company’s interest revenues in its profit and loss account. (x) Pensions The company is the principal employer in the R.E.A. Pension Scheme (the “Scheme”) and a subsidiary company is a participating employer. The Scheme, which has participating employers outside the R.E.A Holdings plc group, is a multi-employer contributory defined benefit scheme with assets held in a trustee-administered fund. 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 FRS 17 “Retirement Benefits” basis, the company accounts for the Scheme as if it 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 2009 (2008: £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 by the company. A non-FRS 17 valuation of the Scheme was last prepared, using the attained age method, as at 31 December 2008. This is considered to be the most appropriate method of calculating contributions to cover future service benefits at 31 December 2008 as the Scheme is closed to new entrants. Had the Scheme been valued at 31 December 2008 using the projected unit method and the same assumptions, the overall deficit would have been similar. The principal actuarial assumptions adopted in this valuation were an annual investment return of 5.85 per cent pre-retirement and 4.92 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 3.0 per cent. The rate of increase in the retail price index was assumed to be 3.0 per cent. It was further assumed that both non-retired and retired members’ mortality would reflect PNA00 Ic YOB tables, with males at min 0.75 per cent 110 percent and females at min 0.5 per cent 110 per cent. The valuation at 31 December 2008 showed an overall shortfall in assets (deficit), when measured against the Scheme’s technical provisions, of £3,579,000. This is applicable to all participants and is being funded by additional deficit funding contributions by participating employers over the period to 30 September 2018, as agreed with the Scheme trustee. (xi) Related party transactions Aggregate directors’ remuneration: Salaries and fees Benefits Annual bonus Gains on exercise of share options 2009 £’000 2008 £’000 562 30 – – 592 467 42 – – 509 During 2009 and 2008, 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. 118 (xii) Rates of exchange See note 39 to the consolidated financial statements. (xiii) Contingent liabilities and commitments Sterling notes The company has guaranteed the obligations for both principal and interest relating to the outstanding £37 million (2008: £37 million) 9.5 per cent guaranteed sterling notes 2015/17 issued by REA Finance B.V.. The directors consider that the risk of loss to the company from this guarantee to be remote. Bank borrowings The company has given, in the ordinary course of business, guarantees in support of the borrowings by certain subsidiaries from and other contracts with banks (including cross currency interest rate swaps) amounting in aggregate to £49 million. The directors consider that the risk of loss to the company from these guarantees to be remote. Pension liability The company’s contingent liability for pension contributions is disclosed in note (x) above. Operating leases The company has annual commitments under a non-cancellable operating lease which can be terminated during 2012 of £101,000 (2008 £101,000). The lease does not contain any contingent rentals or an option to purchase the property; the lease is renewable. (xiv) Post balance sheet events Dividends An interim dividend of 2p per ordinary share in lieu of final in respect of the year ended 31 December 2009 was paid on 29 January 2010. In accordance with IAS10 “Events after the reporting period” this dividend, amounting in aggregate to £651,000, has not been reflected in these financial statements. Financing of coal operations On 11 February 2010 the company issued $15 million nominal of further 7.5 per cent dollar notes 2012/14 (“additional dollar notes”) and KCC Resources Limited (“KCC”), its wholly owned subsidiary, issued 150,000 redeemable participating preference shares of $10 each (“KCC participating preference shares”). The additional dollar notes rank pari passu with and form a single issue with the $30,000,000 nominal of 7.5 per cent dollar notes 2012/14 that were already in issue. 119 Notes to the company financial statements continued (xiv) Post balance sheet events - continued The KCC participating preference shares will provide a limited interest in certain defined coal operations of the group (the “relevant coal operations”) such that, if the earnings before interest, tax, depreciation and amortisation of the relevant coal operations over the four and a half year period from 1 January 2010 to 30 June 2014 amount, in aggregate, to $36 million or more, the KCC participating preference shares will be redeemable on 31 December 2014 at $44.70 per share. If the required level of earnings is not achieved, then, except in certain limited circumstances (such as divestment of all or a significant part of the relevant coal operations or a change of control of the company), no dividends or other distributions will be paid or made on the KCC participating preference shares and after 31 December 2014 those shares will be converted into valueless deferred shares. The $15 million gross proceeds of the issues are being applied by the group in funding its coal operations, with the coal operations bearing the costs of the issue and utilising $4.5 million of the proceeds in repaying $4.5 million that had been previously advanced to the coal operations by other group companies. Exercise of director’s share option On 1 February 2010 a director exercised an option to subscribe 840,689 ordinary shares in the company at a price of 43.753 pence, following which the number of ordinary shares in issue at the date of this report amounts to 33,414,545. 120 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 fiftieth 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 8 June 2010 at 10.00 am to consider and, if thought fit, to pass the following resolutions. Resolutions 13 and 14 will be proposed as special resolutions; all other resolutions will be proposed as ordinary resolutions. 1 To receive the company's annual accounts for the financial year ended 31 December 2009, together with the directors' report, the directors' remuneration report and the auditors' report. 2 To approve the directors' remuneration report for the financial year ended 31 December 2009. 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 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. 5 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. 6 To re-elect as a director Mr D H R Killick, 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 article 105 of the company's articles of association and submits himself for re-election. 7 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. 8 To re-appoint Deloitte LLP, chartered accountants, as auditors of the company to hold office until the conclusion of the next annual general meeting of the company at which accounts are laid before the meeting. 9 To authorise the directors to fix the remuneration of the auditors. 10 That the authorised share capital of the company (being the maximum amount of shares in the capital of the company that the company may allot) be and is hereby increased from the creation of £27,750,000 10,000,000 9 per cent cumulative preference shares of £1 each ranking pari passu in all respects with the existing 9 per cent cumulative preference shares of £1 each in the capital of the company. to £37,750,000 by 11 That the directors be and are hereby generally and unconditionally authorised for the purposes of section 551 of the Companies Act 2006 (the “Act”) to exercise all the powers of the company to allot, and to grant rights to subscribe for or to convert any security into, shares in the capital of the company (other than 9 per cent cumulative preference shares) up to an aggregate nominal amount (calculated, in the case of the grant of rights to subscribe for, or to convert any security into, shares in the capital of the company, in accordance with sub-section (6) of section 551 of the Act) of £2,784,545; such authorisation to expire at the conclusion of the next annual general meeting of the company (or, if earlier, on 30 June 2011), save that the company may before such expiry make any offer or agreement which would or might require shares to be allotted, or rights to be granted, after such expiry and the directors may allot shares, or grant rights to subscribe for or to convert any security into shares, in pursuance of any such offer or agreement as if the authorisations conferred hereby had not expired. 121 Notice of annual general meeting continued the directors may consider necessary or appropriate to deal with fractional entitlements, treasury shares (other than treasury shares being sold), record dates or legal, regulatory or practical difficulties which may arise under the laws of any territory or the requirements of any regulatory body or stock exchange in any territory; or (ii) otherwise than as specified at (i) above, to the allotment of equity securities and the sale of treasury shares up to an aggregate nominal amount (calculated, in the case of the grant of rights to subscribe for, or convert any security into, shares in the capital of the company, in accordance with sub-section (6) of section 551 of the Act) of £417,681 and shall expire at the conclusion of the next annual general meeting of the company (or, if earlier, on 30 June 2011), save that the company may before such expiry make any offer or agreement that would or might require equity securities to be allotted, or treasury shares to be sold, after such expiry and the directors may allot equity securities or sell treasury shares, in pursuance of any such offer or agreement as if the power conferred hereby had not expired. 14 That a general meeting of the company other than an annual general meeting may be called on not less than 14 clear days' notice. By order of the board R.E.A. SERVICES LIMITED Secretary 27 April 2010 Registered office: First Floor 32 – 36 Great Portland Street London W1W 8QX Registered in England and Wales no: 00671099 12 That the directors be and are hereby generally and unconditionally authorised for the purposes of section 551 of the Companies Act 2006 (the “Act”) to exercise all the powers of the company to allot, and to grant rights to subscribe for or to convert any security into, 9 per cent cumulative preference shares in the capital of the company (“preference shares”) up to an aggregate nominal amount of £11,107,046, such authorisation to expire at the conclusion of the next annual general meeting of the company (or, if earlier, on 30 June 2011), save that the company may before such expiry make any offer or agreement which would or might require preference shares to be allotted or rights to be granted, after such expiry and the directors may allot preference shares, or grant rights to subscribe for or to convert any security into preference shares, in pursuance of any such offer or agreement as if the authorisations conferred hereby had not expired. 13 That, subject to the passing of resolution 11 set out in the notice of the 2010 annual general meeting of the company (the “2010 Notice”), the directors be and are hereby given power: (a) for the purposes of section 570 of the Companies Act 2006 (the “Act”), to allot equity securities (as defined in sub-section (1) of section 560 of the Act) of the company for cash pursuant to the authorisation conferred by resolution 11 set out in the 2010 Notice; and (b) for the purposes of section 573 of the Act, to sell ordinary shares (as defined in sub-section (1) of section 560 of the Act) in the capital of the company held by the company as treasury shares for cash as if section 561 of the Act did not apply to the allotment or sale, provided that such powers shall be limited: (i) to the allotment of equity securities in connection with a rights issue or open offer in favour of holders of ordinary shares and to the sale of treasury shares by way of an invitation made by way of rights to holders of ordinary shares, in each case in proportion (as nearly as practicable) to the respective numbers of ordinary shares held by them on the record date for participation in the rights issue, open offer or invitation but subject in each case to such exclusions or other arrangements as 122 Notes The sections of the accompanying Directors' report entitled “Increase in share capital”, “Authorities to issue share capital”, “Powers to issue share capital and sell treasury shares”, “General meeting notice period” and “Recommendation” contain information regarding, and recommendations by the board of the company as to voting on, resolutions 10 to 14 set out in the above notice. Pursuant to regulation 41 of the Uncertificated Securities Regulations 2010 and section 360B of the Companies Act 2006, the company specifies that in order to have the right to attend and vote at the annual general meeting (and also for the purpose of determining how many votes a person entitled to attend and vote may cast), a person must be entered on the register of members of the company at 6.00 pm on 6 June 2010 or, in the event of any adjournment, at 6.00 pm on the date which is two days before the day of the adjourned meeting. Changes to entries on the register of members after this time shall be disregarded in determining the rights of any person to attend or vote at the meeting. Only holders of ordinary shares are entitled to attend and vote at the annual general meeting. A holder of ordinary shares may appoint another person as that holder’s proxy to exercise all or any of the holder’s rights to attend, speak and vote at the annual general meeting. A holder of ordinary shares may appoint more than one proxy in relation to the meeting provided that each proxy is appointed to exercise the rights attached to (a) different share(s) held by the holder. A proxy need not be a member of the company. A form of proxy for the meeting is enclosed. To be valid, forms of proxy and other written instruments appointing a proxy must be received by post or by hand (during normal business hours only) by the company’s registrars, Capita Registrars, by no later than 10.00 am on 6 June 2010. Alternatively, appointment of a proxy may be submitted electronically by using either Capita Registrars' share portal service at www.capitashareportal.com (and so that the appointment is received by the service by no later than 10.00 am on 6 June 2010) or the CREST electronic proxy appointment service as described below. Shareholders who have not already registered for Capita Registrars' share portal service may do so by registering as a new user at www.capitashareportal.com and giving the investor code shown on the enclosed proxy form (as also shown on their share certificate). Completion of a form of proxy, or other written instrument appointing a proxy, or any appointment of a proxy submitted electronically, will not preclude a holder of ordinary shares from attending and voting in person at the annual general meeting if such holder wishes to do so. CREST members may register the appointment of a proxy or proxies for the annual general meeting and any adjournment(s) thereof through the CREST electronic proxy appointment service by using the procedures described in the CREST Manual (available via www.euroclear.com/CREST). CREST personal members or other CREST sponsored members, and those CREST members who have appointed (a) voting service provider(s), should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf. In order for a proxy appointment or instruction regarding a proxy appointment made or given using the CREST service to be valid, the appropriate CREST message (a “CREST proxy instruction”) must be properly authenticated in accordance with the specifications of Euroclear UK and Ireland Limited (“Euroclear”) and must contain the required information as described in the CREST Manual (available via www.euroclear.com/CREST). The CREST proxy instruction, regardless of whether it constitutes a proxy appointment or an instruction to amend a previous proxy appointment, must, in order to be valid be transmitted so as to be received by the company’s registrars (ID: RA10) by 10.00 am on 6 June 2010. For this purpose, the time of receipt will be taken to be the time (as determined by the time stamp applied to the message by the CREST applications host) from which the company’s registrars are able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. The company may treat as invalid a CREST proxy instruction in the circumstances set out the Uncertificated Securities Regulations 2001. in Regulation 35(5)(a) of CREST members and, where applicable, their CREST sponsors or voting service provider(s) should note that Euroclear does not make available special procedures in CREST for particular messages. Normal system timings and limitations will therefore apply in relation to the input of CREST proxy instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member or sponsored member or has appointed (a) voting service provider(s), to procure that such member’s CREST sponsor or voting service provider(s) take(s)) such action as shall be necessary to ensure that a message is transmitted by means of the CREST system by 123 Notice of annual general meeting continued Under section 527 of the Companies Act 2006, members meeting the threshold requirements set out in that section have the right to require the company to publish on a website (in accordance with section 528 of the Companies Act 2006) a statement setting out any matter that the members propose to raise at the relevant annual general meeting relating to (i) the audit of the company's annual accounts that are to be laid before the annual general meeting (including the auditors’ report and the conduct of the audit); or (ii) any circumstance connected with an auditor of the company having ceased to hold office since the last annual general meeting of the company. The company may not require the members requesting any such website publication to pay its expenses in complying with section 527 or section 528 of the Companies Act 2006. Where the company is required to place a statement on a website under section 527 of the Companies Act 2006, it must forward the statement to the company's auditors by not later than the time when it makes the statement available on the website. The business which may be dealt with at the annual general meeting includes any statement that the company has been required under section 527 of the Companies Act 2006 to publish on a website. As at the date of this notice, the issued share capital of the company comprises 33,414,545 ordinary shares and 16,392,954 9 per cent cumulative preference shares. Only holders of ordinary shares (and their proxies) are entitled to attend and vote at the annual general meeting. Accordingly, the voting rights attaching to shares of the company exercisable in respect of each of the resolutions to be proposed at the annual general meeting total 33,414,545 as at the date of this notice. Shareholders may not use any electronic address (within the meaning of section 333(4) of the Companies Act 2006) provided in this notice (or any other related document including the form of proxy) to communicate with the company for any purposes other than those expressly stated. any particular time. In this connection, CREST members and, where applicable, their CREST sponsors or voting service provider(s) are referred, in particular, to those sections of the CREST Manual concerning practical limitations of the CREST system and timings. The rights of members in relation to the appointment of proxies described above do not apply to persons nominated under section 146 of the Companies Act 2006 to enjoy information rights (“nominated persons”) but a nominated person may have a right, under an agreement with the member by whom such person was nominated, to be appointed (or to have someone else appointed) as a proxy for the annual general meeting. If a nominated person has no such right or does not wish to exercise it, such person may have a right, under such an agreement, to give instructions to the member as to the exercise of voting rights. Any corporation which is a member can appoint one or more corporate representatives who may exercise on its behalf all of its powers as a member provided that they do not do so in relation to the same shares. Any member attending the annual general meeting has the right to ask questions. The company must cause to be answered any such question relating to the business being dealt with at the meeting but no such answer need be given if (a) to do so would interfere unduly with the preparation for the meeting or involve the disclosure of confidential information, (b) the answer has already been given on a website in the form of an answer to a question, or (c) it is undesirable in the interests of the company or the good order of the meeting that the question be answered. Copies of letters setting out the terms and conditions of appointment of non-executive directors are available for inspection at the company's registered office during normal business hours from the date of this notice until the close of the annual general meeting (Saturdays, Sundays and public holidays excepted) and will be available for inspection at the place of the annual general meeting for at least 15 minutes prior to and during the meeting. A copy of this notice, and other information required by section 311A of the Companies Act 2006, may be found on the company's website www.rea.co.uk. 124