R.E.A. HOLDINGS PLC - ANNUAL REPORT 2 0 1 0 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 Auditor’s 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 Auditor’s 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 16 55 57 64 70 75 76 77 79 80 81 81 82 83 89 114 116 117 117 118 119 126 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 The Registry 34 Beckenham Road Beckenham Kent BR3 4TU 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 33 Grosvenor Place London SW1X 7HY 2 Maps showing plantation areas as at 31 December 2010 3 Summary of results for the year ended 31 December 2010 Revenue 2010 $’000 2009 $’000 Change % 114,039 78,885 + 45 Earnings before interest, tax, depreciation, amortisation and biological gain 1 58,394 41,290 + 41 Profit before tax Profit for the year 50,447 41,717 + 21 34,973 29,856 + 17 Profit attributable to ordinary shareholders 32,325 27,119 + 19 Cash generated by operations 2 50,210 38,829 + 29 Earnings per ordinary share (diluted) in US cents 96.8 81.4 + 19 Dividend per ordinary share in pence 3 5.0 4.0 + 25 Average exchange rates 2010 2009 2008 2007 2006 Indonesian rupiah to US dollar US dollar to pound sterling 9,078 1.55 10,356 1.56 9,757 1.84 9,166 2.01 9,129 1.86 1. See note 5 to consolidated financial statements 2. See note 36 to consolidated financial statements 3. Paid in respect of the year 4 Key statistics for the year ended 31 December 2010 Allocated area - Hectares Mature oil palm Immature oil palm (prior years) Oil palm development (current year) 1 Planned oil palm development (succeeding year) Reserve area 2 Total 2010 2009 2008 2007 2006 21,984 18,736 16,487 8,850 1,249 32,083 6,907 55,773 94,763 8,171 4,083 30,990 4,000 79,828 9,032 2,781 28,300 – 86,541 13,080 11,814 1,514 26,408 11,500 84,018 13,080 5,250 6,564 24,894 6,500 34,022 65,416 114,818 114,841 121,926 Production - Tonnes Oil palm fresh fruit bunch crop - group 518,742 490,178 450,906 393,217 332,704 Oil palm fresh fruit bunch crop - external 20,089 13,248 6,460 2,767 1,372 538,831 503,426 457,366 395,984 334,076 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 127,256 118,357 105,597 24,614 23,740 20,846 93,229 15,660 151,870 142,097 126,443 108,889 77,597 12,698 90,295 23.6% 4.6% 23.5% 4.7% 23.1% 4.6% 23.5% 4.0% 23.2% 3.8% 23.6 26.2 27.3 29.6 25.5 5.6 1.1 6.7 6.2 1.2 7.4 6.3 1.2 7.5 7.1 1.2 8.3 5.9 1.0 6.9 1. Includes 156 hectares in 2010, 1,393 hectares in 2009 and 889 hectares in 2008 also included as oil palm development in the preceding year. 2. Includes conservation areas, roads and other infrastructure and areas available for planting and under negotiation. 5 Crude palm oil monthly average price e n n o t / $ S U 1400 1200 1000 800 600 400 200 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Share performance graph REA Ordinary FT All Share 2006 2007 2008 2009 2010 400 300 x e d n I 200 100 0 6 Chairman’s statement Introduction IFRS fair value gains for 2010 at $2.0 million were significantly lower than the $11.3 million reported in The “Review of the group” section of this annual report 2009. The reduction in the net gain arising from changes gives detailed information intended to assist shareholders in fair value of agricultural inventory ($0.4 million against in understanding the group's business and strategic $1.5 million) reflected a lower closing stock at the end of objectives. Because the review is designed to provide a 2010 than at the end of the preceding year. More reasonably complete and self-contained description of significant was the reduction in the net gain from changes the group, it does, in many places, repeat what has been in the fair value of biological assets ($1.6 million against said in the reviews of the group contained in previous $9.8 million) which was principally caused by the annual reports. This “Chairman's statement” endeavours continuing inflation in planting costs. This meant that the to be less repetitive and to provide a synopsis of the more value of additions to prospective crops from new significant matters noted in the review with particular development during 2010 showed a lower surplus over emphasis on developments that occurred during 2010 or the value of crops harvested during the year than was the are in prospect. Results case in 2009. Administrative expenses increased from $7.2 million to $10.2 million in part because of inflation and a lower Group profit before tax for 2010 at $50.4 million was well capitalisation rate (reflecting the increasing ratio of ahead of the $41.7 million reported for 2009. mature to immature areas) but also because of an increased administrative requirement reflecting the Underlying the increased profit and cash flow was the growth of the group’s business and, in particular, the need higher revenue for 2010 which amounted to $114.0 to manage the expanding smallholder programmes. million, 45 per cent ahead of 2009 revenue of $78.9 Some offset against the costs of this last was provided by million. This reflected the combined effect of the higher management fees paid to the group by smallholder average crude palm oil (“CPO”) and crude palm kernel oil cooperatives which are included in 2010 operating (“CPKO”) prices prevailing during 2010, the larger crop income of $0.4 million. and initial coal sales of $4.2 million. At the after tax level, group profit for the year was $35.0 The benefit of the higher revenue was offset to an extent million against $29.9 million in 2009 while profit by an increase in cost of sales which rose by 43 per cent attributable to ordinary shareholders was $32.3 million from $34.0 million to $48.6 million. Several factors against $27.1 million. Fully diluted earnings per share contributed to this increase: increased production; costs amounted to US 96.8 cents (2009: US 81.4 cents). of $3.9 million attributable to the new coal activities; the higher unit cost of cropping in the significant area of A provision of $5.5 million relating to tax connected with newly mature plantings; general cost inflation; and a cash flow hedge has been charged to other weakening of the US dollar against the Indonesian rupiah comprehensive income for 2010. This provision relates to which meant that rupiah denominated costs increased in tax relief claimed in respect of mark to market losses on US dollar terms. cross currency interest rate swaps entered into by the group to hedge, against US dollars, the group’s liability in respect of its outstanding 9.5 per cent guaranteed 7 Chairman’s statement continued sterling notes 2015/17. The group has been advised by Agricultural operations its professional advisers that mark to market differences arising on annual revaluations of such swaps should be Operational matters taken as profits or losses for Indonesian tax purposes as they arise, but an Indonesian tax assessment recently The crop out-turn for 2010 amounted to 518,742 tonnes received by an Indonesian subsidiary of the company has of oil palm fresh fruit bunches (“FFB”). This represented denied the tax relief claimed by the subsidiary for 2008 in an increase of 5.8 per cent on the FFB crop for 2009 of relation to the swaps in question. The group is appealing 490,178 tonnes but was below the budgeted crop for the against this assessment but, pending a decision on the year of 561,680 tonnes. External purchases of FFB from appeal, the directors have felt it appropriate to recognise smallholders and other third parties in 2010 totalled the inherent uncertainties of the appeal process by 20,089 tonnes (2009: 13,248 tonnes). making a provision equivalent to approximately half of the tax relief claimed. The disputed Indonesian tax Rainfall across the group's estates averaged 4,434 mm assessment has been paid in full pending appeal. for 2010, compared with 3,123 mm for the previous year. After reversal of non cash items included in operating disruptions to harvesting in the last quarter of 2010, the profit, operating cash flows before movements in working directors believe that the principal reason for the crop capital increased during 2010 by $19.3 million from shortfall against budget was the extended drier period $40.1 million to $59.4 million. However, net cash from experienced in 2009 coincident with an occurrence of the Although the high level of rainfall caused some operating activities for 2010 amounted to $21.3 million in El Niño weather phenomenon. 2010 against $29.6 million in 2009. The apparent disparity of an increase in operating cash flows before Processing of the group's own FFB production and the movements in working capital and a reduction in net cash externally purchased FFB, together totalling 538,831 from operating activities is principally the result of two tonnes (2009: 503,426 tonnes), produced 127,256 items: increase in receivables, which amounted to $10.3 tonnes of CPO (2009: 118,357 tonnes) and 24,614 million in 2010 against $2.7 million in 2009, and taxes tonnes of palm kernels (2009: 23,740 tonnes) reflecting paid, which amounted to $21.1 million in 2010 against extraction rates of 23.62 per cent for CPO (2009: 23.51 $2.3 million in 2009. The former reflected additional per cent) and 4.57 per cent for kernels (2009: 4.72 per receivables in the group balance sheet at 31 December cent). Production of CPKO amounted to 9,745 tonnes 2010 arising from the group’s new coal trading activity (2009: 9,636 tonnes) with an extraction rate of 40.07 per while the latter was largely attributable to the payment cent (2009: 40.04 per cent). during 2010 of the disputed Indonesian tax assessment referred to above and now the subject of appeal. A major overhaul of the group’s older oil mill was initiated during 2010. As a result of ageing mill machinery and deterioration in one of the mill boilers, it was becoming difficult to operate the mill at its intended capacity of 80 tonnes per hour. The overhaul involves upgrading of machinery and the installation of a new boiler. This should restore the effective mill capacity to 80 tonnes per hour. The overhaul is currently on schedule and should be 8 completed before the start of the 2011 peak cropping generated electricity. Because the methane conversion period in September. Meanwhile, the group’s newer oil plants will reduce the group’s greenhouse gas emissions mill was expanded during 2010 to increase its capacity (and thus the group’s carbon footprint), the group expects from 60 to 80 tonnes per hour. to obtain carbon credits under the Clean Development Mechanism for the period from completion of the plants The upgrading of the older mill and expansion of the up to 2020. newer mill should provide the group with sufficient capacity to meet the expected FFB processing Land allocations and development requirements of 2011 but by 2012 the group will require a third mill. Work is already in hand on the construction of The group’s land titling made further progress during this third mill and it is expected that mill commissioning 2010 to the extent that the fully titled agricultural land will be completed ahead of the peak cropping months of area held by the group amounted at year end to 63,263 2012. The third mill will incorporate its own kernel hectares (2009: 52,029 hectares). During the year, the crushing plant. group was successful in obtaining a renewed allocation of 15,000 hectares out of a total area of 20,000 hectares in Investments made in 2009 in increased mechanical respect of which a land allocation previously held by the handling of FFB collection and transport and in group had expired. The renewed allocation is conditional establishing an “in house” road maintenance capability upon completion of a planned rezoning of East have proved successful and resulted in significant savings Kalimantan which is slowly progressing through the during 2010. The relatively new system for composting governmental authorities who must approve it. As a empty fruit bunches and oil mill effluent is also proving result, the group held land allocations at 31 December effective. The area in respect of which compost was 2010 covering a total area of 31,500 hectares. substituted for inorganic fertiliser in 2010 amounted to 6,763 hectares and is projected to amount to over 9,000 Since 31 December 2010, 7,321 hectares from one land hectares in 2011. allocation of 7,445 hectares has been granted full HGU title and the 124 hectare balance of the allocation has During 2011, the group is aiming to make further cost been relinquished. The full titling of the remaining land savings from the recycling of waste by establishing two allocations must be expected to result in exclusion of methane conversion plants. Each plant will be further allocated areas. Moreover, not all of the areas in constructed adjacent to an existing oil mill and will be respect of which full titles are issued can be planted with based around a lagoon covered with inflatable high oil palms. Some fully titled land may be unsuitable for density polyethylene sheeting. Mill effluent will pass to planting or subject to zoning or similar restrictions (such the lagoon which is designed to accelerate the anaerobic as areas potentially available for mining), a proportion will digestion of the effluent. The methane released during be set aside for conservation and a further proportion is the digestion process will be captured and used to fuel required for roads, buildings and other infrastructural one or more gas powered generators. Methane that is facilities. This means that the prospective maximum area surplus to requirements for electricity generation will be that the group could plant with oil palms on the fully titled flared off. The electricity generated from the captured and allocated agricultural land areas currently held must methane will be supplied to a number of estate villages, be expected to be less than the gross hectarage that thereby reducing materially the requirement for diesel those areas comprise. 9 Chairman’s statement continued Areas planted and in course of development as at 31 Social responsibility December 2010 amounted in total to 32,083 hectares. Of this total, mature plantings comprised 21,984 The area planted or under development on the group hectares. A further 3,450 hectares planted in 2007 came supported plasma schemes increased during 2010 from to maturity at the start of 2011. 1,578 hectares to 3,076 hectares. The areas developed to-date are owned by cooperatives with members from 9 Reserve land held by the group only becomes available local villages. During 2011, it is planned to increase the for development when the titling process has proceeded number of villages participating in the schemes by adding to a point at which the group has been granted further co-operatives. The plasma development development and necessary land clearing licences, and programme for 2011 has been budgeted at 1,000 compensation agreements have been reached with local hectares. External financing for the plasma schemes villagers who have claims in respect of their previous use initiated to-date has been agreed with a local of the land. During 2010, progress of the group's plans development bank in East Kalimantan in the form of for oil palm extension planting was seriously delayed by fifteen year loans secured on the land and assets of the hold ups in the issue of necessary permits and in schemes and guaranteed by the group. If necessary, this particular of the recently introduced timber cutting licences (“IPKs”). This reflected, at least in part, a lack of clarity on the part of the relevant authorities as to the financing will be supplemented by funds advanced by the group. procedure to be followed by plantation company The group’s conservation department (conducting its applicants seeking to obtain these newly required permits. activities under the name “REA Kon”) is continuing with its As a result, the aggregate area planted or under establishment of a permanent database of flora and fauna development increased over 2010 by only some 1,000 found within the group’s conservation reserves and hectares, all of which related to areas that were exempted neighbouring watercourses. Other activities of REA Kon from the IPK requirement having been already under during 2010 included a project to recycle plastic waste, development when this requirement was introduced. the initiation of a study of the contribution of forest Encouragingly, the group did finally secure its first IPK in first children’s educational camp at the new REA Kon field January 2011 and a further IPK was issued in March. This station located within the conservation reserves, has permitted the resumption of extension planting. construction of which was completed in October 2010. predators to pest control within oil palm plantings and a Moreover, the group believes that the relevant authorities, having now started to issue IPKs, will be able to process All operations of the company’s two main operating the group’s further IPK applications more quickly than subsidiaries in Indonesia have now obtained ISO 14001 was the case immediately after the new IPK requirement accreditation. Audit of one of these subsidiaries and its came into force. The group therefore retains its oil palm associated smallholders for Roundtable on Sustainable planting target for the two year period ending 31 Palm Oil (“RSPO”) accreditation (conducted by an RSPO December 2011 of 8,000 hectares in total. The directors approved independent auditor) took place in early 2011 believe that this target remains achievable but whether it and has recommended that the subsidiary and its will actually be achieved will be critically dependent upon associated smallholders be granted accreditation. Audit land becoming available for development as needed. of the second subsidiary for RSPO accreditation is planned for later in 2011. 10 Coal operations blending Liburdinding coal with low sulphur traded coal purchased from third parties and this remains an option. Whilst it is taking longer than originally hoped to develop However, with the higher prices for coal that are currently the coal operations, good progress has been made. prevailing, the group would prefer to sell the Liburdinding production without blending and to accept a discount for The major concentration during 2010 was on bringing the the sulphur content. Discussions to this end with possible Kota Bangun concession into production. Land purchasers are continuing. compensation was completed, mining and environmental management plans settled, necessary permits for mining The position as respects the group’s plans to establish a operations obtained and arrangements for evacuating limited coal trading activity is more positive. Sales of mined coal concluded. Removal of overburden (being traded coal in 2010 (which started in the second half of earth and rock overlaying the coal) started in November the year) totalled 71,000 tonnes. Since the start of 2011, 2010, the first coal seams were exposed in January 2011 the group has been able to formalise trading relationships and initial shipments of some 15,000 tonnes of coal are with two major export buyers and is aiming within the scheduled for April 2011. The stripping ratio (being the current year to be achieving average monthly sales of amount of overburden required to be removed to gain 100,000 tonnes. The objectives for the coal trading access to the coal expressed as the number of bank cubic activity are to augment the revenues from the mining of metres of overburden in situ to be removed to extract one the Kota Bangun and Liburdinding concessions and to tonne of coal) is under the present mining plan expected establish a customer base on which the group can build. to be 30 to 1. As previously announced, the group is Coal for traded sales is currently being sourced by aiming to build up to a production level within 2011 of at outright purchase from third party suppliers but the group least 16,000 tonnes per month. Arrangements have been intends that, in due course, it will enter into long term agreed for the sale of current production from the Kota arrangements to procure a proportion of the coal that it Bangun concession to two buyers. Selling prices will be trades by mining third party owned concessions against fixed against deliveries of the coal on a basis related to payment of a royalty. the Newcastle globalCOAL index. The average price currently being realised is $137 per tonne. Finance Operations at the Liburdinding concession have been less 840,689 new ordinary shares of the company were satisfactory. Original plans to mine 150,000 tonnes issued on 1 February 2010 on exercise of a director’s during 2010 had to be abandoned when it became clear option at an exercise price of 43.753p per share. In that the relatively high sulphur content of the coal was addition, in February, with the object of funding the new making it difficult to sell. Coal production at Liburdinding coal operations, the company issued an additional $15 in 2010 therefore amounted to some 21,000 tonnes only. million nominal of 7.5 per cent dollar notes 2012/14 A limited market for the coal has been found in Java and (“dollar notes”) at $90 per $100 nominal of notes in this seems capable of selling 3,000 to 4,000 tonnes per conjunction with the issue by a wholly owned subsidiary of month on a regular basis. For mining to be economic, the company, KCC Resources Limited (“KCC”), of Liburdinding needs to produce at a level of at least 150,000 redeemable participating preference shares of 15,000 tonnes per month and this means that an export $10 each at par. The effect of the additional dollar note market for the coal is needed. The group has looked at issue was to increase the nominal amount of dollar notes in issue to $45 million. 11 Chairman’s statement continued 1,670,727 new preference shares were issued in October addition, construction of the group’s third oil mill and the 2010 by way of capitalisation of share premium account two methane conversion plants is likely to involve an pursuant to the capitalisation issue to ordinary outlay of in excess of $25 million over 2011 and 2012. If shareholders referred to under “Dividends” below. This CPO prices remain at good levels, the directors expect was followed later in the same month by the issue of 9 that such capital expenditure can be funded from internal million new preference shares for cash at par to raise £9 cash flow possibly supplemented by some additional million. drawings on existing bank facilities. Following these issues, group indebtedness and related Provided that the coal operations evolve as planned, such engagements at 31 December 2010 amounted to operations should become cash generative during 2011. $132.1million, made up of $45 million nominal of dollar If that proves the case, the cash generated may be notes (carrying value: $43.3 million), £37 million nominal utilised for further expansion of the coal operations. The of 9.5 per cent guaranteed sterling notes 2015/17 directors do not anticipate that the coal operations will (“sterling notes”) (carrying value: $55.2 million), $11.6 require material cash support from elsewhere in the group million in respect of a hedge of the principal amount of during 2011, although short term cash advances may be the sterling notes, $1.5 million in respect of the KCC made to meet temporary spikes in the working capital participating preference shares (which are classified as needed for coal trading. debt), term loans from Indonesian banks of $14.7 million and other short term indebtedness comprising drawings Commodity markets are inherently volatile and the under working capital lines of $5.8 million. Against this directors believe that it is prudent for the group to hold indebtedness, at 31 December 2010 the group held cash some cash cushion to ensure that when new oil palm and cash equivalents of $36.7 million. areas are planted, those areas can be brought to maturity even if CPO and CPKO prices fall sharply. However, the Changes to Indonesian tax regulations effective from the cash and cash equivalents held by the group at 31 beginning of 2010 meant that Indonesian withholding tax December 2010, which reflected the proceeds of the on interest payments on certain intra-group loans to issue of new preference shares made in October 2010, Indonesian subsidiaries of the company (being loans that was in excess of the amount required for that purpose. formed part of the assets then charged as security for the Some $5 million of such cash resources has already been sterling notes) which had been payable at the rate of 10 applied during 2011 in retiring debt and the directors per cent became payable at the rate of 20 per cent. The intend that further cash resources should be applied for security for the sterling notes was therefore reorganised the same purposes before the end of 2011. during 2010 to achieve a structure in which the withholding tax rate on interest on charged intra-group The directors consider that it will be prudent, when market loans would revert to 10 per cent. conditions permit, to retire existing shorter dated debt and to replace it with preference share capital or new debt of Planned extension planting and the requirement for a longer tenor. The October 2010 issue of new investment in estate buildings and other estate plant and preference shares was made with this intention and the equipment that follows any expansion of the group’s directors may consider further issues of medium term planted hectarage will involve the group in continuing debt securities or new preference shares for the same major capital expenditure for several years to come. In purpose. 12 Dividends to be paid on 30 September 2011 to ordinary shareholders on the register of members on 2 September The fixed semi-annual dividends on the 9 per cent 2011. The directors wish to emphasise that in proposing cumulative preference shares that fell due on 30 June that a final dividend in respect of 2010 be substituted for and 31 December 2010 were duly paid. Dividends a first interim dividend in respect of 2011, they do not totalling 5p per ordinary share have been paid in respect intend to signal a change in the prospective level of of 2010 (2009 – 4p per ordinary share). These dividends payable to shareholders during any particular comprised a first interim dividend of 2½p per ordinary year but only to recharacterise one dividend in each year share paid on 1 October 2010 and a second interim as a final dividend upon the payment of which dividend of 2½p per ordinary share paid on 28 January shareholders can vote. 2011. In addition, the company made a capitalisation issue to ordinary shareholders of 1,670,727 new The directors continue to believe that capitalisation issues preference shares on the basis of one new preference of new preference shares to ordinary shareholders, such share for every 20 ordinary shares held on 24 September as were made in 2010 and on several previous occasions, 2010. provide a useful mechanism for augmenting returns to ordinary shareholders in periods in which good profits are For some years, the directors have followed the practice achieved but demands on cash resources limit the scope of declaring two interim dividends in respect of each for payment of cash dividends. The directors will financial year, the first in late September or early October therefore consider a further such issue during 2011 if of the year in question and the other at the start of the they feel that this is merited by the group’s performance. succeeding year. This has meant that the company has not in recent years paid a final dividend. One corporate Staff governance agency has criticised this practice as depriving shareholders of the opportunity to vote on the The directors extend their thanks to all of the group's staff level of overall dividend paid by the company. To respond for their continued loyalty and hard work. to this criticism, the directors propose that, notwithstanding that the second interim dividend paid in In particular, the directors would like to record their January was intended to be paid in lieu of final dividend, a appreciation of the contribution made to the group by Mr dividend should be paid in September 2011 as a final Derrick Egerton who sadly died in January 2011 after a dividend in respect of 2010 and that this dividend should short illness. He had worked for the group for nearly substitute for the interim dividend in respect of 2011 that twenty years in what was originally intended to be a part the directors would otherwise have expected to declare time capacity after his retirement as finance director of for payment at that time. Dividends declared or proposed Harrisons & Crosfield Limited and, almost single- by directors in respect of 2011 and subsequent years handedly, held together the group’s accounting and would then be expected to comprise an interim dividend secretarial functions during the difficult period in the January following the end of the applicable year experienced by the group during and following the and a final dividend payable in the following September. economic and political turbulence in Indonesia in the late 1990s. His ability to take on and competently deal with a Accordingly, the directors recommend the payment of a vast range of administrative tasks will be much missed. final dividend in respect of 2010 of 3p per ordinary share 13 Chairman’s statement continued Succession In the “Review of the group” in the company’s 2009 annual report, the directors stated that they had The group is proceeding with its previously announced concluded that, whilst the matter should be kept under plan to establish a small regional office in Singapore. A review, the current status quo of the group with a UK senior executive has recently been recruited to head this listed parent company should be retained. That office and it is intended that the office should begin conclusion is currently being reconsidered by the operating during 2011. Thereafter, staffing will be directors. increased to an extent appropriate to enable the Singapore office progressively to assume many of the Two factors have prompted such reconsideration. First, in management functions currently performed by the the face of emigrations by some major UK companies and group’s head office in London. suggestions that more may follow in an effort to avoid UK tax and in some cases restrictions on bonus payments, The group has also taken steps to enhance management there have been reports of possible UK legislation to capacity in Indonesia with the appointment of an inhibit UK companies transferring themselves overseas. additional senior executive to fill the newly created Any decision by the group to move from the UK would not position of chief financial officer for the agricultural be motivated by either tax or bonus restriction avoidance operations. With this position filled, the group believes (indeed there would be no benefit to the group in either that it now has in place the senior management needed respect) but the directors are concerned that legislation to handle the planned further expansion of the designed to prevent others from transferring might agricultural operations. Some further recruitment for the remove the flexibility to transfer that the group currently coal operations is likely to be necessary if those enjoys. Secondly, whilst the group remains in the UK, it operations develop as is hoped. requires staff to undertake its administrative functions. This requires periodic recruitment and such recruitment is The directors have previously expressed concern as to made more complicated if the company’s continued whether the current ownership of the group’s Indonesian presence in the UK remains uncertain. If an eventual businesses through a UK listed company is an transfer is contemplated, both of the foregoing factors appropriate long term structure for the group or whether militate against leaving such transfer pending. the group would be better structured as an entirely South East Asian based entity with a parent company listed in Prospects that region. Arguments in favour of such a move include the reduction in head office costs that could be expected, The group’s own FFB crop for 2011 has been budgeted the better rating of the group’s parent company’s shares at 611,000 tonnes with a normal budgetary assumption that might be achieved on, for example, the Singapore of average rainfall (both as to quantum and distribution). Stock Exchange and the arguably wider research The FFB crop to end March 2011 amounted to 135,424 coverage of South East Asian companies operating in the tonnes against the budget for the period of 141,117 agricultural sector. Against this, the company’s existing tonnes. The directors do not believe that any conclusions investor base is almost entirely in Europe and the as to the likelihood of the group achieving its budgeted company’s UK listing has, in recent years, afforded the crop for 2011 should be drawn from the slight shortfall as company good access to equity and debt when needed. variations from year to year in the monthly phasing of 14 each year’s crop are normal. External purchases of FFB conversion option provides. Nevertheless, the directors during 2011 have been budgeted at 25,000 tonnes. retain their view that vegetable oil markets will remain cyclical and that it is therefore likely that the current high The rise in CPO prices seen in 2009 continued into 2010. prices will eventually result in increased supply and lead After opening the year at a little above $800 per tonne, to lower prices albeit probably not in 2011. CIF Rotterdam, and remaining broadly at that level for the first six months of 2010, the price rose further in the third The directors remain cautious as to the extent and speed quarter of the year to $935 per tonne at the end of to and at which the planned continued expansion of the September 2010 and then again, and even more sharply, group’s oil palm hectarage can be delivered and are in the last quarter to close the year at $1,285 per tonne. reluctant to assume the success of the group’s new Prices have remained comfortably over the $1,000 per venture in coal before this has been proved by bankable tonne level so far in 2011 and at times CPO has traded at results. That said, they are encouraged that, in recent above $1,300 per tonne. At these higher prices, the months, the group has made progress in resolving progressive nature of the Indonesian duty levied on outstanding land issues and can see that, if successful, exports of CPO does however mean that the major the new coal operations could be further expanded into a proportion of any price in excess of $900 per tonne material activity for the group. With CPO and CPKO accrues to the Indonesian state rather than CPO prices looking set to remain at or near current levels for producers. several months to come, the directors believe that 2011 should be another good year for the group. The current historically high prices of CPO and other vegetable oils (which have appreciated commensurately) are attributable to a number of factors: the demand drivers of population growth and developing world economic growth; increasing petroleum oil prices that are RICHARD M ROBINOW improving the economics of converting vegetable oils to Chairman bio-fuels; and the combined impact of the El Niño and La 20 April 2011 Niña weather phenomena that have held back production. For 2011, consumption may outstrip production and with stocks low and the annual oilseed crops competing for land with wheat and corn, which are also at high prices and in strong demand, CPO prices could reasonably be expected to remain at good levels throughout 2011. The current unrest in the Middle East and the after effects of the Japanese tsunami could negatively impact the world economy leading to some downturn in food demand for vegetable oil but, against this, they could also result in higher petroleum oil prices and a consequential increase in the floor price for vegetable oil that the bio-diesel 15 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. Such information is The group is principally engaged in the cultivation of oil intended to help shareholders in understanding the palms in the province of East Kalimantan in Indonesia and group’s business and strategic objectives and thereby in the production of crude palm oil (“CPO”) and by- assist them in assessing how the directors have products from fruit harvested from its oil palms. A performed their duty of promoting the success of the detailed description of the group's oil palm activities is company. provided under “Agricultural operations” below. This review should not be relied upon by any persons During 2008, the directors decided to augment the other than shareholders or for any purposes other than traditional agricultural operations of the group by those stated. The review contains forward-looking developing a modest coal mining business in Indonesia. statements which have been included by the directors in Following this decision, the group has acquired rights in good faith based on the information available to them up respect of three coal concessions in East Kalimantan and to the time of their approval of this review. Such is now in the process of establishing an open cast coal statements should be treated with caution given the mining operation and coal trading activity based on these uncertainties inherent in any prognosis regarding the concessions. Details of this diversification are provided future and the economic and business risks to which the under "Coal operations" below. group's operations are 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 respects. company listed on a stock exchange of international standing and then using capital raised by the company (or This review has been prepared for the group as a whole with the company’s support) to develop natural resource and therefore gives emphasis to those matters that are based operations in Indonesia from which the group significant to the company and its subsidiaries when believes that it can achieve good returns. In this taken together. The review is divided into five sections: endeavour, the group’s inheritance from its past and the overview; agricultural operations; coal operations; group’s recent track record represent significant finances; and risks and uncertainties. intangible resources because they underpin the group’s 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. 16 Other resources that are important to the group are its as productively as possible. Ancillary to the first developed base of operations, bringing with it an component of this approach, the group seeks to add to its established management team familiar with Indonesian land bank when circumstances are conducive to its doing regulatory processes and social customs, a trained so. The directors intend that, as the coal operations come workforce and the group’s land and concession rights. into production, the group will similarly seek production Objectives cost efficiencies in those operations by increasing volumes and focusing on 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 shares and other securities of to equity investors in the company by procuring that a the company from the operation and expansion of the prudent proportion of the group’s funding requirements is group’s existing businesses, to foster economic progress met with prior ranking capital in the form of fixed return in the localities of the group's activities and to develop the permanent preferred capital and debt with a maturity group's operations in accordance with best corporate profile appropriate to the group's projected future cash social responsibility and sustainability standards. flows. Achievement of these objectives is dependent upon, among other things, the group’s ability to generate the Diversification operating profits that are needed to finance such achievement. 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 2010, 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 Whilst the group’s continuing commitment to expansion resources by developing the group’s land bank as rapidly by organic growth in its existing businesses provides as logistical, financial and regulatory constraints permit reasonable clarity as to future management requirements, with a view to increasing production volumes without it does not relieve the group of the need constantly to commensurate increases in the fixed overhead of the review and upgrade its management resources. That group’s agricultural management. Secondly, the group need stems from a combination of factors: the expanding strives to manage its established agricultural operations operations; growth in external expectations of the group 17 Review of the group continued (reflecting both the group’s increasing size and an senior Indonesians to handle its interface with Indonesia international trend towards greater public corporate is therefore a significant asset upon which the group accountability by listed companies); and the inevitable plans to build. The group also derives valuable local ageing of the group’s senior management with a support and advice from local advisers and from the local consequential requirement to provide for succession. non-controlling investors in, and local non-executive directors of, the company's Indonesian subsidiaries. Faced with this need, the group is proceeding with its previously announced plan to establish a small regional The directors have previously expressed concern as to office in Singapore. A senior executive has recently been whether the current ownership of the group’s Indonesian recruited to head this office and it is intended that the businesses through a UK listed company is an office should begin operating during 2011. Thereafter, appropriate long term structure for the group or whether staffing will be increased to an extent appropriate to the group would be better structured as an entirely South enable the Singapore office progressively to assume East Asian based entity with a parent company listed in many of the management functions currently performed that region. Arguments in favour of such a move include by the group’s head office in London. The group believes the reduction in head office costs that could be expected, that the close proximity of Singapore to Indonesia and the the better rating of the group’s parent company’s shares limited time differences between the two countries will be that might be achieved on, for example, the Singapore conducive to greater senior management oversight of Stock Exchange and the arguably wider research Indonesian operational matters than has hitherto been coverage of South East Asian companies operating in the possible for senior management based in London. agricultural sector. Against this, the company’s existing investor base is almost entirely in Europe and the The group has also taken steps to enhance management company’s UK listing has, in recent years, afforded the capacity in Indonesia with the appointment of an company good access to equity and debt when needed. additional senior executive to fill the newly created In the “Review of the group” in the company’s 2009 position of chief financial officer for the agricultural annual report, the directors stated that they had operations. With this position filled, the group believes concluded that, whilst the matter should be kept under that it now has in place the senior management needed review, the current status quo of the group with a UK to handle the planned further expansion of the listed parent company should be retained. That agricultural operations. Some further recruitment for the conclusion is currently being reconsidered by the coal operations is likely to be necessary if those directors. operations develop as is hoped. This has been prompted by two factors. First, in the face Whilst the group continues to rely on expatriate staffing of emigrations by some major UK companies and for some functions, the group is increasingly managed by suggestions that more may follow in an effort to avoid UK local Indonesian staff and now has senior Indonesian tax and in some cases restrictions on bonus payments, nationals in overall charge of both the agricultural and the there have been reports of possible UK legislation to coal operations. As a foreign investor in Indonesia, the inhibit UK companies transferring themselves overseas. group needs to remain aware that it is in essence a guest Any decision by the group to move from the UK would not in Indonesia and an understanding of local customs and be motivated by either tax or bonus restriction avoidance sensitivities is important. The group’s ability to rely on (indeed there would be no benefit to the group in either 18 respect) but the directors are concerned that legislation compromise was accompanied by the replacement of the designed to prevent others from transferring might incumbent Minister of Finance (generally regarded as a remove the flexibility to transfer that the group currently reformist) and the appointment of a new Governor of the enjoys. Secondly, whilst the group remains in the UK, it Indonesian Central Bank. Some believe that this requires staff to undertake its administrative functions. compromise will further constrain the President’s This requires periodic recruitment and such recruitment is legislative agenda but it may equally be argued that the made more complicated if the company’s continued compromise is no more than a reminder of the constraints presence in the UK remains uncertain. If an eventual that already existed as a result of the minority position of transfer is contemplated, both of the foregoing factors the President’s party in the lower house of the Indonesian militate against leaving such transfer pending. parliament. The directors retain their previously stated intention that The strengthening of the Indonesian rupiah seen in the the board of the company should continue as currently latter months of 2009 continued into 2010 with the rate constituted until the new Singapore office becomes fully against the US dollar improving from Rp 9,400 = $1 at operational (which it is planned will be during 2012) but 31 December 2009 to Rp 8,991 = $1 at 31 December should then be reconstituted and thereafter refreshed on 2010. However, Indonesian inflation, driven by strong the basis of a policy that length of service by independent domestic demand and rising commodity prices, increased non executive directors be limited to nine years. The to nearly 7 per cent in 2010 compared with 3 per cent in chairman and managing director have indicated their the preceding year. willingness to continue in their present roles for a period sufficient to ensure management continuity. Growing Indonesian awareness of environmental and The Indonesian context conservation issues was given impetus by the signature during 2010 of a letter of intent between Indonesia and Norway on a proposed two year moratorium on further In 2010, the Indonesian economy grew by 6 per cent per conversion of natural forest in exchange for an annum, the level last achieved in 2006 and 2007 ahead undertaking by Norway to invest up to $1 billion in of the world economic problems of 2008. A reduction creating monitoring and pilot projects under the United during 2010 in the ratio of debt to gross domestic Nations backed forest preservation scheme known as product was reflected in an improving credit rating and, “REDD” (reduced emissions from deforestration and with increasing foreign currency reserves, encouraged degradation). Whilst regulations to implement the foreign investment inflows. The Indonesian credit rating proposed moratorium have not yet been issued, it appears has continued to improve during 2011 and Standard & that the increased accountability that such regulations Poors has recently raised the sovereign debt and credit threaten to impose on government officials is already ratings from BB to BB+. having the effect of further restricting the issue of permits for new plantation development even when development Political controversy over alleged improprieties in a is in areas that are without conservation value such as the government funded rescue of an Indonesian bank was areas that the group develops. eventually resolved by compromise between what are seen as liberal technocrats pushing for reforms of the The Indonesian province of East Kalimantan remained political process and an anti reform lobby. The stable and prosperous during 2010 which saw efforts by 19 Review of the group continued the provincial government to develop and improve the second and third indicators are measures of field and mill provincial infrastructure. Evaluation of performance efficiency and, as such, provide a basis for assessing the extent to which the group is achieving its objective of maximising output from its operations. Quantifications of the above indicators for 2010 and comparable In seeking to meet its expansion and efficiency objectives, quantifications for 2009 (in both cases as sourced from the group sets operating standards and targets for most the group's internal management reports) are provided aspects of its activities and regularly monitors under “Land development” and “Crops and extraction performance against those standards and targets. For rates” in “Agricultural operations” below, together with many aspects of the group's activities, there is no single targets for 2011. standard or target that, in isolation from other standards and targets, can be taken as providing an accurate The coal operations are still at an early stage but the continuing indicator of progress. In these cases, a directors are in the process of establishing appropriate collection of measures has to be evaluated and a performance indicators for those operations and intend to qualitative conclusion reached. publish these in future annual reports. The directors do, however, rely in the agricultural Key indicators used by the directors in evaluating the operations on regular reporting of certain key group's financial performance for any given period performance indicators that are comparable from one comprise: year to the next. These indicators for any given period comprise: • 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 from the group’s estates 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 • 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 • net debt to total equity which is measured as 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 2010 and comparable figures for 2009 (derived from figures extracted from the audited consolidated financial 20 statements of the company) are provided under “Group verification of the group’s performance in these areas is results” and “Financing policies” in “Finances” below, provided as described under “Accreditation and together with target percentages. verification” in “Agricultural operations” below. In relation to social and environmental matters, the Agricultural operations directors continue to rely principally on qualitative rather than quantitative assessments but have now established Structure some quantitative indicators to assist evaluation of the group’s performance in these areas. Accordingly the All of the group's agricultural operations are located in qualitative commentary under “Employees”, “Community East Kalimantan and have been established pursuant to development”, “Smallholders”, “Conservation” and an understanding dating from 1991 whereby the East “Sustainable practices” in “Agricultural operations” below Kalimantan authorities undertook to support the group in includes quantitative data on examination results in the acquiring, for its own account and in co-operation with group’s primary schools, incidence of vector borne local interests, substantial areas of land in East diseases, serious accidents sustained, pollution of water Kalimantan for planting with oil palms. courses, use of diesel oil and substitution of organic for inorganic fertiliser. The oldest planted areas, which represent the core of the group’s operations, are owned through PT REA Kaltim The group has appointed consultants to assist the group Plantations (“REA Kaltim”) in which a group company in assessing its carbon footprint and will aim to publish holds a 100 per cent economic interest. With the REA carbon footprint data once this has been satisfactorily Kaltim land areas approaching full utilisation, over the four measured. year period from 2005 to 2008 the company established or acquired several additional Indonesian subsidiaries, The directors recognise the significance of environmental, each potentially bringing with it a substantial allocation of social and governance matters to the business of the land in the vicinity of the REA Kaltim estates. These group. Identification, assessment, management and additional subsidiaries comprise PT Cipta Davia Mandiri mitigation of the risks associated with such matters forms (“CDM”), PT Kartanegara Kumala Sakti (“KKS”), PT Kutai part of the group’s system of internal control for which the Mitra Sejahtera (“KMS”), PT Putra Bongan Jaya (“PBJ”) board of the company has ultimate responsibility. The and PT Sasana Yudha Bhakti (“SYB”). Each of these board discharges that responsibility as described in the subsidiaries is, or will on completion of necessary legal “Corporate governance” section of this annual report. formalities be, owned as to 95 per cent by group Material risks and related policies regarding companies and 5 per cent by Indonesian local investors. environmental, social and governance matters are described under “Risks and uncertainties” below and Land areas under “Employees”, “Community development”, “Smallholders”, “Conservation” and “Sustainable practices” Although the 1991 understanding established a basis for in “Agricultural operations” below. The latter sections the provision of land for development by or in cooperation also detail the group’s successes and failures in with the group, all applications to develop previously environmental, social and governance areas and the undeveloped land areas have to be agreed by the measures taken in response to failures. Independent Indonesian Ministry of Forestry and to go through a titling 21 Review of the group continued and permit process. This process begins with the grant of REA Kaltim and 11,771 hectares held by SYB. In the a land allocation. This is followed by environmental and case of SYB, the total takes into account the excision other assessments to delineate those areas within the from the titled areas of some 750 hectares of allocation that are suitable for development, settlement of undeveloped land following the group’s agreement to compensation claims from local communities and other release such land for a government smallholder scheme. necessary legal procedures that vary from case to case. The land titling process is completed by a cadastral survey During the year, KKS was successful in obtaining a (during which boundary markers are inserted) and the issue of a formal registered land title certificate (an “hak guna usaha” or “HGU” certificate). renewed allocation of 15,100 hectares out of a total area of 20,000 hectares in respect of which its previous land allocation had expired (the balance of such land being subject to Ministry of Forestry licences for logging Permits are then required for the development of fully activities although those activities ceased many years titled land and these are often issued in stages. In ago). The renewed allocation is conditional upon particular, since the end of 2009, the Ministry of Forestry completion of a planned rezoning of East Kalimantan has required that all companies clearing land for which is slowly progressing through the governmental plantation development obtain a so-called timber cutting permit (“izin pemanfaatan kayu” or “IPK”) before commencing land development. As pre-conditions of the authorities who must approve it. Against this, parts of several of the land allocations previously held by the group had to be relinquished either because they issue of an IPK to a plantation company, the Ministry of comprised land that was found not to be zoned for Forestry requires that the zoning of the land to be covered plantation development or because of conflicting land by the IPK is checked to ensure that plantation claims. As a result, the land allocations still subject to development occurs only in areas that have been titling that were held within the group at 31 December approved for agricultural development and, further, that 2010 comprise 6,741 hectares in CDM, 15,100 hectares the land concerned is surveyed by representatives of the in KKS, 7,445 hectares in KMS and 2,214 hectares in Ministry. SYB. In the group’s experience, the land titling and permit In February 2011, KMS was granted full HGU title in process, which was never straightforward, has become respect of 7,321 hectares of its 7,445 hectares land more complicated in recent years. This has followed the allocation and the balance of 124 hectares was devolution of significant authority in relation to land relinquished. The titling of the remaining land allocations matters from the Indonesian central government to may result in exclusion of further areas, particularly in the Indonesian provincial and district authorities. This has case of the CDM where the land allocation is known to resulted in an increase in the number of official bodies include a number of smallholder settlements. Moreover, involved in the titling process. not all of the areas in respect of which full HGU titles are issued can be planted with oil palms. Some fully titled The group’s land titling made further progress during land may be unsuitable for planting or subject to zoning or 2010 to the extent that the fully titled agricultural land similar restrictions (such as areas potentially available for area held by the group amounted by year end to 63,263 mining), a proportion will be set aside for conservation hectares, comprising 9,784 hectares held by CDM, and a further proportion is required for roads, buildings 11,602 hectares held by PBJ, 30,106 hectares held by and other infrastructural facilities. This means that the 22 prospective maximum area that the group could plant with hectares. A further 3,450 hectares planted in 2007 came oil palms on the fully titled and allocated agricultural land to maturity at the start of 2011. areas currently held must be expected to be less than the gross hectarage that those areas comprise. Reserve land held by the group only becomes available for development when the titling process has proceeded The operations of REA Kaltim are located some 140 to a point at which the group has been granted kilometres north west of Samarinda, the capital of East development and necessary land clearing licences, and Kalimantan, and lie either side of the Belayan river, a compensation agreements have been reached with local tributary of the Mahakam, one of the major river systems villagers who have claims in respect of their previous use of South East Asia. The KKS and SYB areas are of the land. During 2010, progress of the group's plans contiguous with the REA Kaltim areas so that the three for oil palm extension planting was seriously delayed by areas together form a single site. All of these areas fall hold ups in the issue of necessary permits and, in within the Kutai Kartanegara district of East Kalimantan. particular, of the recently introduced IPKs. This reflected, The PBJ area sits some 70 kilometres to the south of the at least in part, a lack of clarity on the part of the relevant REA Kaltim areas in the West Kutai district of East authorities as to the procedure to be followed by Kalimantan while the CDM and KMS areas are located in plantation company applicants seeking to obtain these close proximity of each other in the East Kutai district of newly required permits. As a result, the aggregate area East Kalimantan less than 30 kilometres to the east of the planted or under development increased over 2010 by REA Kaltim areas. only some 1,000 hectares, all of which related to areas that were exempted from the IPK requirement having At present, access to the REA Kaltim, SYB, KKS, CDM been already under development when this requirement and KMS areas can be obtained only by river and by air was introduced. although the completion in 2005 of a road bridge over the Mahakam at Kota Bangun may eventually permit road Encouragingly, the group did finally secure its first IPK in access as well. The PBJ area is already accessible by January 2011 and a further IPK was issued in March. This road. The CDM and KMS areas can be accessed from the has permitted the resumption of extension planting. REA Kaltim area by way of abandoned logging roads. Moreover, the group believes that the relevant authorities, having now started to issue IPKs, will be able to process The group continues to look at acquiring further areas the group’s further IPK applications with less delay than suitable for planting with oil palms within the general was the case immediately after the new IPK requirement vicinity of its existing land allocations but, with land prices came into force. The group therefore retains its oil palm rising and increasing interest in plantation development, planting target for the two year period ending 31 land is much less available than was the case in 1991 December 2011 of 8,000 hectares in total. The directors when the group first established itself in East Kalimantan. believe that this target remains achievable but whether it Land development will actually be achieved will be critically dependent upon land becoming available for development as needed. Areas planted and in course of development as at 31 At current cost levels and CPO prices, extension planting December 2010 amounted in total to 32,083 hectares. in areas adjacent to the existing developed areas still Of this total, mature plantings comprised 21,984 offers the prospect of attractive returns. Accordingly, it 23 Review of the group continued remains the policy of the directors that, subject to capacity to meet the expected FFB processing financial and logistical constraints, the group should requirements of 2011 but by 2012 the group will require continue its expansion and should aim over time to plant a third mill. Work is already in hand on the construction of with oil palms all suitable undeveloped land available to this third mill and it is expected that mill commissioning the group (other than areas set aside by the group for will be completed ahead of the peak cropping months of conservation). Such expansion will, however, involve a 2012. series of discrete annual decisions as to the area to be planted in each forthcoming year and the rate of planting The group's newer oil mill incorporates, within the overall may be accelerated or scaled back in the light of facility, a palm kernel crushing plant in which palm kernels prevailing circumstances. Moreover, the group’s capacity can be further processed to extract the CPKO that the for extension development will continue to be dependent palm kernels contain. The kernel crushing plant is upon the rate at which the group can make additional land economic to run because the oil mill in which the plant is areas available for planting. Processing and transport facilities located is able to generate sufficient power, from the combustion of waste products from the mill’s processing of FFB, to operate the kernel crushing plant and to meet the other power requirements of the mill. Moreover, The group currently operates two oil mills in which the processing kernels into CPKO avoids the material FFB crops harvested from the mature oil palm areas are logistical difficulties and cost associated with the processed into CPO and palm kernels. transport and sale of kernels. The kernel crushing plant has a capacity of 150 tonnes of kernels per day which is The first mill, which dates from 1998, was developed to sufficient to process all kernel output from the group’s give an intended capacity of 80 tonnes per hour but, by two existing oil mills. Further kernel crushing capacity will 2009, the combined effect of a reduction in available be needed in 2012 and the third mill now under power (following deterioration in one of the two boilers) construction will therefore incorporate its own kernel and inefficiencies in other ageing mill machinery was crushing plant. making it difficult to operate the mill at the intended capacity over any extended period. A major overhaul of The group maintains a fleet of barges for transport of the mill was initiated in 2010 to address this problem. This CPO and CPKO. The fleet is used in conjunction with has involved upgrading of machinery and the installation tank storage adjacent to the oil mills and a transhipment of a new boiler. The overhaul, which will restore the terminal owned by the group downstream of the port of effective mill capacity to 80 tonnes per hour, is currently Samarinda. The fleet now comprises one barge of 4,000 on schedule and should be completed before the start of tonnes, which the group time charters (and which, in the 2011 peak cropping period in September. 2010, replaced a 3,000 tonne barge that the group previously time chartered), and a number of smaller The capacity of the second oil mill, which was brought into barges, ranging between 750 and 2,000 tonnes, which production in 2006, was expanded during 2010 from 60 are owned by the group. The smaller barges are used for to 80 tonnes per hour. transporting palm products from the upriver operations to the transhipment terminal for collection from that terminal The upgrading of the older mill and expansion of the by buyers or for transfer to the larger barge. The latter is newer mill should provide the group with sufficient 24 then used for sea voyages to make deliveries to 70 kilometres downstream where year round loading of customers in Malaysia and other parts of Indonesia. barges of up to 2,000 tonnes is possible. The group owns The directors believe that flexibility of delivery options is a riverside site in this downstream location. Road access helpful to the group in its efforts to optimise the net to this site was washed away in 2005 but restored during prices, FOB port of Samarinda, that it is able to realise for 2009. The group is now considering the development of its produce. Moreover, the group’s ability itself to deliver its own permanent loading facilities on the site for use CPO and CPKO allows the group to make sales without during dry periods. The group is also seeking (by the collection delays sometimes experienced with FOB obtaining licences to use third party owned roads) to buyers. Currently, a significant proportion of the group's establish alternative routes for the transfer of palm CPO is sold for delivery to ports in Sabah in East Malaysia. products to the downstream loading point during drier As a result, the 4,000 tonne barge is employed almost periods to ensure that, as volumes increase, the group exclusively in sailing between Samarinda and Sabah. can continue during such periods promptly to evacuate all Because of the relatively short distance involved, this is palm product output. proving very efficient in minimising transformation costs. Crops and extraction rates A trial made in 2005 established that it is both feasible and economic to use the barge fleet to transfer CPO from FFB crops for the years from 2006 to 2010 are shown in the Samarinda transhipment terminal to ships anchored the “Key statistics” section of this annual report. The crop offshore outside the port of Samarinda. This potentially out-turn for 2010 amounted to 518,742 tonnes of oil provides access to vessels of much greater tonnage than palm fresh fruit bunches. This represented an increase of the vessels that can be loaded within the port of 5.8 per cent on the FFB crop for 2009 of 490,178 tonnes Samarinda (which are effectively limited to 6,000 tonnes). but was below the budgeted crop for the year of 561,680 Moreover, the recent construction of bulking facilities in tonnes. External purchases of FFB from smallholders and the port of Balikpapan means that larger vessels may now other third parties in 2010 totalled 20,089 tonnes (2009: also be accessed by barging from the upstream oil 13,248 tonnes). storage tanks to Balikpapan and transhipping there rather than in Samarinda. Access to larger vessels would permit Rainfall across the group's estates averaged 4,434 mm the group to ship palm products to Europe when for 2010, compared with 3,123 mm for the previous year. differentials between European and South East Asian Although the high level of rainfall caused some prices for CPO and CPKO make it worthwhile to do so. disruptions to harvesting in the last quarter of 2010, the This is not currently the case but the situation may directors believe that the principal reason for the crop change when the group becomes able to deliver palm shortfall against budget was the extended drier period products that have been certified as sustainably experienced in 2009 coincident with an occurrence of the produced. El Niño weather phenomenon. Theoretical calculations based on average daily rainfall had indicated that rainfall During periods of lower rainfall (which normally occur for during 2009 was sufficient to avoid palms suffering short periods during the drier months of May to August of moisture stress (which is known to have a temporary each year), river levels on the upper reaches of the effect on subsequent cropping levels) but 2010 cropping Belayan become volatile and palm products at times have experience suggests that these calculations were to be transferred by road from the mills to a point some unfortunately over-optimistic and underestimated the 25 Review of the group continued variations in moisture levels across the estates and in period of 168.8 million tonnes with CPO accounting for particular the negative effects on moisture absorption of 46.7 million tonnes of this (27.6 per cent of the total). run-off in hilly areas. Vegetable and animal oils and fats have conventionally The group’s own FFB crop for 2011 has been budgeted been used principally for the production of cooking oil, at 611,000 tonnes with a normal budgetary assumption margarine and soap. Consumption of these basic of average rainfall (both as to quantum and distribution). commodities correlates with population growth and, in The FFB crop to end March 2011 amounted to 135,424 less developed areas, with per capita incomes and thus tonnes against the budget for the period of 141,117 economic growth. Demand is therefore driven by the tonnes. The directors do not believe that any conclusions increasing world population and economic growth in the as to the likelihood of the group achieving its budgeted key markets of India and China. Vegetable and animal oils crop for 2011 should be drawn from the slight shortfall of and fats can also be used to provide bio-fuels and, in the first quarter as variations from year to year in the particular, bio-diesel. According to Oil World, bio-fuel use monthly phasing of each year’s crop are normal. External during the year to 31 December 2010 accounted for 12 purchases of FFB during 2011 have been budgeted at per cent of all vegetable and animal oil and fat 25,000 tonnes. consumption. Processing of the group's own FFB production and the The principal competitors of CPO are the oils from the externally purchased FFB, together totalling 538,831 annual oilseed crops, the most significant of which are tonnes (2009: 503,426 tonnes), produced 127,256 soybean, oilseed rape and sunflower. Because these tonnes of CPO (2009: 118,357 tonnes) and 24,614 oilseeds are sown annually, their production can be rapidly tonnes of palm kernels (2009: 23,740 tonnes) reflecting adjusted to meet prevailing economic circumstances with extraction rates of 23.62 per cent for CPO (2009: 23.51 high vegetable oil prices encouraging increased planting per cent) and 4.57 per cent for kernels (2009: 4.72 per and low prices producing a converse effect. Accordingly, cent). Production of CPKO amounted to 9,745 tonnes in the absence of special factors, pricing within the oils (2009: 9,636 tonnes) with an extraction rate of 40.07 per and fats complex can be expected to oscillate about a cent (2009: 40.04 per cent). mean at which adequate returns are obtained from growing the annual oilseed crops. The group’s target extraction rates for 2010 were 24.0 per cent for CPO, 4.75 per cent for palm kernels and 42 Since the oil yield per hectare from oil palms (at between per cent for CPKO. These target rates are being retained 4 and 7 tonnes) is much greater than that of the principal for 2011. 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 4.1 continue to benefit from health concerns in relation to per cent to 169.5 million tonnes in the year to 30 trans-fatty acids. Such acids are formed when vegetable September 2010. 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 26 sunflower oil, require hydrogenation before they can be between a high of $1,249 per tonne and a low of $234 used for shortening or other solid fat applications but per tonne. The monthly average price over the ten years CPO does not. as a whole has been $580 per tonne. Bio-fuel has become an important factor in the vegetable The rise in CPO prices seen in 2009 continued into 2010. and animal oil and fat markets, not so much because of After opening the year at a little above $800 per tonne, the oil and fats that it currently consumes, although this is CIF Rotterdam, and remaining broadly at that level for the not insignificant, but because the size of the energy first six months of 2010, the price rose further in the third market means that bio-fuel can provide a ready outlet for quarter of the year to $935 per tonne at the end of large volumes of oils and fats over a short period when September 2010 and then again, and even more sharply, surpluses in supply depress prices to levels at which bio- in the last quarter to close the year at $1,285 per tonne. fuel can be produced at a cost that is competitive with Prices have remained comfortably over the $1,000 per prevailing petroleum oil prices. This should provide a floor tonne level so far in 2011 and at times CPO has traded at for vegetable and animal oil and fat prices. above $1,300 per tonne. The directors believe that demand for, supply of and The current historically high prices of CPO and other consequent pricing of, vegetable and animal oils and fats vegetable oils (which have appreciated commensurately) will ultimately be driven by fundamental market factors. It are attributable to a number of factors: the demand is however possible that normal market mechanisms may, drivers of population growth and developing world for a time at least, be affected by government intervention. economic growth referred to above; increasing petroleum It has long been the case that some areas (such as the oil prices that are improving the economics of converting EU) have provided subsidies to encourage the growing of vegetable oils to bio-fuels and the combined impact of the oilseeds and that such subsidies have distorted the El Niño and La Niña weather phenomena that have held natural economics of producing oilseed crops. More back production. For 2011, consumption may outstrip recently there have been actions by governments production and with stocks low and the annual oilseed attempting to reduce dependence on fossil fuels. These crops competing for land with wheat and corn, which are have included steps to enforce mandatory blending of also at high prices and in strong demand, CPO prices bio-fuel as a fixed minimum percentage of all fuels and could reasonably be expected to remain at good levels subsidies to support the cultivation of crops capable of throughout 2011. being used to produce bio-fuel. Concerns as to the side effect of such actions in reducing food availability and in The current unrest in the Middle East and the after effects encouraging despoliation of forest lands may limit further of the Japanese tsunami could negatively impact the measures to encourage the production of bio-fuel but it world economy leading to some downturn in food demand appears likely that measures already in place will remain for vegetable oil but, against this, they could also result in in force for some time to come. higher petroleum oil prices and a consequential increase in the floor price for vegetable oil that the bio-diesel A graph of CIF Rotterdam spot CPO prices for the last ten conversion option provides. Nevertheless, the directors years, as derived from prices published by Oil World, is retain their view that vegetable oil markets will remain shown in the “Key statistics” section of this annual report. cyclical and that it is therefore likely that the current high The monthly average price over the ten years has moved 27 Review of the group continued prices will eventually result in increased supply and lead tonne, CIF Rotterdam, to 25 per cent on sales at prices to lower prices, albeit probably not in 2011. above the equivalent of $1,250 per tonne. Whilst the progressive nature of this duty means that the Indonesian In 2010, approximately 37 per cent by volume of group state takes a large part of the benefit of high prices, an CPO sales was made to the local Indonesian market and effect of the duty is to constrain the impact of rising the balance of 63 per cent was exported. FOB prices international CPO prices on the local Indonesian price of realised for CPO in the local market during 2010 were for cooking oil. This may be important to continuing political the most part broadly in line with those available in the stability in Indonesia which is certainly beneficial to export market but, with production volumes increasing, foreign investors in Indonesia. the group wishes to ensure that it can access both domestic and international CPO markets. Sales As a general rule, all CPO and CPKO produced by the continued to be made to a small number of buyers with group is sold on the basis of prices prevailing immediately export sales concentrated within the South East Asian ahead of delivery but, on occasions when market region and the vast majority of exports going to refineries conditions appear favourable, the group may consider in East Malaysia owned by one customer (a major making forward sales at fixed prices. The fact that export company of international standing). duty is levied on prices prevailing at date of delivery, not on prices realised, does act as a disincentive to making With CPKO prices rising to an even greater extent than forward fixed price sales since a rise in CPO prices prior CPO prices during 2010, CPKO became a more to delivery of such sales will mean that the group will not important second product for the group. To ensure that only forego the benefit of a higher price but may also pay full value was being captured, the group expanded its export tax on, and at a rate calculated by reference to, a CPKO customer base and started selling CPKO for export higher price than it has obtained (and in this context it as well as domestically. As a result, exports represented should be noted that if CPO prices were to rise 34 per cent of CPKO sales by volume in 2010 against nil significantly above $1,250 per tonne CIF Rotterdam, the in 2009. current sliding scale of export duties might well be extended). When making forward fixed price sales, the CPO and CPKO sales are made on contract terms that group would not normally commit a volume equivalent to are comprehensive and standard for each of the markets more than 60 per cent of its projected CPO or CPKO into which the group sells. The group therefore has no production for a forthcoming period of twelve months. No current need to develop its own terms of dealing with deliveries were made against forward fixed price sales of customers. The group will give consideration to separate CPO or CPKO during 2010 and the group currently has marketing of segregated sustainable oil once it has no sales outstanding on this basis. obtained accreditation from the Roundtable on Sustainable Palm Oil as referred to under “Accreditation The average US dollar prices per tonne realised by the and verification” below. group in respect of 2010 sales of CPO and CPKO, adjusted to FOB, Samarinda, and net of export duty were, The Indonesian regulations imposing sliding scales of respectively, $779 (2009: $591) and $1,066 (2009: duty on exports of CPO and CPKO remain in place. The $579). rate of duty payable on CPO currently rises from nil per cent on sales at prices of up to the equivalent of $700 per 28 Costs sites adjacent to the group’s oil mills. The contractor takes title to these residues and manages the composting The group's revenue costs principally comprise: direct process (this takes 45 days and involves seeding the costs of harvesting, processing and despatch; direct costs residues with an accelerant of micro-organisms (which of upkeep of mature areas; estate and central overheads the contractor supplies), mixing the residues and in Indonesia; the overheads of the UK head office; and macerating the mix to encourage biodegradation). The financing costs. The group’s strategy in seeking to contractor then sells back the resultant compost to the minimise unit costs of production is to maximise yields per group at an agreed price with a guaranteed nutrient hectare, to seek efficiencies in the overall costs and to content. spread central overheads over as large a cultivated hectarage as possible. The expellate from the milling of palm kernels has hitherto been used as a further substitute for inorganic fertiliser The level of rainfall in the areas of the agricultural but with rising demand for this expellate for use in animal operations provides the group with some natural feeds, the group will in future sell its palm kernel expellate advantage in relation to crop yields. The group production at times when the sales value of the expellate endeavours to capitalise on this advantage by constantly exceeds its value as a fertiliser substitute. striving to improve its agricultural practices. In particular, careful attention is given to ensuring that new oil palm During 2011, the group is aiming to make further cost areas are planted with high quality seed from proven seed savings from the recycling of waste by establishing two gardens and that all oil palm areas receive the upkeep methane conversion plants. Each plant will be and fertiliser that they need. constructed adjacent to an existing oil mill and will be based around a lagoon covered with inflatable high With inorganic fertiliser representing a major and density polyethylene sheeting. After initial cooling, mill increasing cost, the group has endeavoured in recent effluent will pass to the lagoon which is designed to years to develop natural fertilisers. Two consequences have been the extensive planting of macuna bracteata as a cover crop in the oil palm areas and the composting of residues of the CPO production process. Macuna bracteata (of which the group was an early user in Indonesia) not only keeps down noxious weeds but is also accelerate the anaerobic digestion of the effluent. The methane released during the digestion process will be captured within the lagoon cover, passed through a biological scrubber and used to fuel one or more gas powered generators. Methane that is surplus to requirements for electricity generation will be flared off. a prolific generator of vegetative matter that acts as a The digested effluent will be discharged from the lagoon natural fertiliser and soil improver, thereby promoting oil to the existing mill effluent ponds and subsequently palm growth, particularly in the immature phase. passed to the composting process. The electricity Composting too produces substantial volumes of natural generated from the captured methane will be supplied to fertiliser by converting empty fruit bunches and oil mill a number of estate villages, thereby reducing materially effluent into a nutrient rich compost. the requirement for diesel generated electricity. It is expected that each lagoon will have a methane Composting is effected by delivering all empty fruit production capacity sufficient to generate about 3 bunches and oil mill effluent (in the latter case after megawatts of power. treatment in effluent ponds) to a composting contractor at 29 Review of the group continued Because the methane conversion plants will reduce the Employees group’s greenhouse gas emissions, the group expects to obtain carbon credits under the Clean Development The workforce in the group’s agricultural operations Mechanism for the period from completion of the plants continues to expand in line with the growth in the up to 2020. Taking these credits into account, the operations so that, by the end of 2010, the workforce methane conversion plants are expected to generate numbered over 7,400 (2009: 6,900). acceptable investment returns and reduce considerably the group’s carbon footprint. The reorganisation of the human resources department that was initiated in 2009 is now nearing completion. Investments made in 2009 in increased mechanical Employment manuals have been overhauled, new handling of FFB collection and transport and in defined indicators introduced for evaluating performance establishing an “in house” road maintenance capability and positions re-graded so as to ensure that the group’s have proved successful and resulted in significant savings remuneration in the ongoing is competitive and fair and during 2010. Further efficiencies are likely as staff appropriately reflects the grading of positions and become fully accustomed to the new arrangements. industry benchmarks. Formal processes have been introduced for recruitment, particularly for key managerial The group is persevering with its development of a new positions. The changes, which are intended to ensure a management information and accounting database but more consistent approach to the management of human implementation has proved more complex than originally resources, have been well received. foreseen. This has caused some delays and it is now hoped that the new database will be operational for 2012. Almost all members of the workforce and their The new database should facilitate analysis by reference dependants are housed in group housing in a network of to much smaller units than has hitherto been possible and villages across the group estates. All villages are should thus permit management to identify and remedy equipped with potable water and electricity and provided underperformance on a more focused basis. with a range of amenity buildings including mosques, churches, shops, schools and crèches. A full review of The group’s costs are currently subject to many housing and related facilities is planned for 2011 to inflationary pressures. Fertiliser, diesel and steel prices all assess future housing requirements and investigate the rose during 2010 and are continuing to rise. Higher scope for further enhancing workforce amenities. Indonesian inflation coupled with a firm Indonesian rupiah is putting pressure on Indonesian labour costs in US A trust funded by the group operates a network of primary dollar terms whilst the rapid expansion of the oil palm schools and crèches across the group's estates and the sector is increasing competition for senior staff and group provides support to state secondary schools pushing up salary costs. The group will not be immune to serving the children of the group's employees. In 2010, these pressures but the impact on unit costs may be 90 pupils from the group’s primary schools sat mitigated over time by increased cropping from newly examinations for entry to state secondary schools and a mature areas. 100 per cent pass rate was achieved (2009: 88 pupils and 100 per cent). 30 The group runs its own health service with a medical clinic path. Until recently, the graduate intake was limited to in each estate village and a central hospital. It also has graduates holding agricultural qualifications but this was partnership links with larger hospitals in Samarinda and broadened in 2009 to include engineering graduates. Jakarta. The estate clinics and hospital are open not only Future graduate recruitment may be further broadened to to the group's employees and their dependants but also include a wider spectrum of graduates with the aim of to members of the local communities. The group actively providing the group with a pool of staff qualified to supports measures to control endemic diseases and to manage all aspects of the group’s plantation activities. further the education of its workforce in hygiene and similar health matters. No incidents of vector borne Continued training is provided for staff at all levels. diseases (such as dengue fever and malaria) in which Regular programmes are constructed by, and operated infection occurred on the group’s estates were reported out of, the group's own training school. These are during 2010 or 2009. 29 cases of malaria were treated supplemented by external management development during 2010 and, in each case, the affected persons had courses and attendance at industry conferences. A wide been infected prior to arrival on, or return to, the estates. variety of topics is covered including health and safety, sustainability, communication skills and English language The group has health and safety policies that are clearly courses. An analysis of training needs was conducted communicated to all employees and are managed during 2010 to identify any competency gaps and to through regular meetings on each operating unit attended ensure that future training programmes address these by management and employee representatives. The effectively. minutes from all such meetings are reviewed by senior management ultimately accountable to the group In 2010, the group introduced a system of total quality managing director and appropriate action is taken to management for all levels of the workforce with the remedy any deficiencies identified. There were no serious objectives of encouraging teamwork and motivating accidents to members of the group’s workforce during employees to achieve improvements in productivity. This 2010 or 2009. involved intensive training and the formation of quality control circle teams. The teams participated and were Having available staff in the numbers and with the skills assessed in an internal competition and the best and commitment that are required is vital to the group in performing team was selected to participate in a national its efforts to establish best practice in all aspects of its competition in Batam, where the team came second out agricultural activities. In most years, graduates from of 197 participants from 94 different companies. The Indonesian universities are recruited to join a twelve group intends to pursue additional total quality month training programme organised by the group's management initiatives during 2011 with the aim of training school that provides a grounding in oil palm further improving the effectiveness of the group’s estate management. Those successfully completing the operations. programme are offered management positions. Wherever possible, the group fills available staff positions ethnically diverse employment opportunities and by internal promotion. With the continuing expansion of encourages the establishment of forums in which the agricultural operations, this gives the group the ability employees or their representatives can have free and to offer graduates the prospect of an attractive career open dialogue with the group’s management. The group promotes a policy for the creation of equal and 31 Review of the group continued Community development such projects by assisting with sale arrangements and providing financial and technical assistance. Projects The group believes that maintenance of good relations undertaken to-date have included chicken, duck and pig with, and encouraging the development of, local rearing, fish farming, fruit, vegetable and rice cultivation communities in its areas of operation is an essential and bee keeping. Such projects have hitherto, for the component of its agricultural operations. To this end, the most part, been organised by small groups of individual group provides assistance to adjacent villages in a variety villagers but the group has now started also to encourage of ways and encourages joint social and cultural activities village cooperatives to undertake projects. This permits between its employees and local villagers. Formal liaison projects on a slightly larger scale and widens the with the communities is conducted through a committee opportunity for members of each village to participate in made up of representatives of the group and the the projects. communities. The committee meets regularly and provides a forum in which the concerns of any of the In addition to the foregoing responsibilities, the parties represented can be freely aired. community development department has a particular role in the titling of new agricultural land areas allocated to the Responsibility for day to day dealings with the local group. It oversees the production by external consultants communities is now split between three departments: of the community needs assessment that the group now community development, smallholder and conservation. commissions in all new areas prior to any development of The activities of the smallholder and conservation such areas. It explains to the local communities the departments are dealt with under “Smallholder implications of oil palm development and it seeks to programmes” and “Conservation” below. The community identify and meet local concerns so that the free, prior and development department is primarily responsible for informed consent of local people is obtained for new overseeing infrastructural assistance to, and supporting developments. self-help projects within, the local communities. The department is overseen by the group’s head of estates Smallholder programmes and is managed by three senior members of staff. The availability of the group’s oil mills to process FFB Infrastructural assistance provided to local villages to- harvested from plantings in the vicinity of the group’s date has included provision of generating sets, assistance estates provides an opportunity for the local communities with repairs of village roads, replacement of a village to further their economic progress by developing bridge and drilling of tube wells to provide drinking water. smallholdings of oil palms in areas surrounding the In addition, regular fogging for mosquitoes in the group's estates. The group continues to support such surrounding communities is helping to reduce the development and has established its smallholder incidence of vector borne diseases in those communities. department as a dedicated department to manage that Self-help projects supported by the group are intended to support. promote economic development in the local communities by encouraging the communities to take advantage of the readily accessible local market for produce that the proximate group workforce provides. The community development department assists in the establishment of Until 2009, the group’s smallholder support was provided to individuals pursuant to a scheme known as “Program Pemberdayaan Masyarakyat Desa” or “PPMD”. Under this scheme, each individual smallholder cultivates oil palm on 32 his own two hectare plot. The group provides technical provided on terms that FFB produced by the cooperatives advice and supplies each smallholder with fertilisers and will be sold to the group and that the group will ensure chemicals on deferred terms on the basis that when the that, out of the proceeds of such sale, the cooperatives smallholder’s oil palm plantings reach maturity, all FFB meet their debt service obligations in respect of the produced will be sold to the group for processing and the external funding. group will, on an agreed basis, recover from the amounts payable for the FFB, the deferred amounts owed to the The area planted or under development on the group group. At 31 December 2010, some 1,561 hectares of supported plasma schemes increased during 2010 from smallholder plantings across 14 local villages had been 1,578 hectares to 3,076 hectares. The areas developed established following this model. In addition, the group to-date are owned by cooperatives with members from 9 now treats as if they were PPMD plantings a further 795 local villages. During 2011, it is planned to increase the hectares of smallholder plantings originally developed number of villages participating in the schemes by adding under a government scheme for which the group has further co-operatives. The plasma development effectively assumed responsibility. programme for 2011 has been budgeted at 1,000 While continuing to support established smallholdings hectares. developed under the PPMD scheme, since 2009 the It was originally planned that cooperative members would group’s efforts to procure further smallholder form the core labour force for the plasma scheme development have been concentrated on encouraging the developments but would be supplemented when formation of local village cooperatives to develop oil palm necessary by labour from the group’s estates for which on larger areas pursuant to what are known as “plasma the group would render an appropriate charge. It has now schemes” (such terminology reflecting an analogy with become clear that, with urban migration reducing village elementary particle physics in which a company’s estates numbers, the cooperative members available to work on represent a “nucleus” and the associated smallholders a the plasma schemes will be insufficient to provide more “plasma” of linked particles). This shift in emphasis was than a minor proportion of the workforce needed to prompted by a wish to accelerate the rate of smallholder maintain and harvest the scheme plantings. Whilst this development as it became progressively clearer that the does not change the basic principle that the labour force logistical constraints of dealing with a large number of for the scheme development will be made up of a individuals, each operating on a relatively small area, combination of cooperative members and labour supplied would inevitably limit the rate at which the group could under contract by the group, it does mean that the group expand the smallholdings that it was supporting under the must be in a position to supply contract labour in much PPMD scheme. greater numbers than was originally expected. The group is taking steps to expand estate village housing and Under the plasma scheme model, the land areas for facilities to permit recruitment of the additional permanent development are provided by village cooperatives but the workers that it will in consequence need. development is managed by the group for a fee, with the advantage that development and production standards Financing for the group supported plasma schemes similar to those of the group can be established in the initiated to-date has been agreed with a local plasma areas. The costs of development are borne by the development bank in the form of fifteen year loans cooperatives but with funding from external sources secured on the land and assets of the schemes and 33 Review of the group continued guaranteed by the group. It is expected that the loans • within the locality of the group’s agricultural provided by the development bank will finance most of the operations, compiling a detailed record of the initial development costs of the scheme but will be physical attributes of the landscape, of its bio- supplemented to the extent necessary by funds advanced diversity resources and of the status and value of by the group. those resources in a local, national and international Whilst the group views its support for smallholder oil palm plantings in the local communities adjacent to its operations as part of its social obligations to those communities, the discharge of those obligations will be mutually beneficial to the communities and the group. The communities will benefit from the economic development generated as a result of the plantings while the group will benefit from the additional throughput in its oil mills that will result from the processing of FFB from the plantings. Conservation 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 group. REA Kon augments its effectiveness through partnerships with local bodies and international non The group continues to plan the development of its governmental organisations. Since commencing agricultural operations on the basis of environmental operations in 2008, the department has organised clear impact assessments and advice provided by independent physical demarcation of all existing conservation reserves experts. Within the areas already developed, and has established a permanent database on flora and approximately 6,000 hectares have been left intact as fauna that are found within the reserves and neighbouring conservation reserves with the aim of conserving flora watercourses. Up to the end of 2010, REA Kon had and fauna and enhancing the biodiversity of the confirmed the presence in the land reserves of a total of landscape. Areas identified as requiring conservation and 42 species of mammals, 154 species of birds and 74 set aside as part of the planning process for each new species of cold-blooded vertebrates (such as frogs, development area will be added to the conservation snakes and lizards). In addition, collaboration in studies of reserves as the group expands. aquatic fauna conducted with the Indonesian Institute for Sciences and Dr Maurice Kottelat, a leading ichthyologist, The group’s conservation department (conducting its had recorded in total over 120 species of fish and activities under the name “REA Kon”) is responsible for described over 10 previously unknown to science. A total implementing the group’s conservation objectives. Led by of 13 species of crustacean have been identified around an experienced local manager with a staff of eight and the Belayan river including prawns found to be endemic to advised by an international conservation expert, the Kalimantan. department has established a long term development plan for the period 2010 to 2015 with the following Camera trapping and walking surveys within the objectives: 34 conservation reserves and adjacent estate areas have so far recorded a total 26 orang-utans of various ages. At least two baby orang-utans are known to have been born shredding plastic bottles and producing plastic flakes for on the conservation reserves during 2009 and a further resale. two in 2010. REA Kon is monitoring the health of the orang-utan population in the conservation reserves and A charitable foundation, the Yayasan Ulin (“YU”) or will consider enrichment planting in the reserves if it Ironwood Foundation, was set up by the group in 2009 to appears that the naturally available food resources need extend conservation activities into the wider Belayan river to be enhanced although this has not, to-date, appeared basin and beyond the immediate areas of the group’s necessary. agricultural operations that are managed by REA Kon. YU works with non-governmental organisations, academic Quarterly monitoring of water quality in all rivers in the bodies, zoos and other third parties and focuses on conservation reserves on the north of the Belayan promoting conservation in areas external to the group’s continued during 2010 and this will be extended to the plantations. Projects undertaken to-date include tributaries in the conservation reserves on the south bank monitoring of water levels and a tag and release during 2011. REA Kon has initiated a study of the programme for endangered or threatened aquatic species contribution that forest predators can make to pest caught by traditional fishermen in the wetlands around control within oil palm plantings. Pest levels on the the group’s agricultural areas. YU is assisted by a board group’s estates are relatively low against industry norms of respected international and local scientific advisers. In and there is indirect evidence that pests are controlled by addition to the group, donors to YU have to-date included natural predators in forested conservation reserves. a number of zoological and conservation organisations as During 2010, REA Kon again organised a number of children’s conservation education camps and children Sustainable practices from both the group’s primary school and local village well as private individuals. schools participated. The camps included a first camp at The group recognises its social obligations with respect to the new REA Kon field station located within the pollution and energy efficiency. The group operates a conservation reserves, construction of which was zero burning policy in relation to land development and, in completed in October 2010. Conservation for added dry periods, maintains active fire patrols in an effort to limit value schemes continue with seedlings of rattan and fruit the risks of accidental fires. Corridors are used to trees being provided to local villages for planting in, and at separate all plantings from water courses and the latter the periphery of, the group’s conservation reserves. are regularly monitored to ensure that they are not These schemes are intended to enhance sustainable use contaminated by leaching of fertilisers and chemicals. and deter destruction of areas by local slash and burn The group actively promotes integrated pest farming. Demand for seedlings has been such that the management throughout its operations. Wherever REA Kon tree nursery has had to be expanded. possible, natural predators are preferred to pesticides for pest control. Selective varieties of flowering plants have New initiatives undertaken by REA Kon during 2010 been planted throughout the group’s estates to promote included the establishment of a model organic vegetable the population of wasps, the natural predators of garden and a project to recycle plastic waste. As respects bagworm and caterpillars. As noted under “Costs” above, the latter, REA Kon is currently trialling a machine for processing waste is converted into compost which is applied in the oil palm areas. The area in respect of which 35 Review of the group continued compost substituted for inorganic fertiliser in 2010 The group is a member of the Roundtable on Sustainable amounted to 6,763 hectares and is projected to amount Palm Oil (“RSPO”) which has produced a set of eight to over 9,000 hectares in 2011. principles and 39 criteria for the sustainable production of palm oil. Members of RSPO are required, within a Handling arrangements are designed to ensure that no stipulated period after joining RSPO, to obtain CPO, CPKO or effluent passes into water courses. There accreditation that they comply with such principles and were no incidents of accidental spillage during 2010 criteria. The directors believe that the group's operational (2009: one minor incident). Steps are being taken to practices have always been of a high standard but the educate the group’s resident workforce and its accreditation process requires that such operational dependants to segregate domestic waste so as to permit practices are embedded in formal systems and are recycling of organic waste and, if the conservation subject to controls that are auditable. Measures to ensure department plastic recycling project referred to under that this was the case were completed during 2010. “Conservation” above proves successful, also plastic Audit of REA Kaltim and its associated smallholders for waste. RSPO accreditation (conducted by an RSPO approved independent auditor) took place in early 2011 and has Fibre extracted during the milling of oil palm fruit is used recommended that both REA Kaltim and its associated to fuel oil mill boilers from which steam is generated. The smallholders be granted accreditation. Audit of SYB for steam is then used to drive steam turbines for generating RSPO accreditation is planned for later in 2011. electricity. This electricity is sufficient to power not only the group’s oil mills but also to provide power to several ISO 14001 and RSPO accreditations are subject to estate villages. However, the power is not sufficient for all periodic independent recertification. villages and power can anyway only be provided when the mills are running. Estate villages are therefore heavily ISO 14001 rules and RSPO principles and criteria impose dependent on diesel generated power and this, coupled internationally agreed obligations but, as a substantial with fuel used in vehicles, results in a currently estimated Indonesian plantation operator, REA Kaltim is also subject consumption of 45 litres of diesel oil and petrol per tonne to, and monitored for compliance with, local regulations of CPO produced. Power generation from the planned applicable to the Indonesian palm oil industry. Hitherto, methane conversion plants referred to under “Costs” such monitoring has been conducted under a programme above should materially reduce this diesel consumption managed by the Indonesian Ministry of Environment and and should also substantially eliminate methane known as “PROPER”. However, the Indonesian emissions from effluent ponds. Accreditation and verification government is now introducing a new certification programme for oil palm growers who will in future be required to comply with recently promulgated regulations defining Indonesian Sustainable Palm Oil (“ISPO”). It During 2010, REA Kaltim extended its ISO 14001 seems likely that ISPO certification will replace the certification so as to cover all of its operations. ISO PROPER programme but, in the meantime, REA Kaltim 14001 audits of the SYB estate units were conducted in has retained its previously awarded PROPER status. February 2011 and ISO certification of SYB’s operations has also now been obtained. 36 Coal operations Concessions and structure cent by KCC Resources Limited (“KCC”) (a subsidiary of the company incorporated in England and Wales that acts as a co-ordinating company for the group's coal operations) and five per cent by the local partners, has The group holds rights in respect of three mining been established by KCC to spearhead the group's coal concessions in Indonesia. These comprise the operations. Liburdinding and Muser concessions located together near Tanah Grogot in the southern part of East Pursuant to the arrangements between the group and its Kalimantan, which were acquired in the second half of local partners, KCC has the right to acquire the three coal 2008, and the Kota Bangun concession in the central part concession holding companies at original cost as soon as of East Kalimantan which was added in late 2009. The Indonesian law allows this on a basis that will give the Liburdinding and Muser concessions cover areas of, group (through KCC) 95 per cent ownership with the respectively, 1,000 hectares and 2,100 hectares and the balance of five per cent remaining owned by the local Kota Bangun concession an area of 4,400 hectares. Coal partners. The group has been advised that Indonesian extraction, in each case, is or will be by open cast mining. law does now allow this, subject to necessary Indonesian government approvals. Accordingly, the group intends to Until recently, Indonesian law restricted foreign direct prepare applications for such approvals. In the meantime, ownership of Indonesian companies holding coal mining the concession holding companies are being financed by concessions but a new Indonesian mining law enacted in loan funding from the group and no dividends or other December 2008 allows such ownership (subject to a distributions or payments may be paid or made by the provision that foreign controlled mining companies must concession holding companies to the local partners be owned locally to the extent of not less than 20 per cent without the prior agreement of KCC. within a prescribed period after such companies commence commercial mining operations). The rights held by the concession holding companies in respect of the Liburdinding and Kota Bangun Because the Liburdinding, Muser and Kota Bangun concessions are in the form of exploitation licences. concessions were acquired prior to publication of These licences are valid for terms expiring, respectively, in regulations implementing the new mining law, the group 2013 and 2016, but are renewable on expiry. Currently, entered into temporary arrangements with a local investor Muser is held on an exploration licence but this will be and members of his family (together the group's “local converted into an exploitation licence which will be for an partners”) for the acquisition of the concessions in a initial term of five years and will also be renewable on manner that did not require the group to take immediate expiry. Royalties based on coal sales are payable at the control of the Indonesian companies owning the rate of 13 per cent in respect of Liburdinding coal, 5 per concessions. Pursuant to these arrangements, the cent in respect of Muser coal and 13 per cent in respect Liburdinding and Muser concessions are currently held by of Kota Bangun coal. All three concession holding two companies which are wholly owned by the group's companies will be required to reconstitute the areas local partners and which in turn own the company holding mined when coal extraction has been completed. the Kota Bangun concession. A fourth company, PT KCC Mining Services Indonesia, incorporated under the Geological surveys conducted to date suggest that the Indonesian foreign investment law and owned 95 per concessions contain commercial deposits of coal 37 Review of the group continued accessible by open cast mining and having typical gross and initial shipments of some 15,000 tonnes of coal are calorific values of between 5,800 and 6,200 kilocalories scheduled for April 2011. The stripping ratio (being the per kilogramme (“kcal/kg”) air dried basis (“ADB”) in the amount of overburden required to be removed to gain case of Liburdinding, between 6,000 and 7,000 kcal/kg access to the coal expressed as the number of bank cubic ADB in the case of Muser and between 8,500 and 9,500 metres of overburden in situ to be removed to extract one kcal/kg ADB in the case of Kota Bangun. Inferred coal tonne of coal) is under the present mining plan expected reserves have been estimated at 14.7 million tonnes for to be 30 to 1. As previously announced, the group is Liburdinding, 17.6 million tonnes for Muser and up to 2 aiming to build up to a production level within 2011 of at million tonnes for Kota Bangun. Economically mineable least 16,000 tonnes per month. Arrangements have been reserves are likely to be less, and perhaps significantly agreed for the sale of current production from the Kota less, than the inferred reserves. The group has Bangun concession to two buyers. Selling prices will be concentrated its continuing geological exploration on fixed against deliveries of the coal on a basis related to proving its immediately mineable reserves and does not the Newcastle globalCOAL index. The average price therefore yet have geological data sufficient to make an currently being realised is $137 per tonne. accurate determination of overall mineable reserves. Operations at the Liburdinding concession have been less One of the coal mining concession holding companies satisfactory. Original plans to mine 150,000 tonnes has obtained a mining exploration licence in respect of an during 2010 had to be abandoned when it became clear area near to the group’s agricultural estates containing that the relatively high sulphur content of the coal was stone deposits. If geological surveys prove satisfactory, making it difficult to sell. Coal production at Liburdinding application will be made for the exploration licence to be in 2010 therefore amounted to some 21,000 tonnes only. converted into an exploitation licence. This will permit the A limited market for the coal has been found in Java and company to establish a stone quarry and to sell crushed this seems capable of selling 3,000 to 4,000 tonnes per stone to the group's agricultural operations (which have a month on a regular basis. For mining to be economic, considerable need for crushed stone) and to third parties Liburdinding needs to produce at a level of at least operating in the same vicinity. Operating activities 15,000 tonnes per month and this means that an export market for the coal is needed. The group has looked at blending Liburdinding coal with low sulphur traded coal purchased from third parties and this remains an option. Whilst it is taking longer than originally hoped to develop However, with the higher prices for coal that are currently the coal operations, good progress has been made. prevailing, the group would prefer simply to sell the Liburdinding production without blending and to accept a The major concentration during 2010 was on bringing the discount for the sulphur content. Discussions to this end Kota Bangun concession into production. Land with possible purchasers are continuing. compensation was completed, mining and environmental management plans settled, necessary permits for mining The group has established a port facility for the operations obtained and arrangements for evacuating Liburdinding concession and had hoped to generate mined coal concluded. Removal of overburden (being additional revenue by making this available for use by earth and rock overlaying the coal) started in November third parties for an appropriate charge. Some revenues 2010, the first coal seams were exposed in January 2011 have been generated and the port remains open for use 38 in this way but throughput levels have been disappointing Markets, revenues and costs because third party users of the port have not to date been mining large volumes of coal. Within the Asia Pacific region, China and India are large coal producers but their internal production is inadequate The position as respects the group’s plans to establish a to meet their energy requirements. The shortfall is made limited coal trading activity is more positive. Sales of up by imports primarily from Indonesia and Australia. A traded coal in 2010 (which started in the second half of number of other Asian Pacific countries also have the year) totalled 71,000 tonnes. Since the start of 2011, demand for imported coal. Because coal is bulky, the group has been able to formalise trading relationships economic availability is constrained by logistics. The with two major export buyers and is aiming within the directors consider that this offers excellent opportunities current year to be achieving average monthly sales of for Indonesian coal producers because Indonesia is 100,000 tonnes. The objectives for the coal trading geographically well located for the main Asia Pacific activity are to augment the revenues from the mining of markets and much of its coal (particularly in East the Kota Bangun and Liburdinding concessions and to Kalimantan) is located adjacent to rivers which provide an establish a customer base on which the group can build. economic method of evacuation. Furthermore, in addition Coal for traded sales is currently being sourced by to the potential of an expanding export market driven by outright purchase from third party suppliers but the group increasing demand for coal generated power, Indonesia intends that, in due course, it will enter into long term can expect significant growth in internal demand as the arrangements to procure a proportion of the coal that it Indonesian state electricity company implements plans to trades by mining third party owned concessions against expands its generating capacity to meet the growing payment of a royalty. demand for power within Indonesia. The majority of traded sales are currently being made in The directors believe that the published Newcastle export markets. The group continues to pursue the globalCOAL weekly index, when adjusted for differences possibility of domestic sales to the Indonesian state in calorific values (the index being based on coal of net electricity company to which one of the concession calorific value of 6,000 kcal/kg), has over time provided a holding companies has been approved as a supplier. reasonable indicator of prevailing East Kalimantan coal prices. This index opened 2010 at $85 per tonne, rose to Geological assessments of the Muser concession a temporary high of $109 at the end of April before falling indicate that the Muser coal deposits are complex and back and trading generally in the $85 to $100 range for that the overburden includes rock that cannot easily be the following six months. It then rose sharply in the last removed without blasting. This may pose problems, given two months of the year to close the year at $128. To date that there are villages located in quite close proximity to in 2011 it has traded in the range $120 to $140. the concession. Moreover, the Muser coal has a higher Although increased inflation in China, bringing with it the sulphur content than the Liburdinding coal. The group possibility of higher Chinese interest rates, may scale therefore intends to defer bringing the Muser concession back Chinese growth in 2011, the current level of Asian into production until increased levels of activity are being coal demand is such that it seems likely that Indonesian achieved by the rest of the group’s coal operations. coal prices will remain firm for much of 2011. 39 Review of the group continued Unit costs of production within the coal operations will be As in previous years, the fair value of the biological assets critically dependent upon production volumes and at 31 December 2010 has been derived by the directors efficiency of operation. Sustainable practices on a discounted cash flow basis by reference to the FFB expected to be harvested from the group's oil palms over the full remaining productive lives of the palms and to an estimated profit margin per tonne of FFB so harvested. In developing its mining activities, the group remains This estimated unit profit margin is based on current costs committed to observing international standards of best and an estimated produce value for FFB transferred to environmental practice. Health and safety procedures mill derived from a twenty year average of historic CPO have been established to protect and safeguard the prices but is buffered to restrict any implied change in welfare of all persons involved with the mining operations margin in contradiction of the trend in current margins. and measures are in place to ensure the proper The 20 year average CPO price, FOB port of Samarinda management of waste water and to provide for the and net of Indonesian export duty, to 31 December 2010 reinstatement, in so far as reasonably practicable, of land amounted to $472 per tonne which is higher than the 20 areas affected by mining to their original condition upon year average to 31 December 2009 of $446 per tonne. completion of mining operations. Finances Accounting policies However, because of inflation, the unit profit margin per tonne of FFB harvested implied by the average price of $472 and the current unit cost of production is lower than the unit profit margin assumed at 31 December 2009 whereas the unit profit margin that is currently being achieved is, in reality, greater than that margin. The group reports in accordance with International Accordingly, the same unit profit margin as that assumed Financial Reporting Standards (“IFRS”) and presents its as at 31 December 2009 (namely $50 per tonne of FFB) financial statements in US dollars. The company has been applied in valuing the biological assets as at 31 continues to prepare its individual financial statements in December 2010. sterling and in accordance with UK Generally Accepted Accounting Practice; accordingly the company’s individual The discount rates used for the purposes of the biological financial statements are presented separately from the asset revaluation at 31 December 2010 were 16 per cent consolidated financial statements. in the case of REA Kaltim, 17½ per cent in the case of SYB and 19 per cent in the case of all other group The accounting policies applied under IFRS are set out in companies (31 December 2009: REA Kaltim: 16 per the “Accounting policies (group)” section of this annual cent; and all other companies: 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 17½ per cent as an appropriate in respect of each such movement. area becomes well established and then further to 16 per 40 cent when plantings in an established area become Revenue for 2010 amounted to $114.0 million which was predominantly mature. The discount rates used at 31 45 per cent ahead of 2009 revenue of $78.9 million. The December 2010 and 31 December 2009 were derived revenue in each case is stated net of Indonesian export accordingly. duty. The increase in revenue during 2010 reflected the combined effect of the higher average CPO and CPKO The directors recognise that the IFRS accounting policy in prices prevailing during 2010, increased production and relation to biological assets does have theoretical merits initial coal sales of $4.2 million. Cost of sales also rose by in charging each year to income a proper measure of 43 per cent from $34.0 million to $48.6 million. Several capital consumed (so that, for example, a fair distinction is factors contributed to this increase: the larger crop; costs drawn each year between the cost of the shortening life of $3.9 million attributable to the new coal activities; the expectancy of younger plantings still capable of many higher unit cost of cropping in the significant area of years of cropping and that of older plantings nearing the newly mature plantings; general cost inflation; and end of their productive lives). It does, nevertheless, weakening of the US dollar against the Indonesian rupiah concern the directors that no estimate of fair value can which meant that rupiah denominated costs increased in ever be completely accurate (particularly in a business in US dollar terms. which selling prices and costs are subject to very material fluctuations). Moreover, in the case of the group’s IFRS fair value gains for 2010 at $2.0 million were biological assets, small differences in valuation significantly lower than the $11.3 million reported in assumptions can have a quite disproportionate effect on 2009. The reduction in the net gain arising from changes results. The biological assets are recorded in the group in fair value of agricultural inventory ($0.4 million against balance sheet at 31 December 2010 at $221.9 million. $1.5 million) reflected a lower closing stock at the end of An increase or reduction of $5 per tonne in the estimated 2010 than at the end of the preceding year. The more profit margin used for the purpose of the valuation significant reduction in the net gain from changes in the (namely $50 per tonne of FFB) would increase or reduce fair value of biological assets ($1.6 million against $9.8 the valuation by approximately $25 million. million) was principally caused by the continuing inflation in planting costs which meant that the value of additions Revenue from coal sales represented less than 5 per cent to prospective crops from new development during 2010 of total 2010 revenues. Accordingly, no separate showed a lower surplus over the value of crops harvested segmental report in respect of the coal operations has during the year than was the case in 2009. been provided in the notes to the consolidated financial statements. Group results Administrative expenses increased in 2010 from $7.2 million to $10.2 million in part because of inflation and a lower capitalisation rate (reflecting the increasing ratio of mature to immature areas) but also because of an Group operating profit for 2010 amounted to $56.3 increased administrative requirement reflecting the million and profit before tax to $50.4 million. The growth of the group’s business and in particular the need comparable figures for the preceding year were, to manage the expanding smallholder programmes. respectively, $47.7 million and $41.7 million. Some offset against the costs of this last was provided by management fees paid to the group by smallholder 41 Review of the group continued cooperatives which are included in 2010 operating group to hedge, against US dollars, the group’s liability in income of $0.4 million. respect of its outstanding 9.5 per cent guaranteed sterling notes 2015/17. The group has been advised by Finance costs net of investment revenues were much in its professional advisers that mark to market differences line with those of 2009 so that the movement in group arising on annual revaluations of such swaps should be profit before taxation substantially tracked that in group taken as profits or losses for Indonesian tax purposes as operating profit. they arise but an Indonesian tax assessment recently received by REA Kaltim has denied the tax relief claimed Before deduction of the interest component added to by REA Kaltim for 2008 in relation to the swaps in biological assets, interest payable in 2010 amounted to question. The group is appealing against this assessment $12.4 million (2009: $10.4 million). Interest cover for but, pending a decision on the appeal, the directors have 2010 (measured as the ratio of earnings before interest, felt it appropriate to recognise the inherent uncertainties tax, depreciation and amortisation, and biological gain to of the appeal process by making a provision equivalent to interest payable) was 4.8 (2009: 4.0). approximately half of the tax relief claimed. The disputed Indonesian tax assessment has been paid in full pending An extra $850,000 of withholding tax was incurred by the appeal. group as a result of changes to Indonesian tax regulations that came into effect on 1 January 2010 and increased The group’s appeal against a disputed Indonesian the withholding tax payable on interest on certain intra- assessment of tax on the profits of REA Kaltim for 2006 group loans to Indonesian subsidiaries of the company. has still to be decided. The group has previously provided The restructuring of these loans that was completed in in full through the income statement against this November 2010, as referred to under “Capital structure” assessment. below, should avoid a recurrence of this additional impost in future years. Dividends At the after tax level, profit for the year for 2010 was The fixed semi-annual dividends on the 9 per cent $35.0 million against $29.9 million in 2009 while profit cumulative preference shares that fell due on 30 June attributable to ordinary shareholders was $32.3 million and 31 December 2010 were duly paid. Dividends against $27.1 million. Fully diluted earnings per share totalling 5p per ordinary share have been paid in respect amounted to US 96.8 cents (2009: US 81.4 cents). of 2010 (2009: 4p per ordinary share). These comprised a first interim dividend of 2½p per ordinary share paid on The group's target long term average annual return on 1 October 2010 and a second interim dividend of 2½p adjusted equity is 20 per cent. The return achieved for per ordinary share paid on 28 January 2011. In addition, 2010 was 27 per cent (2008: 26 per cent). the company made a capitalisation issue to ordinary shareholders of 1,670,727 new preference shares on the A provision of $5.5 million relating to tax connected with basis of one new preference share for every 20 ordinary a cash flow hedge has been charged to other shares held on 24 September 2010. comprehensive income for 2010. This provision relates to tax relief claimed in respect of mark to market losses on For some years, the directors have followed the practice cross currency interest rate swaps entered into by the of declaring two interim dividends in respect of each 42 financial year, the first in late September or early October this expenditure and the continuing expansion of the of the year in question and the other at the start of the group beyond 2011 will continue to constrain the rates at succeeding year. This has meant that the company has which the directors feel that they can prudently declare, or not in recent years paid a final dividend. One corporate recommend the payment of, forthcoming ordinary governance agency has criticised this practice as dividends. The directors retain their previously stated depriving shareholders of the opportunity to vote on the belief that, with the crop increases in prospect over the level of overall dividend paid by the company. To respond next few years, it should be possible, notwithstanding the to this criticism, the directors propose that, constraints of continuing development, to maintain a notwithstanding that the second interim dividend paid in progressive dividend policy albeit that the rate of January was intended to be paid in lieu of final dividend, a progression may have to be rather conservative. dividend should be paid in September 2011 as a final dividend in respect of 2010 and that this dividend should The directors continue to believe that capitalisation issues substitute for the interim dividend in respect of 2011 that of new preference shares to ordinary shareholders, such the directors would otherwise have expected to declare as were made in 2010 and on several previous occasions, for payment at that time. Dividends declared or proposed provide a useful mechanism for augmenting returns to by directors in respect of 2011 and subsequent years ordinary shareholders in periods in which good profits are would then be expected to comprise an interim dividend achieved but demands on cash resources limit the scope in the January following the end of the applicable year for payment of cash dividends. The directors will and a final dividend payable in the following September. therefore consider a further such issue during 2011 if they feel that this is merited by the group’s performance. Accordingly, the directors recommend the payment of a final dividend in respect of 2010 of 3p per ordinary share Capital structure to be paid on 30 September 2011 to ordinary shareholders on the register of members on 2 September The group is financed by a combination of debt and equity 2011. The directors wish to emphasise that in proposing (which under IFRS includes non-controlling interests and that a final dividend in respect of 2010 be substituted for the company's preference capital). Total equity less non- a first interim dividend in respect of 2011, they do not controlling interests at 31 December 2010 amounted to intend to signal a change in the prospective level of $233.5 million as compared with $193.4 million at 31 dividends payable to shareholders during any particular December 2009. Non-controlling interests at 31 year but only to recharacterise one dividend in each year December 2010 amounted to $2.0 million (2009: $1.3 as a final dividend upon the payment of which million). shareholders can vote. 840,689 new ordinary shares of the company were As noted under “Agricultural operations” above, the group issued on 1 February 2010 on exercise of a director’s has ambitious plans for the further development of its option at an exercise price of 43.753p per share. In agricultural activities during 2011. These will entail major addition, in February, with the object of funding the new capital expenditure on extension planting, on the coal operations, the company issued an additional $15 buildings and plant needed to support that planting and million nominal of 7.5 per cent dollar notes 2012/14 on the construction of the new SYB oil mill and the two (“dollar notes”) at $90 per $100 nominal of notes in planned methane conversion plants. The need to fund conjunction with the issue by KCC of 150,000 43 Review of the group continued redeemable participating preference shares of $10 each instalments commencing 31 December 2012. The (“KCC participating preference shares”) at par. The effect sterling notes are issued by REA Finance B.V., a wholly of the additional dollar note issue was to increase the owned subsidiary of the company. Changes to nominal amount of dollar notes in issue to $45 million. Indonesian tax regulations effective from the beginning of 2010, meant that Indonesian withholding tax on interest 1,670,727 new preference shares were issued in October payments on certain intra-group loans to Indonesian 2010 by way of capitalisation of share premium account subsidiaries of the company (being loans that formed part pursuant to the capitalisation issue to ordinary of the assets then charged as security for the sterling shareholders referred to under “Dividends” above. This notes) which had been payable at the rate of 10 per cent was followed later in the same month by the issue of 9 became payable at the rate of 20 per cent. The security million new preference shares for cash at par to raise for the sterling notes was therefore reorganised during £8.7 million net of expenses. 2010 so as to achieve a structure in which the withholding tax rate on interest on charged intra-group Following these issues, group indebtedness and related loans would revert to 10 per cent. As a result, the notes engagements at 31 December 2010 amounted to are now guaranteed both by the company and another $132.1 million, made up of $45 million nominal of dollar wholly owned subsidiary of the company, R.E.A. Services notes (carrying value: $43.3 million), £37 million nominal Limited (“REAS”), are secured principally on unsecured of 9.5 per cent guaranteed sterling notes 2015/17 loans made by REAS to REA Kaltim, SYB and CDM, and (“sterling notes”) (carrying value: $55.2 million), $11.6 are repayable by three equal annual instalments million in respect of the hedge of the principal amount of commencing 31 December 2015. the sterling notes as described below, $1.5 million in respect of the KCC participating preference shares The group has entered into a long term sterling US dollar (which are classified as debt), term loans from Indonesian debt swap to hedge against US dollars the sterling liability banks of $14.7 million and other short term indebtedness for principal and interest payable in respect of the entire comprising drawings under working capital lines of $5.8 issue of the sterling notes (but in the case of interest on million. Against this indebtedness, at 31 December 2010 £22,000,000 nominal of the sterling notes only as the group held cash and cash equivalents of $36.7 respects interest payments falling due up to 31 million. December 2015). The group has no material contingent indebtedness save The KCC participating preference shares will provide a that, in connection with the development of oil palm limited interest in the group's coal operations such that if plantings owned by village cooperatives and managed by those operations achieve an average annual level of the group, the group has, as noted under “Smallholder earnings before interest, tax, depreciation and programmes” in “Agricultural operations” above, agreed to amortisation of $8 million over the four and a half year guarantee the bank borrowings of the cooperatives period from 1 January 2010 to 30 June 2014 (equivalent concerned, the outstanding balance of which at 31 to $36 million for the full period), those persons who December 2010 was equivalent to $4.8 million. subscribed dollar notes and KCC participating preference shares in the combined issue of those securities in The dollar notes are unsecured obligations of the February 2010, and who retain their notes and shares company and are repayable by three equal annual until redeemed, will receive an overall compound return of 44 15 per cent per annum on their total investment. If the increase of $19.3 million rising from $40.1 million to required level of earnings is not achieved, then, except in $59.4 million. However, net cash from operating activities certain limited circumstances (such as divestment of all or was lower than in 2009 at $21.3 million against $29.6 a significant part of the coal operations or a change in million. The apparent disparity of an increase in operating control of the company), no dividends or other cash flows before movements in working capital and a distributions will be paid or made on the KCC participating reduction in net cash from operating activities is preference shares and after 31 December 2014 such principally the result of two items: increase in receivables, shares will be converted into valueless deferred shares. which amounted to $10.3 million in 2010 against $2.7 million in 2009, and taxes paid, which amounted to $21.1 The term loans from Indonesian banks comprise a US million in 2010 against $2.3 million in 2009. The former dollar denominated balance of $8.7 million owed by REA reflected additional receivables in the group balance Kaltim to a consortium of Indonesian banks and the sheet at 31 December 2010 arising from the group’s new equivalent of $6.0 million drawn by SYB from PT Bank coal trading activity while the latter was largely DBS Indonesia (“DBS”) under an Indonesian rupiah attributable to the payment during 2010 of the disputed denominated amortising loan facility of Rp 350 billion Indonesian tax assessment referred to under “Group ($38.9 million) agreed with DBS during 2010. The loans results” above and now the subject of appeal. are secured on the assets of, respectively, REA Kaltim and SYB and are guaranteed by the company. The Investing activities for 2010 involved a net outflow of aggregate outstanding balance of the loans at 31 $41.4 million (2009: $34.8 million). This represented December 2010 of $14.7 million was repayable as new investment totalling $43.8 million (2009: $35.8 follows: 2010: $2.1 million; 2011: $2.7 million; 2012: million), offset by inflows from interest and other items of $3.6 million; and 2013 and thereafter: $6.3 million. $2.4 million (2009: $1.0 million). The new investment Group cash flow comprised expenditure of $34.3 million (2009: $27.0 million) on further development of the group's agricultural operations, of $3.5 million (2009: $1.3 million) on land Group cash inflows and outflows are analysed in the rights and titling and of $6.0 million (2009: $7.5 million) consolidated cash flow statement. Cash and cash on the acquisition and development of coal concession equivalents increased over 2010 from $22.0 million to rights. $36.7 million. The increase of $14.5 million (excluding a benefit of $0.2 million from the effect of exchange rate The net cash inflow on financing activities of $34.6 million movements) represented that component of the cash (2009, outflow: $4.3 million) was made up of a net inflow inflow from operating activities that was left after funding from issues of new shares and dollar notes of $29.5 the $20.1 million outflow on investing activities that was million (2009, issue of new preference shares: $2.5 not covered by net cash from operating activities. million), net additions to bank debt and finance lease obligations of $10.2 million (2009, net repayments: $2.8 As noted under “Group results” above, operating profit for million) and outflows in respect of dividend payments and 2010 amounted to $56.3 million, an increase of $8.5 the restructuring of the sterling notes of, respectively, million on the $47.7 million of the preceding year. After $4.9 million and $0.2 million (2009: $4.0 million and $nil). reversal of non cash items, operating cash flows before movements in working capital showed an even greater 45 Review of the group continued Liquidity and financing adequacy volatile and the directors believe that it is prudent for the group to hold some cash cushion to ensure that when As noted above, at 31 December 2010, the group held new areas are planted, those areas can be brought to cash and cash equivalents of $36.7 million. In addition, maturity even if CPO and CPKO prices fall sharply. the group had at 31 December 2010 an undrawn balance However, the cash and cash equivalents held by the of Rp 296 million ($32.9 million) under the SYB group at 31 December 2010, which reflected the amortising loan facility with DBS (available for drawing proceeds of the issue of new preference shares made in until 31 December 2014) and working capital lines October 2010, is in excess of the amount required for (subject to annual renewal) equivalent to $8.75 million of that purpose. Some $5 million of such cash resources which $3 million was undrawn. has already been applied during 2011 in retiring debt and the directors intend that further cash resources should be Planned extension planting and the requirement for applied for the same purposes before the end of 2011. investment in estate buildings and other estate plant and equipment that follows any expansion of the group’s The group's financing is materially dependent upon the planted hectarage will involve the group in continuing contracts governing the sterling and dollar notes. There major capital expenditure for several years to come. In are no restrictions under those contracts, or otherwise, on addition, construction of the group’s third oil mill and the the use of group cash resources or existing borrowings two proposed methane conversion plants is likely to and facilities that the directors would expect materially to involve an outlay of in excess of $25 million over 2011 impact the planned development of the group. Under the and 2012. If CPO prices remain at good levels, the terms of the Indonesian consortium loan facility and the directors expect that such capital expenditure can be DBS amortising loan facility, REA Kaltim and SYB are funded from internal cash flow, possibly supplemented by restricted to an extent in the payment of interest on some additional drawings on the SYB term loan facility borrowings from, and on the payment of dividends to, with DBS. other group companies but the directors do not believe that the applicable covenants will affect the ability of the Provided that the coal operations evolve as planned, such company to meet its cash obligations. operations should become cash generative during 2011. If that proves the case, the cash generated may be The group's oil palms fruit continuously throughout the utilised for further expansion of the coal operations. The year and there is therefore no material seasonality in the directors do not anticipate that the coal operations will funding requirements of the agricultural operations in require material cash support from elsewhere in the group their ordinary course of business. It is not expected that during 2011, although short term cash advances may be the development of the coal operations will introduce any made to meet temporary spikes in the working capital material swings in the group’s utilisation of cash for the needed for coal trading. funding of its routine activities. Whilst the group’s extension planting programme can Financing policies always be scaled back, once areas have been planted with oil palms, some or all of the benefits of the The directors believe that, in order to maximise returns to investment made in such areas will be lost if the areas are holders of the company's ordinary shares, it is essential not maintained. Commodity markets are inherently that a proportion of the group's funding needs are met 46 with prior ranking capital, namely borrowings and The October 2010 issue of new preference shares was preference share capital with the latter offering the made with this intention and the directors will consider particular advantage that it represents relatively low risk further issues of medium term debt securities or new permanent capital. preference shares for the same purpose. With respect to borrowings, the directors believe that the Net debt at 31 December 2010 was 40 per cent of total group’s interests are best served if the group's equity against a target of 60 per cent and a level of 42 per borrowings are structured to fit the maturity profile of the cent at 31 December 2009. The directors intend at least assets that the borrowings are financing. Since oil palm to maintain the overall amount of the group’s prior ranking plantings take nearly four years from nursery planting to capital but would expect that with growth in the net assets maturity and then a further period of three to four years to attributable to ordinary shareholders and replacement of full yield, the directors aim to structure borrowings for the debt with preference capital, net debt will, over time, fall as group’s agricultural operations so that shorter term bank a percentage of equity. debt is used only to finance working capital requirements, while debt funding for the group's extension planting Other treasury policies programme is sourced from issues of medium term listed debt securities and borrowings from development The sterling notes and the dollar notes carry interest at institutions. fixed rates of, respectively, 9.5 and 7.5 per cent per annum. Interest is payable on drawings by REA Kaltim New projects within the coal operations can be brought under the Indonesian consortium loan facility at a floating into commercial production more rapidly than new oil rate equal to Singapore Inter Bank Offered Rate palm plantings and the coal operations can therefore (“SIBOR”) plus a margin which, for so long as inter-bank justify borrowing on a shorter term basis than the markets remain disrupted, includes a liquidity premium agricultural operations. However, the directors believe reflecting the differences between SIBOR and the that no operations of the group should allow themselves lending banks' costs of funds. Interest is payable by SYB to become wholly reliant on bank finance. Accordingly, under the DBS amortising term loan at a floating rate the directors intend that the coal operations should also equal to Jakarta Inter Bank Offered Rate plus a margin. be financed principally by issues of listed debt securities. As a policy, the group does not hedge its exposure to The directors believe that the group’s existing capital floating rates but, insofar as is commercially sensible, structure is consistent with these policy objectives but borrows at fixed rates. A one per cent increase in the recognise that the planned further development of the floating rates of interest payable on the group’s floating group and the inevitable shortening of the maturity profile rate borrowings at 31 December 2010 would have of the group’s current indebtedness that will result from resulted in an annual cost to the group of approximately the passage of time will mean that action will be required $400,000. to ensure that the group’s capital structure continues to meet the objectives. Specifically, the directors consider The group regards the US dollar as the functional that it will be prudent, when market conditions permit, to currency of most of its operations and has, until recently, retire existing shorter dated debt and to replace it with sought to ensure that, as respects that proportion of its preference share capital or new debt of a longer tenor. investment in the group's operations that is met by 47 Review of the group continued borrowings, it has no material currency exposure against Agricultural operations the US dollar. Accordingly, where borrowings were incurred in a currency other than the dollar, the group Climatic factors endeavoured to cover the resultant currency exposure by way of a debt swap or other appropriate currency hedge. Although the group's agricultural operations are located The receipt by REA Kaltim during 2010 of an Indonesian in an area of high rainfall with sunlight hours well suited to tax assessment seeking to disallow for tax purposes the cultivation of oil palm, climatic conditions vary from losses on currency hedges (as referred to in “Group year to year and setbacks are possible. results” above) has called into question this policy but the directors hope that the assessment will be reversed on Unusually high levels of rainfall can disrupt estate appeal and that the policy can be retained. Pending the operations and result in harvesting delays with loss of oil outcome of the appeal the group has decided not to palm fruit or deterioration in fruit quality. Unusually low hedge the rupiah borrowings by SYB under the DBS levels of rainfall that lead to a water availability below the amortising loan facility. The group does not cover the minimum required for the normal development of the oil currency exposure in respect of the component of the palm may lead to a reduction in subsequent crop levels. investment in its operations that is financed with sterling Such reduction is likely to be broadly proportional to the denominated equity. size of the cumulative water deficit. Over a long period, crop levels should be reasonably predictable but there The group's policy is to maintain a cash balance in sterling can be material variations from the norm in individual sufficient to meet its projected sterling expenditure for a years. period of between six and twelve months and a cash balance in Indonesian rupiahs of up to the amount of its Low levels of rainfall can also disrupt and, in an extreme Indonesian rupiah borrowings but, otherwise, to keep all situation (not to date experienced by the group) could cash balances in US dollars. bring to a standstill the river transport upon which the group is critically dependent for estate supplies and the Principal risks and uncertainties evacuation of CPO and CPKO. The group’s business involves risks and uncertainties. Cultivation risks Those risks and uncertainties that the directors currently consider to be material are described below. There are or As in any agricultural business, there are risks that crops may be other risks and uncertainties faced by the group from the group's estate operations may be affected by that the directors currently deem immaterial, or of which pests and diseases. Agricultural best practice can to they are unaware, that may have a material adverse some extent mitigate these risks but they cannot be impact on the group. entirely eliminated. Other operational 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 48 shortages in the availability of such inputs, should such Produce prices shortages occur over any extended period, the group’s operations could be materially disrupted. Equally, The profitability and cash flow of the agricultural increases in input costs are likely to reduce profit margins. operations depend both upon world prices of CPO and CPKO and upon the group's ability to sell those products After harvesting, FFB crops become rotten if not at price levels comparable with such world prices. processed within a short period. Any hiatus in FFB collection or processing may therefore lead to a loss of CPO and CPKO are primary commodities and as such are crop. The group endeavours to maintain resilience in its affected by levels of world economic activity and factors palm oil mills with two mills operating separately and affecting the world economy, including levels of inflation some ability within each factory to switch from steam and interest rates. This may lead to significant price based to diesel based electricity generation but such swings although, as noted under “Revenues and markets” resilience would be inadequate to compensate for any in “Agricultural operations” above, the directors believe material loss of processing capacity for anything other that such swings should be moderated by the fact that the than a short time period. annual oilseed crops account for the major proportion of world vegetable oil production and producers of such The group has bulk storage facilities within its main area crops can reduce or increase their production within a of agricultural operations and at its transhipment terminal relatively short time frame. downstream of the port of Samarinda. Such facilities and the further storage facilities afforded by the group’s fleet In the past, in times of very high CPO prices, the of barges have hitherto always proved adequate to meet Indonesian authorities have for short periods imposed 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 area 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 crop loss through fire and other Above average CPO and CPKO prices during 2007 and perils potentially affecting the planted areas on the the early months of 2008 and again more recently in group's estates), for which insurance cover is either not 2010 and 2011 to-date have not led to a re-imposition of available or would in the opinion of the directors be export restrictions. Instead, the Indonesian government disproportionately expensive, are not insured. These risks continues to allow the free export of CPO and CPKO but are mitigated to the extent feasible by management has introduced a sliding scale of duties on exports. practices but an occurrence of an adverse uninsured Furthermore, the starting point for this sliding scale is set event could result in the group sustaining material losses. 49 Review of the group continued at a level such that when CPO and CPKO prices fell back statement. Whilst this would not affect the group's in the last quarter of 2008, the rate of export duty payable underlying cash flow, it could adversely affect market was reduced to nil. Nevertheless there have been reports perceptions as to the value of the company's securities. that the Indonesian government may take steps to encourage domestic downstream processing of CPO and Environmental, social and governance practices CPKO and may impose domestic sale obligations on oil palm growers from 2015. The group recognises that the agricultural operations are both a large employer and have significant economic World markets for CPO and CPKO may be distorted by importance for local communities in the areas of the the imposition of import controls or taxes in consuming group’s operations. This imposes environmental, social countries. The directors believe that the imposition of and governance obligations which bring with them risks such controls or taxes on CPO or CPKO will normally that any failure by the group to meet the standards result in greater consumption of alternative vegetable oils expected of it may result in reputational and financial within the area in which the controls or taxes have been damage. The group seeks to mitigate such risks by imposed and the substitution outside that area of CPO establishing standard procedures to ensure that it meets and CPKO for other vegetable oils. Should such arbitrage its obligations, monitoring performance against those fail to occur or prove insufficient to compensate for the standards and investigating thoroughly and taking action market distortion created by the applicable import to prevent recurrence in respect of any failures identified. controls or taxes, selling prices for the group’s CPO and In addition, the group commissions independent CPKO could be depressed. Expansion consultants to undertake periodic reviews of its management performance in relation to various matters and this review pays particular attention to the manner in which the group has discharged its corporate social The group is planning further extension planting of oil responsibilities. palm. The directors hope that unplanted land held by or allocated to the group will become available for planting The group's existing agricultural operations and the ahead of the land becoming needed for development and planned expansion of those operations are based on land that the development programme can be funded from areas that have been previously logged and zoned by the available group cash resources and future operational Indonesian authorities as appropriate for agricultural cash flows, appropriately supplemented with further debt development on the basis that, regrettable as it may be funding. Should, however, land or cash availability fall from an environmental viewpoint, the logging has been so short of expectations and the group be unable to secure extensive that primary forest is unlikely to regenerate. alternative land or funding, the extension planting Such land areas fall within a region that elsewhere programme, upon which the group's continued growth will includes substantial areas of unspoilt primary rain forest in part depend, may be delayed or curtailed. inhabited by diverse flora and fauna. As such, the group, in common with other oil palm growers in Kalimantan, Any shortfall in achieving planned extensions of the must expect scrutiny from conservation groups and could group's planted areas would be likely to impact negatively suffer adverse consequences if its environmental policies the annual revaluation of the group's biological assets, the were to be singled out for criticism by such groups. movements upon which are taken to the group's income 50 An environmental impact assessment and master plan employees and their dependents and to promote was constructed using independent environmental smallholder development of oil palm plantings. experts when the group first commenced agricultural operations in East Kalimantan and this plan is updated The group's agricultural operations are established in a regularly with further advice from independent experts to relatively remote and sparsely populated area which was reflect modern practice and to take account of changes in for the most part unoccupied prior to the group's arrival. circumstances (including planned additions to the areas However, some areas of land were previously used by to be developed by the group). Substantial conservation local villagers for the cultivation of crops. Accordingly, reserves have been established in areas already when taking over such areas, the group negotiates with, developed by the group and further reserves will be added and pays compensation to, the affected parties. as new areas are developed. The group actively manages these reserves and endeavours to use them to conserve The negotiation of compensation payments can involve a landscape level biodiversity as detailed under considerable number of local individuals with differing “Conservation” in “Agricultural operations” above. views and this can cause difficulties in reaching agreement with all affected parties. There is also a risk The group is committed to sustainable oil palm that, after an agreement has been completed, a party to development and adopts the measures described under the agreement may become disaffected with the terms “Sustainable practices” in “Agricultural operations” above agreed or the manner in which the agreement has been to mitigate the risk of its operations causing damage to implemented and may seek to repudiate the agreement. the environment or to its neighbours. The group supports Such difficulties and risk have in the past caused, and are the principles and criteria established by RSPO and is at likely to continue periodically to cause, delays to the an advanced stage in obtaining RSPO accreditation. extension planting programme and other disruptions. The Local relations group has to-date been successful in managing such periodic delays and disruptions so that they have not, in overall terms, materially disrupted the group's extension The agricultural operations of the group could be planting programme or operations generally, but there is a seriously disrupted if there were to be a material continuing risk that they could do so. breakdown in relations between the group and the host population in the vicinity of the operations. The group Coal operations endeavours to mitigate this risk by liaising regularly with representatives of surrounding villages and by seeking to The directors have previously expressed their belief that improve local living standards through mutually beneficial the most material risk attaching to the coal operations is economic and social interaction between the local villages the risk that the directors, with no prior experience of and the agricultural operations. In particular, the group, mining, may have misjudged the potential of the when possible, gives priority to applications for operations and that the operations do not become employment from members of the local population and commercially viable. In that event, some or all of the group supports specific initiatives (as described under capital invested in the operations may be lost. This “Community development” and “Smallholders” in remains a risk but the directors believe that with the levels “Agricultural operations” above) to encourage local of activity now being achieved, it is a diminishing risk. The farmers and tradesmen to act as suppliers to the group, its more material risks specific to coal that the directors currently foresee are as described below. 51 Review of the group continued Operational risks of inflation and interest rates. This may lead to significant Coal delivery volumes are dependent upon efficiency of price swings. production and of transport of extracted coal from mines Coal is sold on the basis of its calorific value and other to points of sale. Both production and transport can be aspects of its chemical composition. Supply and demand disrupted by heavy rains, such as are common in East for specific grades of coal and consequent pricing may Kalimantan. Heavy seas can cause delays to the barging not necessarily reflect overall coal market trends and the of coal to its point of sale. Failure to achieve budgeted group may be adversely affected if it is unable to supply delivery volumes will increase unit costs and may result in coal within the specifications that are at any particular operations becoming unprofitable. Whilst weather related time in high demand. impacts cannot be avoided, the group uses experienced contractors, supervises them closely and takes care to The Indonesian government has stated that it intends to ensure that they have equipment of capacity appropriate impose obligations on coal concession holders to sell for the planned delivery volumes. domestically a proportion of the coal that they mine. If obligations imposed mean that domestic sales of coal Failure to load export shipments to an agreed schedule have to be made at prices that are below world market may result in demurrage claims (damages payable for prices (and it is not yet known whether this will be the delays) which may be material. The group endeavours to case) the group’s prospective revenues from coal sales minimise this risk by direct supervision of loading of large will be reduced. shipments and, where possible, by loading barges used for transferring coal from shore to ship ahead of arrival of Environmental practices ships. Open cast coal mining, as conducted on the coal Mining plans are based on geological assessments and concessions in which the group has invested, involves the the group seeks to ensure the accuracy of those removal of substantial volumes of overburden to obtain assessments by extensive drilling ahead of any access to the coal deposits. The prospective areas to be implementation of the plans. Nevertheless geological mined by the group do not, however, cover a large area assessments are extrapolations based on statistical and the group is committed to international standards of sampling and may prove inaccurate to an extent. In that best environmental practice and, in particular, to proper event, unforeseen extraction complications can occur and management of waste water and reinstatement of mined may cause cost overruns and delays. areas on completion of mining operations. Nevertheless, Price risk the group could be adversely affected by environmental criticisms of the coal mining industry as a whole. The profitability and cash flow of the coal operations will General depend both upon world prices of coal and upon the group's ability to sell its coal at price levels comparable Currency with such world prices. Coal is a primary commodity and as such is affected by levels of world economic activity CPO, CPKO and coal are essentially US dollar based and factors affecting the world economy, including levels commodities. Accordingly, the group's revenues and the 52 underlying value of the group's operations are effectively Regulatory exposure US dollar denominated. Changes in existing, and adoption of new, laws and All of the group's borrowings other than the sterling notes regulations affecting the group (including, in particular, (as respects which the group has entered into sterling US laws and regulations relating to land tenure and mining dollar debt swap arrangements) and drawings by SYB concessions, work permits for expatriate staff and under the DBS amortising Indonesian rupiah loan facility, taxation) could have a negative impact on the group’s are US dollar denominated and a substantial proportion of activities. Many of the licences, permits and approvals the group’s costs (including fertiliser and machinery held by the group are subject to periodic renewal. inputs) is US dollar denominated or linked. Renewals are often subject to delays and there is always a risk that a renewal may be refused or made subject to Accordingly, the principal currency risk faced by the group new conditions. is that those components of group costs that arise in Indonesian rupiah and sterling may, if such currencies Agricultural land and mining rights held by the group are strengthen against the US dollar, negatively impact subject to the satisfaction by the group of various margins in US dollar terms. The directors consider that continuing conditions, including, as respects agricultural this risk is inherent in the group's business and capital land, conditions requiring the group to promote structure and the group does not therefore normally smallholder developments of oil palm. hedge against such risk. Although the group endeavours to ensure that its The group’s hedging strategy as respects the sterling activities are conducted only on the land areas, and within notes may itself give rise to risk given the contention of the terms of the licences, that it holds, licensing rules the Indonesian tax authorities (as referred to under change frequently and boundaries of large land areas are “Group results” in “Finances” above) that mark to market not always clearly demarcated. There is therefore always losses in Indonesia on debt swap arrangements hedging a risk that the group may inadvertently and to a limited the notes may not be deducted from chargeable profits extent conduct operations for which it does not hold all for Indonesian tax purposes. necessary licences or operate on land for the use of which it does not have all necessary permits. Counterparty risk The Bribery Act 2010, which applies worldwide to Export sales of CPO, CPKO and coal are made either interests of UK companies, has created an offence of against letters of credit or on the basis of cash against failure by a commercial organisation to prevent a bribe documents. However, domestic sales of CPO, CPKO and being paid on its behalf. It will be a defence if the coal may require the group to provide some credit to organisation has adequate procedures in place to prevent buyers and purchases of coal for trading may require the bribery and the group has traditionally had strong controls group to part pay ahead of delivery. The group seeks to in this area because the group operates predominantly in limit the counterparty risk that such credit and Indonesia, which is classified as high risk by the prepayments entail by effective credit controls. Such International Transparency Corruption Perceptions Index controls include regular reviews of buyer creditworthiness 2010. To mitigate further the risk that this poses, and in and limits on the term and amount of credit that may be anticipation of the Bribery Act coming into effect in 2011, extended to any one buyer and in total. 53 Review of the group continued the group is reviewing its framework of controls to ensure the group’s local partners. The group endeavours to that it will comply with the provisions of the Act. maintain cordial relations with its local investors by seeking their support for decisions affecting their interests and responding constructively to any concerns that they may have. By order of the board R.E.A. SERVICES LIMITED Secretary 20 April 2011 Country exposure All of the group's operations are located in Indonesia and the group is therefore significantly dependent on economic and political conditions in Indonesia. In the late 1990’s, in common with other parts of South East Asia, Indonesia experienced severe economic turbulence and there have been subsequent occasional instances of civil unrest, often attributed to ethnic tensions, in certain parts of Indonesia. However, during 2010 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 impose exchange controls or otherwise seek to restrict the group's freedom to manage its operations. Miscellaneous relationships The group is materially dependent upon its staff and employees and endeavours to manage this dependence as detailed under “Employees” in “Operations” above. Relationships with shareholders in Indonesian group 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 54 Directors Richard Robinow Chairman (65) John Green-Armytage Independent non-executive director (65) 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 (62) 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 the operations of the group. David Blackett Senior independent non-executive director (60) 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 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-executive capacities. These currently include the chairmanship of AMEC PLC. John Keatley Independent non-executive director (77) 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 overseas. David Killick, FCIS Independent non-executive director (73) Mr Killick was appointed a non-executive director in 2006. He is chairman of the nomination committee and a member of the audit and remuneration committees. 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. is currently a director of Reallyenglish.com Limited and a member of the council of management of Slough Council for Voluntary Service. He 55 Directors continued Charles Letts Independent non-executive director (92) 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. 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 (69) 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. 56 Directors’ report The directors present their annual report on the affairs of December 2010 were duly paid. A first interim dividend the group, together with the financial statements and in respect of 2010 of 2½p per share was paid on the auditors’ reports, for the year ended 31 December 2010. ordinary shares on 1 October 2010 and a second interim Principal activities and business review Although the second interim dividend was originally dividend of a further 2½p per share on 28 January 2011. intended to be paid in lieu of final dividend, for the The group is principally engaged in the cultivation of oil reasons explained in the “Review of the group” section of palms in the Indonesian province of East Kalimantan and in this annual report, the directors now recommend the the production of crude palm oil (“CPO”) and by-products payment of a final dividend in respect of 2010 of 3p per from fruit harvested from its oil palms. In addition, the group ordinary share to be paid on 30 September 2011 to holds recently acquired interests in three coal concessions ordinary shareholders on the register of members on 2 in East Kalimantan and is establishing an open cast coal September 2011. The directors intend that this dividend mining operation and coal trading activity based on these should substitute for the interim dividend in respect of concessions. 2011 that they would otherwise have expected to declare for payment in or about September 2011 and that the A review of the activities and planned future development of dividends declared or recommended by the directors in the group, together with the principal risks and uncertainties respect of 2011 and subsequent years should comprise facing the group, is provided in the accompanying an interim dividend payable in the January following the “Chairman’s statement” and “Review of the group” sections end of the applicable year and a final dividend payable in of this annual report which are incorporated by reference in the following September. Resolution 3 in the company’s this “Directors’ report”. In particular, the “Review of the notice of 2011 annual general meeting (the “Notice”) set group” includes information as to group policy and out at the end of this document, which will be proposed as objectives regarding the use of financial instruments. an ordinary resolution, deals with the payment of this Information as to such policy and objectives and the risk dividend. exposures arising is also included in note 21 to the consolidated financial statements. Going concern basis The group does not undertake significant research and The group's business activities, together with the factors development activities. likely to affect its future development, performance and position are described in the “Review of the group” Details of significant events since 31 December 2010 are section of this annual report which also provides (under contained in note 41 to the consolidated financial the heading “Finances”) a description of the group's cash statements. Results and dividends flow, liquidity and financing adequacy, and treasury policies. In addition, note 21 to the consolidated financial statements includes information as to the group's policy, objectives, and processes for managing its capital; its The results are presented in the consolidated income financial risk management objectives; details of its statement and notes thereto. financial instruments and hedging activities; and its exposures to credit and liquidity risks. The fixed annual dividends on the 9 per cent cumulative preference shares that fell due on 30 June and 31 57 Directors’ report continued Although the group has indebtedness, that indebtedness The appointment and replacement of directors is is medium term and the group is not materially reliant on governed by the company’s articles of association and short term borrowing facilities. Moreover, the group has prevailing legislation, augmented by the principles laid considerable cash resources. As a consequence, the down in the UK Corporate Governance Code which the directors believe that the group is well placed to manage company seeks to apply in a manner proportionate to its its business risks successfully. size as further detailed in the “Corporate governance” section of this annual report. For the reasons given under “Board of directors” in the “Corporate governance” section of this annual report (which section is incorporated by reference in this Directors’ report), the directors believe that the board of the company is effective as currently constituted and that its current composition should be maintained at least until the group’s new regional office in Singapore is fully established. 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. The senior independent non-executive director and the chairman have confirmed as regards, respectively, the chairman and the other non-executive directors offering themselves for re-election that, following formal performance evaluations, each such individual's performance continues to be effective and to demonstrate commitment to the role assumed, including commitment of time for board and committee meetings and, where applicable, other assigned duties. Directors’ interests At 31 December 2010, the interests of directors (including interests of connected persons as defined in section 96B (2) of the Financial Services and Markets Act 2000 of which the company is, or ought upon reasonable enquiry to become, aware) in the 9 per cent cumulative preference shares of £1 each and the ordinary shares of 25p each of the company were as follows: 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 adopt the going concern basis in preparing the financial statements. Charitable and political donations During the year the group made no charitable donations to persons ordinarily resident in the United Kingdom and no political donations. The group provided support for conservation activities in East Kalimantan. Supplier payment policy It is the company’s policy to establish appropriate payment terms and conditions for dealings with suppliers and to comply with such terms and conditions. The holding company itself does not have trade creditors. Directors The directors are listed in the “Directors” section of this annual report which is incorporated by reference in this “Directors’ report”. All the directors served throughout 2010. Messrs Robinow, Green-Armytage, Keatley and Letts retire at the forthcoming annual general meeting and, being eligible, offer themselves for re-election, such retirements being in compliance with the provisions of the UK Corporate Governance Code requiring the annual re- election of non-executive directors who have served as such for more than nine years. Resolutions 4 to 7 in the Notice, which will be proposed as ordinary resolutions, deal with the re-election of the above named directors. 58 Preference shares Ordinary shares under “Directors’ interests” above. By deeds dated 24 November 1998 and 10 April 2001, Emba has agreed - 10,005,833 that it will not undertake activities in conflict with those of 250,000 12,481 85,712 - - 80,704 680,878 20,000 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 20,400 108,008 shareholder in a listed company, on the other hand. - - 22,637 442,493 Control and structure of capital 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 Directors’ indemnities Qualifying third party indemnity provisions (as defined in section 234 of the Companies Act 2006) were in force for the benefit of directors of the company and of other members of the group throughout 2010 and remain in force at the date of this report. Substantial shareholders As at the date of this report, the company had received notifications required by The Disclosure Rules and Transparency Rules of the Financial Services Authority from the following persons of voting rights held by them as shareholders through the holdings of ordinary shares indicated: Emba Holdings Limited Number % 9,957,500 29.80 Prudential plc and certain subsidiaries 4,760,229 14.24 Alcatel Bell Pensioenfonds VZW 4,167,049 12.47 Artemis UK Smaller Companies 1,919,400 JPMorgan Asset Management (UK) Limited 1,703,906 5.74 5.10 In addition, the company had been notified that the above interest of Prudential plc group of companies includes 4,030,792 ordinary shares (12.06 per cent) in which M&G Investment Funds 3 is also interested. The shares held by Emba Holdings Limited (“Emba”) are included as part of the interest of Mr R M Robinow shown Details of the company’s share capital and changes in share capital during 2010 are detailed in note (vii) to the company’s financial statements. At 31 December 2010, the preference share capital and the ordinary share capital represented, respectively, 76.4 and 23.6 per cent of the total issued share capital. The rights and obligations attaching to the ordinary and preference shares are governed by the company’s articles of association and prevailing legislation. A copy of the articles of association is available on the company’s website at www.rea.co.uk. Rights to income and capital are summarised in note (vii) to the company’s financial statements. On a show of hands at a general meeting of the company, every holder of shares and every duly appointed proxy of a holder of shares, in each case being entitled to vote on the resolution before the meeting, shall have one vote. On a poll, every holder of shares present in person or by proxy and entitled to vote on the resolution the subject of the poll shall have one vote for each share held. Holders of preference shares are not entitled to vote on a resolution proposed at a general meeting unless, at the date of notice of the meeting, the dividend on the preference shares is more than six months in arrears or the resolution is for the winding up of the company or is a resolution directly and adversely affecting any of the rights and privileges attaching to the preference shares. Deadlines for the exercise of voting rights and for the appointment 59 Directors’ report continued of a proxy or proxies to vote in relation to any resolution company in general meeting by special resolution. The to be proposed at a general meeting are governed by the articles of association may be amended only by a special company’s articles of association and prevailing resolution of the company in general meeting and, where legislation and will normally be as detailed in the notes such amendment would modify, abrogate or vary the class accompanying the notice of the meeting at which the rights of any class of shares, with the consent of that resolution is to be proposed. class given in accordance with the company’s articles of association and prevailing legislation. There are no restrictions on the size of any holding of shares in the company. Shares may be transferred either The 7.5 per cent dollar notes 2012/14 of the company through the CREST system (being the relevant system as (“dollar notes”) and the 9.5 per cent guaranteed sterling defined in the Uncertificated Securities Regulations 2001 notes 2015/17 of REA Finance B.V. (“sterling notes”) of which CRESTCo Limited is the operator) where held in (which are guaranteed by the company) are transferable uncertificated form or by instrument of transfer in any either through the CREST system where held in usual or common form duly executed and stamped, uncertificated form or by instrument of transfer in any subject to provisions of the company’s articles of usual or common form duly executed in amounts and association empowering the directors to refuse to register multiples, in the former case, of $1 and, in the latter case, any transfer of shares where the shares are not fully paid, of £1,000. There is no maximum limit on the size of any the shares are to be transferred into a joint holding of holding in either case. more than four persons, the transfer is not appropriately supported by evidence of the right of the transferor to Significant holdings of preference shares, dollar notes make the transfer or the transferor is in default in and sterling notes shown by the register of members and compliance with a notice served pursuant to section 793 registers of dollar and sterling noteholders at 31 of the Companies Act 2006. The directors are not aware December 2010 were as follows: of any agreements between shareholders that may result in restrictions on the transfer of securities or on voting rights. No person holds securities carrying special rights with regard to control of the company and there are no arrangements in which the company co-operates by which financial rights carried by shares are held by a person other than the holder of the shares. The articles of association provide that the business of the company is to be managed by the directors and empower the directors to exercise all powers of the company, subject to the provisions of such articles (which include a provision specifically limiting the borrowing powers of the group) and prevailing legislation and subject to such directions as may be given by the Preference shares Dollar notes Sterling notes ‘000 $’000 £’000 Bank of New York (Nominees) Limited BNY Mellon Nominees Limited BSDTABN Account Euroclear Nominees Limited EOC01 Account HSBC Global Custody Nominee (UK) Limited 993791 Account HSBC Global Custody Nominee (UK) Limited 942436 Account HSBC Global Custody Nominee (UK) Limited 641898 Account Rulegale Nominees Limited ISA001 Account Rulegale Nominees Limited JAMSCLT Account Securities Services Nominees Limited 2300001 Account State Street Nominees Limited OM04 Account – – – – 17,800 2,596 – 12,840 3,617 – – – – – 1,174 4,179 – – 3,797 1,500 – – – – – 4,000 – – 2,595 2,000 60 Vidacos Nominees Limited CLRLUX Account Morris Edward Zukerman Morris Edward Zukerman ZFT Account Preference shares Dollar notes Sterling notes ‘000 $’000 £’000 – – – 3,515 9,500 9,500 – – – 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 A change of control of the company would entitle holders market purchase, has been previously authorised by the of the sterling notes and certain holders of the dollar company in general meeting and, if not, is made pursuant notes to require repayment of the notes held by them as to a contract of which the terms have been authorised by 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. Awards to senior group executives under the company’s long term incentive plans will vest and may be encashed within one month of a change of control as detailed under “Long term incentive plans” in the “Directors’ remuneration report” section of this annual report. The directors are not aware of any agreements between the company and its directors or between any member of the group and a group employee that provides for compensation for loss of office or employment that occurs because of a takeover bid. a special resolution of the company in general meeting. There is no authority extant for the purchase by the company of its own shares. Increase in share capital At the forthcoming annual general meeting, a resolution will be proposed (resolution 10 set out in the Notice) 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 £37,750,000 to £55,250,000 by the creation of 17,500,000 9 per cent cumulative preference shares of £1 each ranking pari passu in all respects with the existing preference shares and representing 63.6 per cent of the existing authorised preference share capital. As indicated in the “Review of the group” section of this annual report, the directors believe that it will be prudent when market conditions permit for the company to issue additional preference shares and to apply the resultant proceeds in retiring existing group indebtedness. Furthermore, the directors believe that capitalisation issues of new preference shares to ordinary shareholders, such as were made on several previous occasions, provide a useful mechanism for augmenting returns to ordinary shareholders in periods in which good profits are achieved but demands on cash resources limit the scope for payment of cash dividends. The proposed creation of 61 Directors’ report continued additional preference shares is designed to give the share capital” above, the directors have no present company sufficient authorised but unissued preference intention of exercising these authorities. capital to permit the directors to issue preference shares for these purposes without further approval (other than Authority to disapply pre-emption rights shareholder authority to allot such shares, which authority will be sought at the forthcoming annual general meeting as noted under “Authorities to allot share capital” below). Authorities to allot share capital Fresh powers are also being sought at the forthcoming annual general meeting under the provisions of sections 571 and 573 of the Companies Act 2006 to enable the board to make a rights issue or open offer of ordinary shares to existing ordinary shareholders without being At the annual general meeting held on 8 June 2010, obliged to comply with certain technical requirements of shareholders authorised the directors under the the Companies Act 2006 which can create problems with provisions of section 551 of the Companies Act 2006 to regard to fractions and overseas shareholders. allot ordinary shares or 9 per cent cumulative preference shares within specified limits. Replacement authorities In addition, the resolution to provide these powers are being sought at the forthcoming annual general (resolution 13 set out in the Notice) will, if passed, meeting (resolutions 11 and 12 set out in the Notice) to empower the directors to make issues of ordinary shares authorise the directors (a) to allot and to grant rights to for cash other than by way of a rights issue or open offer subscribe for, or to convert any security into, shares in the up to a maximum nominal amount of £417,681 capital of the company (other than 9 per cent cumulative (representing 5 per cent of the issued ordinary share preference shares) up to an aggregate nominal amount of capital of the company at the date of this report). The £1,896,363.75 (being all of the unissued ordinary share company has not within the three years preceding the capital of the company and representing 22.7 per cent. of date of this report issued any ordinary shares for cash, the issued ordinary share capital at the date of this relying on the annual general disapplication of statutory report), and (b) subject to the passing of resolution 10 set pre-emption rights pursuant to section 571 of the out in the Notice, to allot and to grant rights to subscribe Companies Act 2006 (or the predecessor sections of the for, or to convert any security into, 9 per cent cumulative Companies Act 1985. preference shares in the capital of the company up to an aggregate nominal amount of £17,936,319 (being the The foregoing powers (if granted) will expire on the date aggregate of the unissued preference share capital of the of the annual general meeting to be held in 2012 or on company at the date of this report and the additional 30 June 2012 (whichever is the earlier). preference share capital proposed to be created at the forthcoming annual general meeting and representing Increase of directors’ fees 47.8 per cent of the issued preference share capital of the company at the date of this report). At the forthcoming annual general meeting, a resolution (resolution 14 set out in the Notice) will be proposed to The new authorities, if provided, will expire on the date of authorise the directors to increase the fees for services of the annual general meeting to be held in 2012 or on 30 each director from £20,000 per annum as currently June 2012 (whichever is the earlier). Save in relation to provided in the company’s articles of association up to an the preference shares as indicated under “Increase in amount not exceeding £25,000 per annum, such fees 62 being exclusive of any amounts payable under other director and the proposal to permit general meetings provisions of the articles. The directors have no (other than annual general meetings) to be held on just immediate intention of increasing the current level of 14 clear days' notice as detailed under “General meeting directors’ fees but the proposed resolution is designed to notice periods” above are all in the best interests of the provide authority for future increases when deemed company and shareholders as a whole and accordingly appropriate. the board recommends that shareholders vote in favour of the resolutions 10 to 15 as set out in the notice of the General meeting notice period forthcoming annual general meeting. At the forthcoming annual general meeting, a resolution Auditors (resolution 15 set out in the Notice) will be proposed to authorise the directors to convene a general meeting Each director of the company at the date of approval of (other than an annual general meeting) on 14 clear days' this report has confirmed that, so far as he is aware, there notice (subject to due compliance with requirements for is no relevant audit information of which the company's electronic voting). The authority will be effective until the auditors are unaware; and that he has taken all the steps date of the annual general meeting to be held in 2012 or that he ought to have taken as a director in order to make on 30 June 2012 (whichever is the earlier). This himself aware of any relevant audit information and to resolution is proposed following legislation which, establish that the company's auditors are aware of that notwithstanding the provisions of the company's articles information. of association and in the absence of specific shareholder approval of shorter notice, has increased the required This confirmation is given and should be interpreted in notice period for general meetings of the company to 21 accordance with the provisions of section 418 of the clear days. While the directors believe that it is sensible Companies Act 2006. to have the flexibility that the proposed resolution will offer, to enable general meetings to be convened on Deloitte LLP have expressed their willingness to continue shorter notice than 21 days, this flexibility will not be used in office as auditors and resolutions to re-appoint them as a matter of routine for such meetings, but only where and to authorise the directors to fix their remuneration will the flexibility is merited by the business of the meeting be proposed at the forthcoming annual general meeting. and is thought to be to the advantage of shareholders as Resolutions 8 and 9 set out in the Notice, each of which a whole. Recommendation will be proposed as ordinary resolutions, relate to the re- appointment and remuneration of the auditors. 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 allot share capital” and “Authority to disappy pre-emption rights”, the proposal to increase the maximum fee payable to each By order of the board R.E.A. SERVICES LIMITED Secretary 20 April 2011 63 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”), as revised by the UK Corporate Governance Code 2010, provide a widely endorsed model for achieving this. 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 2010, 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 long serving non-executive directors. independence of 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 for the long-term success of the company in the context of the company’s obligations and responsibilities both as a business in Indonesia and as a UK listed entity. In particular, the board believes that the skills and experience of its different members complement each other and their knowledge is of specific relevance to the nature and geographical location of the group’s operations 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 “Performance 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- 64 executive directors. Since the reconstitution of the nomination committee in April 2010, as described below, 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 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 which is kept under review. 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 reviewing to meet objectives and performance, financial controls and risk. for The company carries appropriate insurance against legal action against its directors. The current policy was in place throughout 2010 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 and are updated as necessary. Information concerning the remuneration of directors is provided in the “Directors’ remuneration report” section of this annual report (which is “Corporate reference governance” report) together with details of the basis upon which such remuneration is determined. incorporated by this in 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 on matters of a non routine nature and by prompt 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 65 Corporate governance continued the performance of the chairman is appraised by the 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 commitment and contribution of the board in developing strategy and enforcing disciplined risk management, pursuing areas of concern, if any, setting appropriate social responsibility objectives to the adequacy and timeliness of information made available to the board. At the performance evaluation conducted in 2010 and referred to in “Corporate governance” section of the annual report in respect of 2009, it was concluded that although the board was performing effectively as currently constituted, there was a need for 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 plans for the addition of senior executive management and a new regional office in Singapore but that thereafter the composition of the board 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. As detailed under “Strategic direction and succession” in the “Review of the group” section of this annual report, the process of recruiting new senior executive management and establishing a new Singapore office is proceeding as planned. The board retains its previously stated its own intentions reconstitution and future refreshment once this process has been completed (such completion being expected before the end of 2012). regarding 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 66 affecting its operations, finances and obligations (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 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 2010 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 4 3 2 2 2 1 2 2 2 1 In addition, during 2010, there were four meetings of the audit committee, two meetings of the remuneration committee and one meeting of the nomination committee. All committee meetings were attended by all of the committee members appointed at the time of each meeting. 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. 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, the company ensures that he is fully briefed so that he can make 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 and such announcements contain; statements that • 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 2010, 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 informal discussions between responsibilities by 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 67 Corporate governance continued 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 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. feedback 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 68 All ordinary shareholders may attend the company’s annual and other general meetings and put questions to 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. In particular, the board has always emphasised the importance of integrity and ethical dealing and continues to do so. The board plans to take steps formally to embed this emphasis into the group’s standard operating procedures in order to evidence compliance with the principles of the Bribery Act 2011. 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 reviewed the systems of internal control and risk management in November 2010 (including the group’s internal audit arrangements) and concluded that these remain effective and sufficient for their purpose. 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 Information shareholders, 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 20 April 2011 RICHARD M ROBINOW Chairman 69 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 director who might in future be appointed. how the board has applied the principles relating to directors’ remuneration set out in the Combined Code on In setting remuneration and benefits, the committee Corporate Governance issued in 2008 by the Financial considers the achievement of each individual in attaining Reporting Council (the “Code”). As required by the Act, a the objectives set for that individual (including objectives resolution to approve the report will be proposed at the relating to corporate performance on environmental, annual general meeting at which the accompanying social and governance matters as well as to overall financial statements are laid before the company’s corporate performance), the responsibilities assumed by members. the individual and, where the role is part time, the time commitment involved. The committee draws on data of The Act requires the auditors to report to the company’s the remuneration of others performing similar functions in members on certain parts of this report and to state similarly sized organisations and takes account of the whether in their opinion those parts of the report have remuneration of senior employees of the group who are been properly prepared in accordance with the not directors but with due allowance for differences in Accounting Regulations. The report has therefore been remuneration applicable to different geographical divided into separate sections for audited and unaudited locations. The committee aims to set performance information. Unaudited information The remuneration committee related remuneration on a basis that promotes the long- term success of the company whilst at the same time encouraging 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 2011 and subsequent years) is to attract, whose members comprise Mr D J Blackett (chairman) motivate, retain and fairly reward individuals of a high and Mr D H R Killick. calibre, while ensuring that the remuneration of each individual is consistent with the best interests of the The committee does not use independent consultants but company and its shareholders. In framing its policy on takes into account the views of the chairman and performance related remuneration (which is payable only managing director. Neither the chairman nor the to executive directors) the committee follows the managing director plays a part in any discussion of his provisions of schedule A to the Code. own remuneration. The committee considers all proposals for executive directors to hold outside directorships. Such directorships are normally permitted only if considered to be of value to 70 the group and on terms that any remuneration payable will Remuneration of non-executive directors be accounted for to the group. Remuneration of executive directors the chairman is determined by the board within the limits The remuneration of non-executive directors other than set by the articles of association, no director taking part in The policy on remuneration of executive directors is that the determination of his own remuneration. The level of basic remuneration of each executive director should remuneration is determined having regard to that paid by comprise an annual salary, part of which may be comparable organisations and to the time commitments pensionable, and certain benefits-in-kind, principally a expected. No non-executive director has any entitlement company car. In addition an executive director should be to remuneration on a basis related to performance. paid non-pensionable performance related bonuses. These are to be awarded annually in arrears on a Service contracts discretionary basis taking into account the performance of the group during the relevant year and the contribution The company’s current policy on service contracts is that to performance that a director is assessed by the contracts should have a notice period of not more than committee to have made. Bonuses should not normally one year and a maximum termination payment not exceed 50 per cent of salary and are paid in cash. There exceeding one year’s salary. No director has a service is no separate pension scheme for executive directors contract that is not fully compliant with this policy. and the only current executive director (the managing director) has, since 31 July 2009, been a pensioner The group entered into a service contract with Mr J C member of the R.E.A. Pension Scheme. Oakley on 16 December 1988 initially for a period of two years, thereafter determinable by either party by giving Matters particularly taken into account in setting Mr notice to the other party of not less than six months. In Oakley’s basic salary for 2010 were the general level of 2010, Mr Oakley’s existing service contract was replaced salary increases in the group in the UK and in Indonesia with a dual contract arrangement to reflect more (where a substantial part of Mr Oakley’s responsibilities accurately the division of his responsibilities between are discharged), confirmation that Mr Oakley’s salary was different parts of the group. Accordingly, Mr Oakley now reasonable by comparison with the salaries of managing has two service agreements whereby his working time directors of listed companies of a size similar to that of the and remuneration are shared between two employing group, and the additional workload assumed by Mr Oakley companies within the group. The terms of the in relation to the group’s new coal activities (but with a replacement contracts are substantially the same (in recognition that a further increase in Mr Oakley’s salary combined effect) as the terms of Mr Oakley’s previous might be appropriate if the coal activities developed as contract, save that, in line with benefit arrangements for hoped). Achievements reflected in the bonus paid to Mr all employees, Mr Oakley is now responsible for paying his Oakley in 2010 (being in respect of 2009 performance) own subscriptions to the company’s private health included the overall progress of the group’s profits, scheme. At 31 December 2010, the unexpired term progress in the agricultural operations in relation to under each contract remained as six months. There are composting, improved handling of oil palm fresh fruit no provisions for compensation for early termination save bunches and road maintenance, and the successful that Mr Oakley would be entitled to a payment in lieu of establishment of the first group supported co-operative notice if due notice had not been given. smallholder scheme. 71 Directors’ remuneration report continued Performance graph on the dates with effect from which the plans were agreed after adjustment for subsequent variations in the A performance graph is shown in the “Key statistics” share capital of the company in accordance with the rules section of this annual report. This compares the of the plans. performance of the company’s ordinary shares (measured by total shareholder return) with that of the FTSE all share Each plan provided that the vesting of a participants’ index for the period from January 2006 to December potential entitlements to notional ordinary shares would 2010. The FTSE all share index has been selected as be determined by key performance targets with each there is no index available that is specific to the activities performance target measured on a cumulative basis over of the company. Long term incentive plans the applicable performance period. Under the first plan, for which the performance period has now ended, there were three key performance targets with each target governing the vesting of one third of each potential A first long term incentive plan (the “first plan”) was entitlement. The three targets related to total shareholder established in 2007 and a second similar plan (the return, cost per tonne of crude palm oil produced and “second plan”) was put in place in 2009. The first and annual planting rate achieved. Under the second plan, for second plans (together the “plans”) were designed to which the performance period is continuing, there are two provide incentives, linked to the market price performance key performance targets with each target governing the of ordinary shares in the company, to a small number of vesting of one half of each potential entitlement. The two key senior executives in Indonesia with a view to their targets relate to total shareholder return and cost per participating over the long term in value created for the tonne of crude palm oil produced. Under the first plan group. No director was eligible to participate under either there were, and under the second plan there are, plan. The first plan period commenced on 1 January threshold, target and maximum levels of performance 2007 and ended on 31 December 2010 and the second determining the extent of vesting in relation to each plan period commenced on 1 January 2009 and will end performance target. Targets were or are subject to on 31 December 2012 (the “performance periods”). adjustment at the discretion of the remuneration committee where, in the committee’s opinion, warranted Under the plans, participants were awarded potential by actual performance. entitlements over notional ordinary shares of the company. These potential entitlements then vested or will The vesting of potential entitlements and the exercise of vest to an extent that is dependent upon the achievement vested entitlements is dependent upon continued of targets. Vested entitlements may be exercised in employment with the group. If a participant under a plan whole or part at any time within the six years following the ceases employment with the group before the end of the date upon which they vest. On exercising a vested performance period applicable to that plan, his potential entitlement, a participant will receive a cash amount for entitlement will lapse unless he leaves by reason of death, each ordinary share over which the entitlement is injury, disability, redundancy or retirement or the exercised, equal to the excess (if any) of the market price remuneration committee exercises a discretion to decide of an ordinary share on the date of exercise over 423.93p that his potential entitlement should not lapse. Where the in the case of the first plan and 229.83p in case of the potential entitlement does not lapse, it will vest on a basis second plan, being the market prices of an ordinary share that reflects achievement of performance targets up to 72 the end of the financial year last ended before the date Audited information (the “cessation date”) that the affected participant ceases employment with the group (as determined by the Directors’ remuneration remuneration committee) and time apportioned for the elapsed portion of the applicable performance period up The following table shows details of the remuneration of to the cessation date expressed as a fraction of the full individual directors holding office during the year ended applicable performance period. The resultant vested 31 December 2010 (with comparative totals for 2009): entitlement will be exercisable for a period of twelve months from the cessation date. If a participant leaves after the end of the applicable performance period, the participant may exercise a vested entitlement within six months of leaving. In the event of a change in control of the company as a result of a takeover offer or similar corporate event, potential entitlements will vest on a basis that reflects achievement of performance targets up to the date (the “applicable date”) of change of control or other relevant event (as determined by the remuneration committee) and time apportioned for the elapsed portion of the applicable performance period up to the applicable date 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 Salary and fees Other* 2010 Total £’000 £’000 £’000 180 280 3 139 183 419 2009 Total £’000 172 288 22 20 20 22 20 20 - - - - - - 22 20 20 22 20 20 17 17 17 17 17 17 584 142 726 562 * comprises benefits and, in the case of Mr Oakley a bonus of £65,000, and payments in lieu of pension contributions of £55,000 (see “Director’s pension arrangements – Mr J C Oakley” below) . expressed as a fraction of the full applicable performance The total amount paid to Mr Oakley in respect of 2009 period. Vested entitlements will be exercisable for a was £71,000 less than the amount to which he would period of one month following the applicable date. normally have been entitled. It also reflected payments in lieu of pension only for the period 1 August to 31 At 31 December 2010, entitlements to a total of 35,218 December 2009 (see “Director’s pension arrangements – notional ordinary shares had vested under the first plan Mr J C Oakley” below). The reduction of £71,000 and awards of potential entitlements over a maximum of reflected an agreement with Mr Oakley that a benefit in 40,292 notional ordinary shares had been made and kind that he received in 2006 relating to a tax liability remained outstanding under the second plan. On the arising on a gain on exercise of share options should basis of the market price of the ordinary shares on 31 effectively be refunded by commensurate reductions in December 2010 of 781p per share, the total gain to the subsequent remuneration to which Mr Oakley would participants in respect of their vested and potential otherwise become entitled from 1 January 2008. The entitlements would, if the latter had vested in full, have £71,000, with a reduction of £92,000 in 2008 and an been £348,000. agreed further reduction of £15,000 in 2011 will together fully offset the applicable benefit in kind. Fees paid to Mr Blackett and Mr Killick in respect of 2010 included, in each case, additional remuneration of £2,500 in respect of their membership of the audit committee. 73 Directors’ remuneration report continued Fees payable in respect of Mr Green-Armytage, Mr Letts the year did not reflect any component relating to and Mr Lim were paid to companies in which such inflation. directors were interested. 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 were subsequently amended in accordance with the terms of the option agreement to take account of share issues after the option was granted. As a result, at the 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. On 1 February 2010, Mr Oakley exercised his option (which was due to expire on 21 May 2012) in its entirety. The market price of the ordinary shares on the date of exercise was 405p and the gain on exercise was £3,036,963. Approved by the board on 20 April 2011 RICHARD M ROBINOW Chairman Director’s pension arrangements - Mr J C Oakley Mr Oakley (who was aged 62 at 31 December 2010) was until 31 July 2009 an ordinary member of the R.E.A. Pension Scheme. That Scheme is a defined benefit scheme of which details are shown in note 38 to the consolidated financial statements. Mr Oakley elected to become a pensioner 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 2010 was £54,000 (2009: £22,000). Director’s pension entitlement - Mr J C Oakley Details of Mr Oakley’s annual pension entitlement and of the transfer value of that entitlement are set out below. Pension: Accrued at beginning of year before commutation Effect of commutation In payment at beginning of year after commutation Increase during the year In payment at end of year Transfer value: At beginning of year before commutation Effect of commutation At beginning of year after commutation Contributions made by the director during the year Increase during the year At end of year £ 92,525 (22,925) 69,600 – 69,600 £ 1,933,814 (520,123) 1,413,691 – 2,304 1,415,995 No part of the increase in transfer value during 2010 related to inflation and the nil change in pension during 74 Directors’ responsibilities The directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations. UK company law requires the directors to prepare financial statements for each financial year. The directors are required to prepare the group financial statements in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union and Article 4 of the European Commission Regulation 1606/2002 and have elected to prepare the parent company financial statements in accordance with UK Generally Accepted Accounting Practice including UK Accounting Standards and applicable law. Under UK company law, the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the company and of the profit or loss of the company at the date and for the period to which they relate. In preparing the parent company financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • • present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; provide additional disclosures when compliance with the specific requirements in IFRS are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance; and • make an assessment of the company's ability to continue as a going concern. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company’s transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are also responsible for the maintenance and integrity of the corporate and financial information • make judgments and accounting estimates that are included on the company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. reasonable and prudent; • state whether applicable UK 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. In preparing the group financial statements, International Accounting Standard 1 requires that directors: • properly select and apply accounting policies; 75 Directors’ confirmation To the best of the knowledge of each of the directors: • the financial statements, prepared in accordance with the relevant financial reporting framework, 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 20 April 2011 76 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 2010 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 43. 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 auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and 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 and express an opinion on 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 Ethical Standards for Auditors. • • • give a true and fair view of the state of the group’s affairs as at 31 December 2010 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. 77 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; the part of the Corporate governance statement relating to the company’s compliance with the nine provisions of the UK Corporate Governance Code specified for our review; and • certain elements of the report to shareholders by the Board on directors’ remuneration. Other matter We have reported separately on the parent company financial statements of R.E.A. Holdings plc for the year ended 31 December 2010 and on the information in the Directors’ remuneration report that is described as having been audited. Mark McIlquham ACA (Senior Statutory Auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditors London, England 20 April 2011 78 Consolidated income statement for the year ended 31 December 2010 Revenue Net gain arising from changes in fair value of agricultural produce inventory Cost of sales Gross profit Net gain arising from changes in fair value of biological assets Other operating income Distribution costs Administrative expenses Operating profit Investment revenues Finance costs Profit before tax Tax Profit for the year Attributable to: Ordinary shareholders Preference shareholders Non-controlling interests Earnings per 25p ordinary share Basic Diluted All operations for both years are continuing Note 2010 $’000 2009 $’000 2 4 13 2 5 2, 7 8 5 9 10 35 11 114,039 455 (48,581) 65,913 1,588 449 (1,455) (10,228) 56,267 1,894 (7,714) 50,447 (15,474) 78,885 1,556 (33,951) 46,490 9,765 – (1,303) (7,234) 47,718 827 (6,828) 41,717 (11,861) 34,973 29,856 32,325 2,360 288 34,973 27,119 2,219 518 29,856 97.0 cents 96.8 cents 83.3 cents 81.4 cents 79 Consolidated balance sheet as at 31 December 2010 Note 12 13 14 15 16 27 18 19 20 30 28 22 29 22 23 24 25 26 27 29 31 32 33 34 35 2010 $’000 12,578 221,883 85,488 17,277 18,864 5,743 1,417 2009 $’000 12,578 204,087 72,258 14,117 12,859 5,037 1,276 363,250 322,212 14,006 28,662 36,710 79,378 13,376 14,340 22,050 49,766 442,628 371,978 (12,833) (8,973) – (7,850) (604) (30,260) (12,625) (55,244) (43,269) (1,500) (17,726) (41,010) (5,474) (13,169) (9,016) (64) (1,500) (412) (24,161) (8,719) (56,965) (29,677) – (13,609) (39,478) (4,701) (176,848) (153,149) (207,108) (177,310) 235,520 194,668 60,548 24,901 (18,197) 166,228 233,480 2,040 235,520 43,188 27,297 (13,630) 136,499 193,354 1,314 194,668 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 Preference shares issued by a subsidiary Hedging instruments Deferred tax liabilities Other loans and payables Total non-current liabilities Total liabilities Net assets Equity Share capital Share premium account Translation reserve Retained earnings Non-controlling interests Total equity Approved by the board on 20 April 2011 and signed on behalf of the board. RICHARD M ROBINOW Chairman 80 Consolidated statement of comprehensive income for the year ended 31 December 2010 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 Total comprehensive income for the year Attributable to: Ordinary shareholders Preference shareholders Non-controlling interests Notes 2010 $’000 34,973 2009 $’000 29,856 9 9 3,644 (3,492) (4,676) – (4,524) (6,615) 12,981 (3,567) 743 3,542 30,449 33,398 27,758 2,360 331 30,449 30,620 2,219 559 33,398 Consolidated statement of changes in equity for the year ended 31 December 2010 At 1 January 2009 Total comprehensive income Issue of new preference shares Dividends to preference shareholders Dividends to ordinary shareholders Changes in non-controlling interests Share capital (note 31) $’000 40,714 – 2,474 – – – 43,188 At 31 December 2009 – Total comprehensive income Issue of new ordinary shares 329 Issue of new preference shares (cash) 14,389 2,642 Issue of new preference shares (scrip) – Dividends to preference shareholders – Dividends to ordinary shareholders – Changes in non-controlling interests Share Translation reserve (note 33) $’000 premium (note 32) $’000 Retained earnings (note 34) $’000 Sub total $’000 Non- controlling interests (note 35) $’000 27,322 – (25) – – – 27,297 – 246 – (2,642) – – – (16,388) 110,383 30,081 – (2,219) (1,746) – 2,758 – – – – (13,630) 136,499 34,685 – – – (2,360) (2,596) – (4,567) – – – – – – 162,031 32,839 2,449 (2,219) (1,746) – 193,354 30,118 575 14,389 – (2,360) (2,596) – 580 559 – – – 175 1,314 331 – – – – – 395 Total equity $’000 162,611 33,398 2,449 (2,219) (1,746) 175 194,668 30,449 575 14,389 – (2,360) (2,596) 395 At 31 December 2010 60,548 24,901 (18,197) 166,228 233,480 2,040 235,520 81 Consolidated cash flow statement for the year ended 31 December 2010 Net cash from operating activities 36 21,292 29,644 Note 2010 $’000 2009 $’000 1,894 158 (18,504) (15,824) (3,505) 395 (6,005) 827 – (10,382) (16,626) (1,303) 175 (7,473) (41,391) (34,782) (2,360) (2,597) (1,500) (64) 575 14,389 1,500 13,071 (180) 11,743 34,577 (2,219) (1,746) (13,817) (54) – 2,449 – – – 11,119 (4,268) 37 20 14,478 22,050 182 36,710 (9,406) 30,316 1,140 22,050 Investing activities Interest received Proceeds from disposal of property, plant and equipment Purchases of property, plant and equipment Expenditure on biological assets Expenditure on prepaid operating lease rentals Changes in non-controlling 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 ordinary shares Proceeds of issue of preference shares Proceeds of issue of preference shares by a subsidiary Issue of dollar notes, net of expenses Sterling note reconstruction expenses New bank borrowings drawn Net cash from / (used in) financing activities Cash and cash equivalents Net increase / (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Effect of exchange rate changes Cash and cash equivalents at end of year 82 Accounting policies (group) General information R.E.A. Holdings plc is a company incorporated in the United Kingdom under the Companies Act 2006 with registration number 00671099. 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 79 to 113 are prepared in accordance with International Financial Reporting Standards (“IFRS”) as endorsed for use by the EU 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 these financial statements, the following standards and interpretations which have not been applied in these financial statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU): • • IFRS 9: “Financial instruments” IAS 24 (amended): “Related party disclosures” • • • IAS 32 (amended): “Classification of rights issues” IFRIC 19: “Extinguishing financial liabilities with equity instruments” IFRIC 14 (amended): “Prepayments of a minimum funding requirement” Improvements to IFRSs (May 2010) The adoption of IFRS 9 which the group plans to adopt for the year beginning on 1 January 2013 will impact both the measurement and disclosures of financial instruments. The directors do not expect that the adoption of the other standards listed above will have a material impact on the financial statements of the group in future periods. Basis of consolidation The consolidated financial statements consolidate those of the company and its subsidiary companies (as listed in note (i) to the company’s individual financial statements) made up to 31 December of each year. The acquisition method of accounting is adopted with assets and liabilities valued at fair values at the date of acquisition. The interest of non-controlling shareholders is stated at the non-controlling shareholders’ proportion of the fair values of the assets and liabilities recognised. Any subsequent losses attributable to the non-controlling shareholders in excess of the non-controlling 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 All expenses are eliminated on consolidation. transactions, balances, income and 83 Accounting policies (group) continued Goodwill Leasing 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 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. 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 foreign currency are not retranslated. Exchange 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. 84 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. Pensions and other post employment benefits United Kingdom Certain existing and former UK employees of the group are members of a defined benefit scheme. The estimated regular cost of providing for benefits under this scheme 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 Indonesia In accordance with local labour law, the group's employees in Indonesia are entitled to lump sum payments on retirement. These obligations are unfunded and provision is made annually on the basis of a periodic assessment by independent actuaries. Actuarial gains and losses are not recognised at the balance sheet date to the extent permitted by paragraphs 92 and 93 of IAS19 “Employee benefits”. Any increase or decrease in the provision, including adjusted actuarial gains and losses, is recognised in the consolidated statement of income, net of amounts added to biological assets. Taxation The tax expense represents the sum of tax currently payable and deferred tax. Tax currently payable represents amounts expected to be paid (or recovered) based on the taxable profit for the period using the tax rates and laws that have been enacted or substantially enacted at the balance sheet date. Deferred tax is calculated on the balance sheet liability method on a non-discounted basis on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding fiscal balances used in the computation of taxable profits (temporary differences). Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. A deferred tax asset or liability is not recognised in respect of a temporary difference that arises from goodwill or from the initial recognition of other assets or liabilities in a transaction which affects neither the profit for tax purposes nor the accounting profit. Deferred tax is calculated at the tax rates that are expected to apply in the periods when deferred tax liabilities are settled or deferred tax assets are realised. Deferred tax is charged or credited in the consolidated income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. 85 Accounting policies (group) continued 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 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 86 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. Recognition and derecognition of instruments financial 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. the Financial assets and liabilities are recognised in the group’s financial statements when the group becomes a party to the contractual provisions of 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 also classified as loans and receivables. Indonesian coal interests are 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. Non-derivative financial liabilities The group’s non-derivative financial liabilities comprise redeemable instruments, bank borrowings, finance leases 87 Accounting policies (group) continued 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 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. Redeemable instruments (comprising note issues and redeemable preference shares of a subsidiary of the company), 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 redeemable instruments, the coupon payable together with the amortisation of issuance costs (which include any premiums payable or expected by the directors to be 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. Redeemable instruments are recorded in the accounts at their expected 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. 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. Trade payables Equity instruments 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. 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 not charged to income. The preference shares of the company are regarded as equity instruments. Share-based payments The group has applied the transitional provisions of IFRS 2 “Share-based payments” which provide certain exemptions for grants of equity instruments prior to 7 November 2002. 88 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 a regular 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. 89 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 assessments of tax on an Indonesian group company. 2. Revenue Sales of goods Revenue from services Other operating income Investment income Total revenue 2010 $’000 113,805 234 114,039 449 1,894 116,382 2009 $’000 78,836 49 78,885 – 827 79,712 In 2010, two customers accounted for respectively 57 per cent and 17 per cent of the group’s sales of agricultural goods (2009: three customers, 43 per cent, 20 per cent and 13 per cent). The crop of oil palm fresh fruit bunches for 2010 amounted to 518,742 tonnes (2009: 490,178 tonnes). The fair value of the crop of fresh fruit bunches was $65,344,000 (2009: $44,698,000), 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; the carrying amount of net assets and additions to property, plant and equipment are analysed by geographical area of asset location. The group operates in two segments: the cultivation of oil palms and the development of coal operations. In 2010 and 2009, the latter did not meet the quantitative thresholds set out in IFRS 8 “Operating Segments” and, accordingly, no analyses are provided by business segment. Sales by geographical destination: Indonesia Rest of Asia Carrying amount of net assets by geographical area of asset location: UK and Continental Europe Indonesia 90 2010 $’m 47.0 66.8 113.8 23.8 211.7 235.5 2009 $’m 40.7 38.2 78.9 17.3 177.4 194.7 3. Segment information - continued Additions to property, plant and equipment by geographical area of asset location: UK and Continental Europe Indonesia 2010 $’m – 19.3 19.3 2009 $’m – 13.7 13.7 4. Agricultural produce inventory movement The net gain arising from changes in fair value of agricultural produce inventory represents the movement in the fair value of that inventory less the amount of the movement in such inventory at historic cost (which is included in cost of sales). 5. Profit before tax 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 Administrative expenses Net foreign exchange gains (Credit) / charge for additional UK pension liability (see note 38) National insurance contributions on share options Indonesian operations Head office Amounts payable to the company’s auditors 2010 $’000 10,228 588 339 3,630 84 (74) (225) – 6,254 4,273 10,228 2009 $’000 7,234 1,311 308 3,147 190 (859) 528 355 3,729 3,481 7,234 The amount payable to Deloitte LLP for the audit of the company’s financial statements was $126,000 (2009: $118,000). Amounts payable to Deloitte LLP for the audit of accounts of associates of the company pursuant to legislation were $16,000 (2009: $16,000). Amounts payable to Deloitte LLP for other services were $7,000 (2009: $3,000) for the provision of certificates of group compliance with covenants under certain debt instruments (being certificates that those instruments require to be provided by the company’s auditors). Amounts payable to an associate of Deloitte LLP for the audit of a subsidiary’s financial statements were $16,000 (2009: $10,000). 91 Notes to the consolidated financial statements continued 5. Profit before tax - continued Earnings before interest, tax, depreciation and amortisation and net biological gain Operating profit Depreciation and amortisation Net biological gain 6. Staff costs, including directors Average number of employees (including executive directors): Agricultural - permanent Agricultural - temporary Head office Their aggregate remuneration comprised: Wages and salaries Social security costs Pension costs 7. Investment revenues Interest on bank deposits 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 2010 $’000 2009 $’000 56,267 3,715 (1,588) 58,394 47,718 3,337 (9,765) 41,290 2010 Number 2009 Number 4,135 2,315 7 6,457 3,943 2,210 7 6,160 $’000 $’000 19,538 754 293 20,585 15,838 576 1,272 17,686 2010 $’000 257 1,637 1,894 2010 $’000 974 3,883 5,666 1 1,910 2009 $’000 430 397 827 2009 $’000 587 2,338 5,989 6 1,467 12,434 (4,720) 7,714 10,387 (3,559) 6,828 Amount included as additions to biological assets arose on borrowings applicable to the Indonesian operations and reflected a capitalisation rate of 39.7 per cent (2009: 30.4 per cent); there is no directly related tax relief. 92 9. Tax Current tax: UK corporation tax Foreign tax (includes prior years $nil (2009: $69,000)) Total current tax Deferred tax: Current year Total deferred tax Total tax 2010 $’000 1,042 12,817 13,859 1,615 1,615 2009 $’000 – 6,858 6,858 5,003 5,003 15,474 11,861 Taxation is provided at the rates prevailing for the relevant jurisdiction. For Indonesia, the current taxation provision is based on a tax rate of 25 per cent (2009: 28 per cent) and the deferred tax provision in 2010 and 2009 reflects the reduction in the corporate taxation rate from 30 per cent to 25 per cent, effective from 2010. For the United Kingdom, the taxation provision reflects a corporation tax rate of 28 per cent. 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 (2009: 28 per cent) Tax effect of the following items: Expenses not deductible in determining taxable profit Non taxable income Overseas tax rates below UK standard rate Overseas withholding taxes, net of relief Additional tax provisions 2010 $’000 50,447 2009 $’000 41,717 14,125 11,681 560 (123) (1,588) 1,855 645 142 (88) (672) 729 69 Tax expense at effective tax rate for the year 15,474 11,861 In addition to the amount charged to the income statement, the following amounts relating to tax have been recognised directly in other comprehensive income: Current tax: Relating to cash flow hedges Deferred tax: Relating to cash flow hedges On share based payment Total tax recognised directly in other comprehensive income 4,882 4,179 (206) – (206) (612) (743) (1,355) 4,676 2,824 93 Notes to the consolidated financial statements continued 10. Dividends Amounts recognised as distributions to equity holders: Preference dividends of 9p per share Ordinary dividends 2010 $’000 2,360 2,596 4,956 2009 $’000 2,219 1,746 3,965 An interim dividend of 21/2p per ordinary share in respect of the year ended 31 December 2010 was paid on 28 January 2011. In accordance with IAS10 “Events after the reporting period”, this dividend, amounting in aggregate to $1,323,550 has not been included in the 2010 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 2010 $’000 32,325 ‘000 33,343 66 33,409 2010 $’000 12,578 12,578 2009 $’000 27,119 ‘000 32,574 736 33,310 2009 $’000 12,578 12,578 The goodwill of $12,578,000 arose from the acquisition by the company in 2006 of a non-controlling 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 is reviewed for impairment as explained under “Goodwill” in “Accounting policies (group)”. The recoverable amount of the goodwill is based upon value in use of the oil palm business in Indonesia, which is regarded as the cash generating unit to which the goodwill relates. Value in use is assessed by revaluing the biological assets of the oil palm business on the basis of the principles applied in determining their fair value as detailed in note 13 but utilising a unit profit margin calculated by reference to a five year average of historic crude palm oil prices rather than the longer term average assumed in determining fair value. The directors consider this to be an appropriate method for determining value in use as it maintains consistency of methodology between estimations of value in use and the IAS 41 valuation. 94 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 Transfers to current receivables Net biological gain End of year Net biological gain comprises: Gain arising from movement in fair value attributable to physical changes Gain arising from movement in fair value attributable to price changes 2010 $’000 204,087 1,076 15,028 772 (227) (441) 1,588 221,883 2009 $’000 179,745 773 13,866 140 (202) – 9,765 204,087 1,588 – 1,588 9,765 – 9,765 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”), 17.5 per cent in the case of PT Sasana Yudha Bhakti (“SYB”) and 19 per cent in the case of all other group companies (2009: 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 $472 per tonne, net of Indonesian export duties, FOB Samarinda (2009: twenty year average of $446 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 $12,560,000 (2009: $11,260,000) if the crops projected for the purposes of the valuation had been reduced by 5 per cent; by $12,000,000 (2009: $10,660,000) if the discount rates assumed had been increased by 1 per cent and by $25,100,000 (2009: $22,490,000) 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 2010, the group had no outstanding forward sale contracts at fixed prices (2009: none). At 31 December 2010, the group had outstanding forward sales of 6,000 tonnes per month for the five month period to May 2011, on terms that the sales price of each delivery be determined immediately ahead of delivery by reference to prevailing open market prices (31 December 2009: 6,000 tonnes per month for the five month period to 31 May 2010). At the balance sheet date, biological assets of $215,700,000 (2009: $165,364,000) had been charged as security for bank loans (see note 22) but there were otherwise no restrictions on titles to the biological assets (2009: none). Expenditure approved by the directors for the development of immature areas in 2011 amounts to $33,000,000 (2009: $37,000,000). 95 Notes to the consolidated financial statements continued 14. Property, plant and equipment Buildings and structures Plant, Construction in progress Total Cost: At 1 January 2009 Reclassification as biological assets (see note 13) Additions Exchange differences Disposals Transfers (see note 13) At 31 December 2009 Reclassification as biological assets (see note 13) Additions Exchange differences Disposals Transfers (see note 13) At 31 December 2010 Accumulated depreciation: At 1 January 2009 Charge for year Exchange differences Eliminated on disposals At 31 December 2009 Charge for year Exchange differences Eliminated on disposals At 31 December 2010 Carrying amount: End of year Beginning of year equipment and vehicles $’000 32,304 – 2,587 57 – 2,462 37,410 – 2,075 (16) (237) 232 39,464 9,810 2,554 33 – 12,397 2,599 (10) (155) 14,831 $’000 35,293 (773) 3,482 – – 7,705 45,707 (1,076) 7,655 – – 1,532 53,818 1,804 1,058 – – 2,862 1,511 – – 4,373 $‘000 $‘000 7,086 – 7,621 – – (10,307) 4,400 – 9,546 – – (2,536) 74,683 (773) 13,690 57 – (140) 87,517 (1,076) 19,276 (16) (237) (772) 11,410 104,692 – – – – – – – – – 11,614 3,612 33 – 15,259 4,110 (10) (155) 19,204 49,445 42,845 24,633 25,013 11,410 4,400 85,488 72,258 The depreciation charge for the year includes $374,000 (2009: $465,000) 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 $nil (2009: $139,000). At the balance sheet date, the group had entered into contractual commitments for the acquisition of property, plant and equipment amounting to $1,367,000 (2009: $360,000). 96 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 2010 $‘000 15,027 3,505 18,532 910 345 1,255 2009 $‘000 13,723 1,304 15,027 635 275 910 17,277 14,117 14,117 13,088 The depreciation charge for the year includes $261,000 (2009: $85,000) which has been capitalised as part of the additions to biological assets. At 31 December 2010, land title certificates had been obtained in respect of areas covering 63,263 hectares (2009: 52,029 hectares). 16. Indonesian coal interests The balance of $18,864,000 (2009: $12,859,000) 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. 97 Notes to the consolidated financial statements continued 18. Inventories Agricultural produce Engineering and other operating inventory 19. Trade and other receivables Due from sale of goods Prepayments and advance payments Advance payment of taxation Deposits and other receivables 2010 $’000 6,231 7,775 2009 $’000 5,477 7,899 14,006 13,376 2010 $’000 5,064 5,216 12,695 5,687 28,662 2009 $’000 2,618 2,375 8,121 1,226 14,340 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 30) of 9 days (2009: 6 days). The directors consider that the carrying amount of trade and other receivables approximates their fair value. 20. Cash and cash equivalents Cash and cash equivalents comprise cash held by the group and short-term bank deposits with a maturity of one month or less. Cash balances amounting to $4.0 million (2009: nil) are subject to a charge in favour of the trustee for the 9.5 per cent guaranteed sterling notes 2015/17 issued by a subsidiary (see note 23), pending deployment as further loans to Indonesian plantation subsidiaries which were advanced on 25 January 2011. 21. Financial instruments Capital risk management The group manages as capital its debt, which includes the borrowings and redeemable preference shares of a subsidiary disclosed in notes 22 to 25, 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 31 to 34. 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 ranking 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 have a maturity profile which suits, the assets that such capital is financing. In so doing, the directors regard the company’s 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. 98 21. Financial instruments - continued 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 2011 is 50 per cent (2010: 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 non-controlling interests) Net debt to equity ratio Significant accounting policies 2010 $’000 132,056 (36,710) 95,346 2009 $’000 104,580 (22,050) 82,530 235,520 40.5% 194,668 42.4% 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 2010 comprised loans and receivables (including Indonesian coal interests) and cash and cash equivalents amounting to $66,293,000 (2009: $38,785,000). Non-derivative financial liabilities as at 31 December 2010 comprised liabilities at amortised cost amounting to $118,424,000 (2009: $106,714,000). Derivative financial instruments at 31 December 2010 comprised instruments in designated hedge accounting relationships at fair value amounting to a liability of $17,726,000 (2009: a liability of $13,609,000). 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 loans to the concession owning companies and the present stage of the operations. 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. 99 Notes to the consolidated financial statements continued 21. Financial instruments - continued 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”) (2009: 2.75 per cent). In addition, the interest rate formula includes an allowance for the bankers’ cost of funds. Interest is payable on drawings under an Indonesian Rupiah term loan facility at 3.5 per cent (2009: nil) above the Jakarta Inter Bank Offer Rate. 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 2010 (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 $162,000 (2009: pre-tax profit (and equity) increase of $118,000). The group regards the US dollar as the functional currency of most of its operations and has, until recently, sought to ensure that, as respects that proportion of its investment in the operations that is met by borrowings, it has no material currency exposure against the US dollar. Accordingly, where borrowings were incurred in a currency other than the US dollar, the group endeavoured to cover the resultant currency exposure by way of a debt swap or other appropriate currency hedge. The receipt by a subsidiary of the company during 2010 of an Indonesian tax assessment seeking to disallow for tax purposes losses on currency hedges has called into question this policy but the directors hope that the assessment will be reversed on appeal and that the policy can be retained. Pending outcome of the appeal, the group has not hedged its Indonesian rupiah borrowings. 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 up to the aggregate amount drawn in that currency under local bank facilities 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 $157,000 on the net sterling denominated non-derivative monetary items (excluding the sterling notes which are hedged) (2009: gain of $180,000). 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 $373,000 on the net Indonesian rupiah denominated, non- derivative monetary items (2009: gain of $188,000). 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 2010, 68 per cent of bank deposits were held with banks with a Moody’s prime rating of P1, 24 per cent with a bank with a Moody’s prime rating of P3 and the 100 21. Financial instruments - continued 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 2010 and 31 December 2009 equal the amounts reported under the corresponding balance sheet headings. Liquidity risk Ultimate responsibility for liquidity risk management rests with the board of directors of the company, which has established an appropriate framework for the management of the group’s short, medium and long-term funding and liquidity requirements. Within this framework, the board continuously monitors forecast and actual cash flows and endeavours to maintain adequate liquidity in the form of cash reserves and borrowing facilities while matching the maturity profiles of financial assets and liabilities. Undrawn facilities available to the group at balance sheet date are disclosed in note 22. The board reviews the cash forecasting models for the operation of the plantations and compares these with the forecast outflows for debt obligations and projected capital expenditure programmes for the plantations, applying sensitivities to take into account perceived major uncertainties. In their review, the directors place the greatest emphasis on the cash flow of the first two years. Non-derivative financial instruments The following tables detail the contractual maturity of the group’s non-derivative financial liabilities. The tables have been drawn up based on the undiscounted amounts of the group’s financial liabilities based on the earliest dates on which the group can be required to discharge those liabilities. The table includes liabilities for both principal and interest. 2010 Bank loans US dollar notes Sterling notes KCC preference shares (see note 25) Trade and other payables, and customer deposits 2009 Bank loans US dollar notes Sterling notes Trade and other payables, and customer deposits Obligations under finance leases Weighted average interest rate % 8.6 8.6 10.4 Under 1 year $’000 9,106 3,375 5,481 – 7,115 Between 1 and 2 years $’000 3,708 18,375 5,467 – – Over 2 years $’000 12,773 33,375 79,659 1,500 – Total $’000 25,587 55,125 90,607 1,500 7,115 25,077 27,550 127,307 179,934 6.5 8.0 10.4 10.0 2,126 2,250 5,663 7,964 68 2,610 2,250 5,647 – – 7,125 34,500 87,915 – – 11,861 39,000 99,225 7,964 68 18,071 10,507 129,540 158,118 At 31 December 2010, the group’s non-derivative financial assets (other than receivables) comprised cash and deposits of $36,710,000 (2009: $22,050,000) carrying a weighted average interest rate of 0.9 per cent (2009: 1.9 per cent) all having a maturity of under one year, and Indonesian coal interests of $18,864,000 (2009: $12,859,000) details of which are given in note 16. 101 Notes to the consolidated financial statements continued 21. Financial instruments - continued 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 26. The cash flows are settled gross and, therefore, the table takes no account of sterling receipts under the CCIRS. At 31 December 2010 At 31 December 2009 Fair value of financial instruments Under 1 year $’000 7,177 7,197 Between 1 and 2 years $’000 7,296 Over 2 years Total $’000 90,133 $’000 104,606 7,178 97,429 111,804 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 and the preference shares issued by a subsidiary that are classified as levels 2 and 3 respectively. No reclassifications between levels in the fair value hierarchy were made during 2010 (2009: none). Cash and deposits + Bank debt - within one year + Bank debt - after more than one year + Finance leases o Preference shares issued by a subsidiary 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 2010 Book value $’000 36,710 (7,850) (12,625) – (1,500) (43,269) (55,244) (11,568) (95,346) (6,158) 2010 Fair value $’000 36,710 (7,850) (12,625) – (1,500) (42,750) (60,827) (11,568) (100,410) (6,158) 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) (101,504) (106,568) (88,484) (85,908) The fair values of cash and deposits and bank debt 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 dates. The fair value of the preference shares issued by a subsidiary has been estimated by the directors on the basis of their assessment of the probability of the shares becoming redeemable on 31 December 2014 in accordance with their terms and of the redemption value then applicable discounted for the period from the balance sheet date to 31 December 2014. 102 21. Financial instruments - continued 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 2010 at fair value resulted in a loss of $17,726,000 (2009: loss of $13,609,000) 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 $2,173,000 (2009: $2,847,000). 22. Bank loans Bank loans The bank loans are repayable as follows: On demand or within one year Between one and two years After two years Amount due for settlement within 12 months (shown under current liabilities) Amount due for settlement after 12 months 2010 $‘000 20,475 7,850 2,700 9,925 2009 $‘000 10,219 1,500 2,100 6,619 20,475 10,219 7,850 12,625 20,475 1,500 8,719 10,219 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 2010 was 7.3 per cent (2009: 5.5 per cent). Bank loans of $13,469,000 (2009: $10,219,000) are secured on substantially the whole of the assets and undertaking of PT REA Kaltim Plantations (“REA Kaltim”), having an aggregate book value of $282 million (2009: $277 million), and are the subject of an unsecured guarantee by the company. Bank loans of $6,006,000 (2009: nil) are secured on the land, plantations, property, plant and equipment owned by PT Sasana Yudha Bhakti (“SYB”), having an aggregate book value of $70 million (2009: nil), 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 $2 million (2009: $4.75 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. Details of the restructuring of the security for the sterling notes are set out in note (i) to the company’s individual financial statements. 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. 103 Notes to the consolidated financial statements continued 24. US dollar notes The US dollar notes comprise US$45 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. Pursuant to a placing agreement dated 28 January 2010 under which the company placed $15 million nominal of US dollar notes and the company’s subsidiary, KCC Resources Limited, issued to placees 150,000 redeemable participating preference shares in the capital of KCC (“KCC preference shares”), the company granted to each placee a non-assignable option, exercisable on the occurrence of any one of certain events and on a basis relating to the number of KCC preference shares retained by the placee at the date of such occurrence, to require the company to purchase or procure the purchase of the US dollar notes acquired by the placee in the placing at a price equal to the aggregate of the nominal value of such notes and any interest accrued thereon up to the date of completion of the purchase. Such events include the disposal of a significant part of the group’s coal business or a person or group of persons acting in concert obtaining the right to exercise more than 50 per cent of the votes that may generally be cast at a general meeting of the company. 25. Preference shares issued by a subsidiary On 11 February 2010 150,000 redeemable participating preference shares of $10 each were issued by KCC Resources Limited (“KCC preference shares”), a subsidiary undertaking of the company, fully paid, by way of a placing at par. The KCC preference shares provide a limited participation in the coal interests of the company such that if those interests achieve an average annual level of earnings before interest, tax, depreciation and amortisation of $8 million over the four and a half year period from 1 January 2010 to 30 June 2014 (equivalent to $36 million for the full period), those persons who subscribed 7.5 per cent dollar notes 2012/14 of the company and KCC preference shares in a combined issue of those securities in February 2010, and who retain their notes and shares until redeemed, will receive an overall compound return of 15 per cent per annum on their total investment. 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 coal interests or a change in control of the company), no dividends or other distributions will be paid or made on the KCC preference shares and after 31 December 2014 such shares will be converted into valueless deferred shares. 26. Hedging instruments At both 31 December 2010 and 31 December 2009, 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. 104 27. 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 2009 (Charge) / credit to income for the year Credit to equity for the year Exchange differences At 31 December 2009 (Charge) / credit to income for the year Credit / (charge) to equity for the year Exchange differences Unutilised loss on exercise Property, plant and equipment $’000 (14,921) (3,052) – (2,407) (20,380) (2,733) – 443 – Biological assets $’000 (13,658) (2,979) – – (16,637) (894) – 253 – At 31 December 2010 (22,670) (17,278) Deferred tax assets Deferred tax liabilities At 31 December 2010 Deferred tax assets Deferred tax liabilities 287 (22,957) (22,670) – (17,278) (17,278) 318 (20,698) – (16,637) 2,615 (2,143) At 31 December 2009 * includes income, gains or expenses recognised for reporting purposes, but not yet charged to or allowed for tax. (16,637) (20,380) 472 Income/ Share based payments expenses* $’000 $’000 538 (1,988) – 1,614 743 – 92 846 472 1,982 394 935 – 3,783 4,558 (775) 3,783 1,373 175 (1,021) (239) (288) – – – – 1,373 – 1,373 Tax losses $’000 995 (586) – 322 731 (145) – 24 288 898 898 – 898 731 – 731 Total $’000 (29,034) (5,003) 743 (1,147) (34,441) (1,615) (627) 1,416 – (35,267) 5,743 (41,010) (35,267) 5,037 (39,478) (34,441) At the balance sheet date, the group had unused tax losses of $3.5 million (2009: $7.8 million) available to be applied against future profits. A deferred tax asset of $898,000 (2009: $2,104,000) has been recognised in respect of these losses made up of $nil in respect of the share based payment provision (2009: $1,373,000) and $898,000 in respect of other tax losses (2009: $731,000). 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 $9,600,000 (2009: $6,150,000). 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 Indonesian tax losses assumes that losses for tax purposes incurred by the operating companies in Indonesia may be carried forward for five years. 105 Notes to the consolidated financial statements continued 28. 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 2010 $’000 2009 $’000 – – – – – – – – – – – 68 – 68 4 64 64 – 64 64 – 64 All the group leases of certain items of plant and equipment under finance leases were terminated during the year. The former leases were at fixed interest rates and the average borrowing rate for the year was 10.0 per cent (2009: 10.0 per cent). 29. Other loans and payables Retirement benefit obligations (see note 38) 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 106 2010 $’000 5,272 806 6,078 2009 $’000 4,573 540 5,113 604 412 663 1,773 3,038 5,474 394 1,308 2,999 4,701 6,078 5,113 2,932 367 2,779 6,078 2,909 436 1,768 5,113 29. Other loans and payables - continued Further details of the retirement benefit obligations are set out in note 38. The directors estimate that the fair value of retirement benefit obligations and of other loans and payables approximates their carrying value. 30. 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 26 days (2009: 37 days). The directors estimate that the fair value of trade payables approximates their carrying value. 31. Share capital Authorised (in pounds sterling): 27,500,000 - 9 per cent cumulative preference shares of £1 each (2009: 17,500,000) 41,000,000 - ordinary shares of 25p each (2009: 41,000,000) Issued and fully paid (in US dollars): 27,063,681 - 9 per cent cumulative preference shares of £1 each (2009: 16,392,954) 33,414,545 - ordinary shares of 25p each (2009: 32,573,856) 2010 $’000 3,900 2,096 3,046 3,021 770 2009 $’000 5,517 1,288 2,098 3,107 1,159 12,833 13,169 2010 £’000 27,500 10,250 37,750 $’000 45,990 14,558 60,548 2009 £’000 17,500 10,250 27,750 $’000 28,958 14,230 43,188 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 1 February 2010, 840,689 ordinary shares were issued fully paid on exercise of a director’s option at 43.753p per ordinary share. on 8 June 2010, the authorised share capital of the company was increased from £27,750,000 to £37,750,000 by the creation of 10,000,000 new 9 per cent cumulative preference shares. on 24 September 2010, 1,670,727 9 per cent cumulative preference shares were issued, credited as fully paid, to ordinary shareholders by way of capitalisation of share premium account. on 29 October 2010, 9,000,000 9 per cent cumulative preference shares were issued, fully paid, by way of a placing at par. 107 Notes to the consolidated financial statements continued $’000 27,322 (25) 27,297 246 (2,642) 24,901 Total $’000 (16,388) – (6,739) 9,497 (13,630) 4,009 (8,576) Hedging reserve $’000 (406) (7,669) (4,653) 9,497 (3,231) 1,356 (8,576) Other reserve $’000 (15,982) 7,669 (2,086) – (10,399) 2,653 – (10,451) (7,746) (18,197) 2010 $’000 136,499 32,325 (2,596) – 2009 $’000 110,383 27,119 (1,746) 743 166,228 136,499 2010 $’000 1,314 288 (28) 71 395 2,040 2009 $’000 580 518 84 (43) 175 1,314 32. Share premium account At 1 January 2009 Expenses of issue of new preference shares At 31 December 2009 Issue of new ordinary shares Capitalisation issue of new preference shares At 31 December 2010 33. Translation reserve At 1 January 2009 Reclassification of balances brought forward Exchange translation differences arising during the year Fair value profit on cash flow hedge At 31 December 2009 Exchange translation differences arising during the year Fair value loss on cash flow hedge At 31 December 2010 34. Retained earnings Beginning of year Profit for the year Ordinary dividend paid Share based payment - deferred tax credit End of year 35. Non-controlling interests Beginning of year Share of profit after taxation Share of items taken directly to equity Exchange translation differences Subscription to share capital of new subsidiary End of year 108 36. Reconciliation of operating profit to operating cash flows Operating profit Depreciation of property, plant and equipment Increase in fair value of agricultural produce inventory Amortisation of prepaid operating lease rentals Amortisation of sterling and US dollar note issue expenses Biological gain Gain on disposal of property, plant and equipment Operating cash flows before movements in working capital Decrease in inventories (excluding fair value movements) Increase in receivables Increase / (decrease) in payables Exchange translation differences Cash generated by operations Taxes paid Interest paid Net cash from operating activities 2010 $’000 56,267 4,110 (455) 345 793 (1,588) (52) 59,420 180 (10,278) 486 402 50,210 (21,134) (7,784) 21,292 No additions to property, plant and equipment during the year were financed by new finance leases (2009: $nil). 37. Movement in net borrowings Change in net borrowings resulting from cash flows: Increase / (decrease) in cash and cash equivalents Net (increase) / decrease in borrowings Issue of US dollar notes less amortised expenses Sterling note reconstruction expenses less amortisation Proceeds of issue of preference shares by a subsidiary Lease repayments Currency translation differences Net borrowings at beginning of year Net borrowings at end of year 38. Retirement benefit obligations United Kingdom 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 2009 $’000 (9,406) 2,698 (6,708) (88) (256) – 54 (6,998) (5,296) (62,581) 2010 $’000 14,478 (10,243) 4,235 (13,579) (104) (1,500) 64 (10,884) 1,981 (74,875) (83,778) (74,875) 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. 109 Notes to the consolidated financial statements continued 38. Retirement benefit obligations - continued 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 £3,850,000. 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 per cent 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. The normal contributions paid by the group in 2010 were £15,000 - $24,000 (2009: £47,000 - $72,000) and represented 23.4 per cent (2009: 24.9 per cent) of pensionable salaries. The additional contribution applicable to the group for 2010 was £219,000 - $339,000 (2009: £218,000 - $333,000). Under the valuation as at 31 December 2008 the normal contributions will continue at the rate of 23.4 per cent of pensionable salaries and the additional contribution will rise to £225,000 - $353,000 for 2011 and thereafter by 2.7 per cent per annum. A liability of £1,592,000 $2,500,000 (2009:£1,737,000 - $2,805,000) for these additional contributions adjusted for the time value of money has been recognised under retirement benefit obligations (see note 29) with an equal charge to income. An annual funding review of the Scheme as a 31 December 2010 based on the 31 December 2008 valuation with revised assumptions reflecting changing market conditions, the rolling forward of liabilities and the valuation of the Scheme assets as at 31 December 2010, indicated a reduction in the Scheme deficit to £892,000 (2009: £2,963,000). 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. Indonesia In accordance with Indonesian labour laws, group employees in Indonesia are entitled to lump sum payments on retirement at the age of 55 years. The group makes a provision for such payments in its financial statements but does not fund these with any third party or set aside assets to meet the entitlements. The provision was assessed at each balance sheet date by an independent actuary using the projected unit method. The principal assumptions used were as follows: 110 38. Retirement benefit obligations - continued Discount rate Salary increases per annum Mortality table (Indonesia) Retirement age (years) Disability rate (% of the mortality table) The movement in the provision for employee service entitlements was as follows: Balance at 1 January Current service cost Interest expense Actuarial loss Exchange Paid during the year Balance at 31 December The amounts recognised in adminstrative expenses in the consolidated income statement were as follows: Current service cost Interest expense Actuarial loss Amount included as additions to biological assets 2010 9% 7% TM 1-11 55 10 2009 10.5% 7% TM 1-11 55 10 2010 $’000 1,781 594 216 380 90 (282) 2,779 2010 $’000 594 216 380 1,190 (425) 765 2009 $’000 1,137 381 147 65 229 (178) 1,781 2009 $’000 381 147 65 593 (256) 337 Unrecognised actuarial losses at 31 December 2010 amounted to $317,000 (2009: $206,000). The movement in the present value of the employee service entitlements (including such unrecognised actuarial losses) were as follows: Balance at 1 January Current service cost Interest expense Actuarial loss Exchange Paid during the year Balance at 31 December Estimated benefit payments in 2011 are $206,000. 2010 $’000 1,987 594 216 481 100 (282) 3,096 2009 $’000 1,263 382 147 117 256 (178) 1,987 111 Notes to the consolidated financial statements continued 39. 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”. Short term benefits Post employment benefits Other long term benefits Termination benefits Share based payments 40. Rates of exchange Indonesia rupiah to US dollar US dollar to pound sterling 41. Events after the reporting period Dividends 2010 $’000 1,128 – – – – 1,128 2009 $’000 877 48 – – – 925 2010 Closing 2010 Average 2009 Closing 2009 Average 8,991 1.566 9,078 1.55 9,400 1.615 10,356 1.56 A second interim dividend of 21/2p per ordinary share in respect of the year ended 31 December 2010 was paid on 28 January 2011. In accordance with IAS10 “Events after the reporting period” this dividend, amounting in aggregate to $1,323,550, has not been reflected in these financial statements. 42. 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 Koperasi 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 ($9.6 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. 112 42. 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 2010 the outstanding balance owing by the cooperative to Bank BPD amounted to Indonesian rupiah 43 billion ($4,759,000) (2009: Indonesian rupiah 29 billion - $3,085,000) and the outstanding balance owing by REA Kaltim to the cooperative amounted to Indonesian rupiah 3 billion ($314,000) (2009: Indonesian rupiah 7.8 billion - $829,000). The latter represented the unexpended balance of drawings to date under the facility to be applied for the purposes of the development. 43. Operating lease commitments The group leases office premises under operating leases in London, Jakarta and Samarinda. These leases, which are renewable, run for periods of between 1 month and 24 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 2010 $’000 304 23 – 327 2009 $’000 72 189 – 261 113 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 2010 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 2010; 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 Ethical Standards for Auditors. financial year for which the financial statements are prepared is consistent with the parent company financial statements. 114 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 2010. Mark McIlquham ACA (Senior Statutory Auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditors London, England 20 April 2011 115 Company balance sheet as at 31 December 2010 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 Note (i) (ii) (vi) (iii) (iv) 2010 £’000 121,591 – – 121,591 3,196 12,417 15,613 (18,534) (2,921) 2009 £’000 62,165 84 989 63,238 437 2,486 2,923 (4,737) (1,814) Total assets less current liabilities 118,670 61,424 Creditors: amounts falling due after more than one year Borrowings Provision for liabilities and charges Net assets (v) (vi) (65,389) – (18,375) (77) 53,281 42,972 Capital and reserves Share capital Share premium account Exchange reserve Profit and loss account Total shareholders’ funds (vii) (viii) (viii) (viii) 35,417 13,146 – 4,718 53,281 24,536 14,659 181 3,596 42,972 Approved by the board on 20 April 2011 and signed on behalf of the board. RICHARD M ROBINOW Chairman 116 Movement in total shareholders’ funds for the year ended 31 December 2010 Total recognised gains / (losses) for the year Dividends to preference shareholders Dividends to ordinary shareholders Issue of new preference shares by way of placing Issue of new ordinary shares by way of exercise of options Issue costs of ordinary shares, preference shares and debt securities Movement on exchange reserves Shareholders' funds at beginning of year Shareholders' funds at end of year 2010 £’000 2009 £’000 4,297 (1,689) (1,486) 9,000 368 – (181) 10,309 42,972 53,281 (290) (1,361) (1,140) 1,490 – (16) – (1,317) 44,289 42,972 Statement of total recognised gains and losses for the year ended 31 December 2010 Profit / (loss) for the year Share based payment - deferred tax (charge) / credit 2010 £’000 5,148 (851) 4,297 2009 £’000 (767) 477 (290) 117 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 paid 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. 118 Notes to the company financial statements (i) Investments Shares in subsidiaries Loans to subsidiaries The movement was as follows: Beginning of year Additions to shares in and loans to subsidiaries Exchange translation difference arising on foreign currency hedge End of year 2010 £’000 57,374 64,217 121,591 2009 £’000 26,446 35,719 62,165 £’000 62,165 59,056 370 121,591 The security for £37,000,000 nominal of 9.5 per cent guaranteed sterling notes 2015/17 issued by REA Finance B.V. (“REAF”), a wholly owned subsidiary of the company, was restructured on 29 November 2010. Pursuant to the restructuring, loans made by REAF to Indonesian subsidiaries of the company were assigned by REAF to another wholly owned subsidiary of the company, R.E.A. Services Limited (“REAS”). As consideration for this assignment, the company acknowledged indebtedness to REAF in amounts equal to the principal amounts of indebtedness assigned (being £37,475,000 and $46,500,000) and, in consideration of the company so acknowledging, REAS issued additional shares to and acknowledged indebtedness to the company to an equivalent aggregate value. The resulting indebtedness owed by the company to REAF was reduced by set off against the balance of $46,500,000 then owed by REAF to the company. The consequent elimination of balances due to the company from REAF and increase in balances due to the company from REAS of £37,475,000 are reflected in loans to subsidiaries at 31 December 2010 while the resultant additional investment of $46,500,000 by the company in REAS is reflected in shares in subsidiaries at that date. The balance of net indebtedness owed by the company to REAF of £37,475,000 is reflected in the amount owing to group undertaking under “creditors: amounts falling due after more than one year” at 31 December 2010 (see note (v)). The principal subsidiaries at the year end, together with their countries of incorporation, are listed below. Details of UK 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 operations 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. 119 Notes to the company financial statements continued (ii) Tangible fixed assets Cost: Beginning of year Disposals End of year Accumulated depreciation: Beginning of year Charge for year Disposals End of year Carrying amount: End of year Beginning of year (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 Amount owing to group undertaking Amounts due between two and five years Amounts due after five years 120 Land and buildings Fixtures and fittings £‘000 (short leasehold) £’000 92 (92) – 26 9 (35) – – 66 45 (45) – 27 9 (36) – – 18 2010 £’000 – 3,180 9 7 3,196 2010 £’000 18,272 73 189 18,534 2010 £’000 27,914 37,475 65,389 40,247 25,142 65,389 Total £‘000 137 (137) – 53 18 (71) – – 84 2009 £’000 1 398 31 7 437 2009 £’000 4,199 49 489 4,737 2009 £’000 18,375 – 18,375 18,375 – 18,375 (v) Creditors: amounts falling due after more than one year - continued The US dollar notes comprise US$45 million (2009: 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 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. Pursuant to a placing agreement dated 28 January 2010 under which the company placed $15 million nominal of US dollar notes and the company’s subsidiary, KCC Resources Limited, issued to placees 150,000 redeemable participating preference shares in the capital of KCC (“KCC preference shares”), the company granted to each placee a non-assignable option, exercisable on the occurrence of any one of certain events and on a basis relating to the number of KCC preference shares retained by the placee at the date of such occurrence, to require the company to purchase or procure the purchase of the US dollar notes acquired by the placee in the placing at a price equal to the aggregate of the nominal value of such notes and any interest accrued thereon up to the date of completion of the purchase. Such events include the disposal of a significant part of the group’s coal business or a person or group of persons acting in concert obtaining the right to exercise more than 50 per cent of the votes that may generally be cast at a general meeting of the company. (vi) Deferred tax asset and provision for liabilities and charges Deferred tax: Beginning of year Net amount debited / (credited) to profit and loss account Net amount debited / (credited) 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 2010 £’000 (912) 131 781 – – – – – – – 2009 £’000 (296) (139) (477) (912) 77 (989) (912) 77 (989) (912) At the balance sheet date, the company had unused tax losses available to be applied against future profits amounting to £nil (2009: £3.5 million). A deferred tax asset of £nil (2009: £989,000) has been recognised in respect of these losses. 121 Notes to the company financial statements continued (vii) Share capital Authorised: 27,500,000 - 9 per cent cumulative preference shares of £1 each (2009: 17,500,000) 41,000,000 - ordinary shares of 25p each (2009: 41,000,000) Called-up and fully paid: 27,063,681 - 9 per cent cumulative preference shares of £1 each (2009: 16,392,954) 33,414,545 - ordinary shares of 25p each (2009: 32,573,856) 2010 £’000 27,500 10,250 37,750 27,064 8,353 35,417 2009 £’000 17,500 10,250 27,750 16,393 8,143 24,536 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 1 February 2010, 840,689 ordinary shares were issued fully paid on exercise of a director’s option at 43.753p per ordinary share. on 8 June 2010, the authorised share capital of the company was increased from £27,750,000 to £37,750,000 by the creation of 10,000,000 new 9 per cent cumulative preference shares. on 24 September 2010, 1,670,727 9 per cent cumulative preference shares were issued, credited as fully paid, to ordinary shareholders by way of capitalisation of share premium account. on 29 October 2010, 9,000,000 9 per cent cumulative preference shares were issued, fully paid, by way of a placing at par. (viii) Movement in reserves Beginning of year Recognised gains / (losses) for the year Dividends to preference shareholders Dividends to ordinary shareholders Capitalisation of preference shares Issue of ordinary shares End of year Share premium account £’000 14,659 – – – (1,671) 158 13,146 Exchange reserve £’000 181 (181) – – – – Profit and loss account £’000 3,596 4,297 (1,689) (1,486) – – – 4,718 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 profit before dividends recognised in the company's profit and loss account for the year is £5,148,000 (2009: loss £767,000) - see statement of total recognised gains and losses. 122 (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 2010 Book value £’000 12,417 (27,914) 2010 Fair value £’000 12,417 (27,304) 2009 Book value £’000 2,486 (18,375) 2009 Fair value £’000 2,486 (16,718) (15,497) (14,887) (15,889) (14,232) The fair value of the US dollar notes reflects the mid market price at the reporting date (2009: the last price at which transactions in those notes were effected prior to 31 December 2009). 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 2010, the company had outstanding US$45 million (2009: $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 shareholders’ funds. A limited degree of interest rate risk is accepted. A substantial proportion of the company’s financial instruments at 31 December 2010 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 £124,000 (2009: £25,000) 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. 123 Notes to the company financial statements continued (x) Pensions - continued 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 per cent 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 £3,850,000. 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. 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 the deficit shown by the 31 December 2008 valuation. The company made no payments to the Scheme in 2010 (2009: £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. (xi) Related party transactions Aggregate directors’ remuneration: Salaries and fees Benefits Annual bonus 2010 £’000 2009 £’000 584 77 65 726 562 30 – 592 During 2010 and 2009, there were service arrangements with companies connected with certain directors as detailed under “Directors’ remuneration” in the “Directors’ remuneration report”, the costs of which are included in the table above. (xii) Rates of exchange See note 40 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 (2009: £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. 124 (xiii) Contingent liabilities and commitments - continued 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 £61 million (2009: £49 million). The directors consider 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 an annual commitment under a non-cancellable operating lease which can be terminated during 2012 of £102,000 (2009 £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 event A second interim dividend of 21/2p per ordinary share in respect of the year ended 31 December 2010 was paid on 28 January 2011. In accordance with IAS10 “Events after the reporting period” this dividend, amounting in aggregate to £835,000, has not been reflected in these financial statements. 125 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 your stockbroker, solicitor, accountant or other appropriate 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 fifty-first annual general meeting of R.E.A. Holdings plc will be held at the London office of Ashurst LLP at Broadwalk House, 5 Appold Street, London EC2A 2HA on 14 June 2011 at 10.00 am to consider and, if thought fit, to pass the following resolutions. Resolutions 13 and 15 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 2010, 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 2010. 3 To declare a final dividend in respect of the year ended 31 December 2010 of 3p per ordinary share to be paid on 30 September 2011 to ordinary shareholders on the register of members on the close of business on 2 September 2011. 4 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 UK Corporate Governance Code and submits himself for re-election. 5 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 UK Corporate Governance Code and submits himself for re-election. 6 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 UK Corporate Governance Code and submits himself for re-election. 126 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 UK Corporate Governance Code 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 £37,750,000 17,500,000 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 £55,250,000 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 (within the meaning of sub-sections (3) and (6) of section 551 of the Act) of £1,896,363.75; such authorisation to expire at the conclusion of the next annual general meeting of the company (or, if earlier, on 30 June 2012), 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. 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 (within the meaning of sub-sections (3) and (6) of section 551 of the Act) of: (a) £436,319; or (b) subject to the passing of resolution 10 set out in the notice of the 2011 annual general meeting of the company (the “2011 Notice”) £17,936,319, such authorisation to expire at the conclusion of the next annual general meeting of the company (or, if earlier, on 30 June 2012), 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 2011 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 2011 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 (and holders of any other class of equity securities entitled to participate therein or, if the directors consider it necessary, as permitted by the rights of those securities) but subject in each case to such exclusions or other arrangements as 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 whatsoever; and (ii) otherwise than as specified at paragraph (i) of this resolution, 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 2012), 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 To authorise the directors to increase the fees for services of each director from £20,000 per annum as currently provided in the company’s articles of association up to an amount not exceeding £25,000 per annum, such fees being exclusive of any amounts payable under other provisions of the articles of association of the company. 15 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 20 April 2011 Registered office: First Floor 32 – 36 Great Portland Street London W1W 8QX Registered in England and Wales no: 00671099 127 Notice of annual general meeting continued Notes The sections of the accompanying Directors' report entitled “Results and dividends”, “Increase in share capital”, “Authorities to issue share capital”, “Powers to issue share capital and sell treasury shares”, “Increase of directors’ fees”, “General meeting notice period” and “Recommendation” contain information regarding, and recommendations by the board of the company as to voting on, resolutions 3 and 10 to 15 set out in the above notice. 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) subject to the company’s articles of association. CREST personal members or other CREST sponsored members, and those CREST members who have Pursuant to regulation 41 of the Uncertificated Securities appointed (a) voting service provider(s), should refer to their Regulations 2001 and section 360B of the Companies Act 2006, CREST sponsor or voting service provider(s), who will be able to the company specifies that in order to have the right to attend and take the appropriate action on their behalf. vote at the annual general meeting (and also for the purpose of determining how many votes a person entitled to attend and vote In order for a proxy appointment or instruction regarding a proxy may cast), a person must be entered on the register of members of appointment made or given using the CREST service to be valid, the company at 6.00 pm on 12 June 2011 or, in the event of any the appropriate CREST message (a “CREST proxy instruction”) adjournment, at 6.00 pm on the date which is two days before the must be properly authenticated in accordance with the day of the adjourned meeting. Changes to entries on the register specifications of Euroclear UK and Ireland Limited (“Euroclear”) of members after this time shall be disregarded in determining the and must contain the required information as described in the rights of any person to attend or vote at the meeting. CREST Manual (available via www.euroclear.com/CREST). The CREST proxy instruction, regardless of whether it constitutes a Only holders of ordinary shares are entitled to attend and vote at proxy appointment or an instruction to amend a previous proxy the annual general meeting. A holder of ordinary shares may appointment, must, in order to be valid be transmitted so as to be appoint another person as that holder’s proxy to exercise all or any received by the company’s registrars (ID: RA10) by 10.00 am on 12 of the holder’s rights to attend, speak and vote at the annual June 2011. For this purpose, the time of receipt will be taken to be general meeting. A holder of ordinary shares may appoint more the time (as determined by the time stamp applied to the message than one proxy in relation to the meeting provided that each proxy by the CREST applications host) from which the company’s is appointed to exercise the rights attached to (a) different share(s) registrars are able to retrieve the message by enquiry to CREST in held by the holder. A proxy need not be a member of the company. the manner prescribed by CREST. The company may treat as A form of proxy for the meeting is enclosed. To be valid, forms of invalid a CREST proxy instruction in the circumstances set out in proxy and other written instruments appointing a proxy must be Regulation 35(5)(a) of the Uncertificated Securities Regulations received by post or by hand (during normal business hours only) by 2001. the company’s registrars, Capita Registrars, at PXS, 34 Beckenham Road, Beckenham BR3 4TU by no later than 10.00 CREST members and, where applicable, their CREST sponsors or am on 12 June 2011. voting service provider(s) should note that Euroclear does not make available special procedures in CREST for particular messages. Alternatively, appointment of a proxy may be submitted Normal system timings and limitations will therefore apply in electronically by using either Capita Registrars' share portal service relation to the input of CREST proxy instructions. It is the at www.capitashareportal.com (and so that the appointment is responsibility of the CREST member concerned to take (or, if the received by the service by no later than 10.00 am on 12 June CREST member is a CREST personal member or sponsored 2011) or the CREST electronic proxy appointment service as member or has appointed (a) voting service provider(s), to procure described below. Shareholders who have not already registered for that such member’s CREST sponsor or voting service provider(s) Capita Registrars' share portal service may do so by registering as take(s)) such action as shall be necessary to ensure that a a new user at www.capitashareportal.com and giving the investor message is transmitted by means of the CREST system by any code shown on the enclosed proxy form (as also shown on their particular time. In this connection, CREST members and, where share certificate). Completion of a form of proxy, or other written applicable, their CREST sponsors or voting service provider(s) are 128 referred, in particular, to those sections of the CREST Manual audit); or (ii) any circumstance connected with an auditor of the concerning practical limitations of the CREST system and timings. company having ceased to hold office since the last annual general meeting of the company. The company may not require the The rights of members in relation to the appointment of proxies members requesting any such website publication to pay its described above do not apply to persons nominated under section expenses in complying with section 527 or section 528 of the 146 of the Companies Act 2006 to enjoy information rights Companies Act 2006. Where the company is required to place a (“nominated persons”) but a nominated person may have a right, statement on a website under section 527 of the Companies Act under an agreement with the member by whom such person was 2006, it must forward the statement to the company's auditors by nominated, to be appointed (or to have someone else appointed) as not later than the time when it makes the statement available on a proxy for the annual general meeting. If a nominated person has the website. The business which may be dealt with at the annual no such right or does not wish to exercise it, such person may have general meeting includes any statement that the company has a right, under such an agreement, to give instructions to the been required under section 527 of the Companies Act 2006 to member as to the exercise of voting rights. publish on a website. Any corporation which is a member can appoint one or more As at the date of this notice, the issued share capital of the corporate representatives who may exercise on its behalf all of its company comprises 33,414,545 ordinary shares and 27,063,681 powers as a member provided that they do not do so in relation to 9 per cent cumulative preference shares. Only holders of ordinary the same shares. shares (and their proxies) are entitled to attend and vote at the annual general meeting. Accordingly, the voting rights attaching to Any member attending the annual general meeting has the right to shares of the company exercisable in respect of each of the ask questions. The company must cause to be answered any such resolutions to be proposed at the annual general meeting total question relating to the business being dealt with at the meeting 33,414,545 as at the date of this notice. but no such answer need be given if (a) to do so would interfere unduly with the preparation for the meeting or involve the Shareholders may not use any electronic address (within the disclosure of confidential information, (b) the answer has already meaning of sub-section 4 of section 333 of the Companies Act been given on a website in the form of an answer to a question, or 2006) provided in this notice (or any other related document (c) it is undesirable in the interests of the company or the good including the form of proxy) to communicate with the company for order of the meeting that the question be answered. any purposes other than those expressly stated. Copies of the executive director’s service agreement and letters Under section 338 and section 338A of the Companies Act 2006, setting out the terms and conditions of appointment of non- members meeting the threshold requirements in those sections executive directors are available for inspection at the company's have the right to require the company (i) to give, to members of the registered office during normal business hours from the date of this company entitled to receive notice of the annual general meeting, notice until the close of the annual general meeting (Saturdays, notice of a resolution which may properly be moved and is intended Sundays and public holidays excepted) and will be available for to be moved at the meeting and/or (ii) to include in the business to inspection at the place of the annual general meeting for at least be dealt with at the meeting any matter (other than a proposed 15 minutes prior to and during the meeting. resolution) which may be properly included in the business. A A copy of this notice, and other information required by section included in the business unless (a) (in the case of a resolution only) 311A of the Companies Act 2006, may be found on the company's it would, if passed, be ineffective (whether by reason of resolution may properly be moved or a matter may properly be website www.rea.co.uk. inconsistency with any enactment or the company’s constitution or otherwise), (b) it is defamatory of any person, or (c) it is frivolous or Under section 527 of the Companies Act 2006, members meeting vexatious. Such a request may be in hard copy form or electronic the threshold requirements set out in that section have the right to form, must identify the resolution of which notice is to be given or require the company to publish on a website (in accordance with the matter to be included in the business, must be authorised by section 528 of the Companies Act 2006) a statement setting out the person or persons making it, must be received by the company any matter that the members propose to raise at the relevant not later than the date 6 clear weeks before the meeting, and (in annual general meeting relating to (i) the audit of the company's the case of a matter to be included in the business only) must be annual accounts that are to be laid before the annual general accompanied by a statement setting out the grounds for the meeting (including the auditor’s report and the conduct of the request. 129