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Origin EnterprisesR.E.A. HOLDINGS PLC - ANNUAL REPORT 2 0 1 2 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 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 Accounting policies (company) Notes to the company financial statements Notice of annual general meeting 2 3 4 5 7 16 59 60 67 74 79 80 81 83 84 85 85 86 87 94 122 124 125 126 127 134 1 Officers and professional advisers Directors R M Robinow J C Oakley M A Parry D J Blackett I Chia D H R Killick Secretary and registered office R.E.A. Services Limited First Floor 32-36 Great Portland Street London W1W 8QX Stockbrokers Mirabaud Securities LLP 33 Grosvenor Place London SW1X 7HY Solicitors Ashurst LLP Broadwalk House 5 Appold Street London EC2A 2HA Auditor Deloitte LLP 2 New Street Square London EC4A 3BZ Registrars and transfer office Capita Registrars The Registry 34 Beckenham Road Beckenham Kent BR3 4TU 2 Maps as at 31 December 2012 T T abangg Tabang (cid:122) (cid:122) (cid:122) (cid:122) EAST EAST KALIMANTAN AN ALIMK ANTTAN AN Sentekan R i ii iRR inaketneS r r r e ee v v v M M M M S SS e e ee n n nn y y yy i i ii u u uu r r rr R R RR i i ii v v v e ee r r r (cid:122) (cid:122) Kembang Janggut K anggut embang J B B e ee l l l a aa y y y a aa n n nn R RR R R i i ii v v vv e e ee r r r ncalong Muara Ancalong Muar ncalong a A K K e e d d a a n n g g K KK e e e p p a aa l l l a a R RR i ii v v v e e r r onB tang Bontang (cid:122) (cid:122) (cid:122) Mah MMa MMa aah haah hh a a aa k k kk a a aa Mahakam River RmakahaMMa revveiR m m mm R R RR R i i iii v v v v e ee r r r (cid:122) (cid:122) ota B Kota Bangun K angun ong(cid:122) (cid:122) Tenggarong ong TTenggar enggar S Samarinda amarinda (cid:87) (cid:87) 10 20 30 40 50 k 0 10 20 30 40 50 km m 00 10 20 30 40 50 k 10 20 30 40 50 k Balikpapan alikB papan apan AKMn ASSAR STR MAKASSAR STRAIT AIT ASSAR STR SIA MAL SIAYAAY MALAYSIA Singapore e ingapor SingSin S amarinda amarin (cid:122) amarin Samarinda (cid:122) Kalimantan aliman Kaliman Kaliman ntann KK aliman ntan n KK Suma atr Sumatra Jakarta ta Jak taar INDONESIA INDONESIA vaaJ J Java PHILIPPINES PHILIPPINES PHILIPPINES M M (cid:87) (cid:87) methane captur e plan t methane captur methane capture plant oil mill oil mill oil mill one quar yr st one quar stone quarry anshipmen minal tr anshipmen transhipment terminal t t er (cid:81) (cid:81) (cid:81) (cid:81) (cid:81) (cid:81) (cid:81) (cid:81) (cid:81) (cid:81) (cid:81) (cid:81) (cid:81) (cid:81) (cid:81) via M PT C andir i ipta Da PT Cipta Davia Mandiri CDM CDM ar PT K tanegar a K umalasakti PT Kartanegara Kumalasakti KSKKKS KKS KMS KMS PT K utai M itr a S ejah aert PT Kutai Mitra Sejahtera ongan Ja PT P utr ay a B PT Putra Bongan Jaya BJP PBJ BJ2P PBJ2 ersada Bangun Ja PT P ay PT Persada Bangun Jaya REAK REAK PT REA K altim P lan ta tions PT REA Kaltim Plantations YBS SYB PT S asana Y udha Bhakti PT Sasana Yudha Bhakti 3 Summary of results for the year ended 31 December 2012 Revenue 2012 $’000 2011 $’000 Change % 124,600 147,758 - 16 Earnings before interest, tax, depreciation, amortisation and biological gain 1 38,083 70,818 - 46 Profit before tax Profit for the year 30,558 64,173 - 52 17,703 45,614 - 61 Profit attributable to ordinary shareholders 11,342 40,453 - 72 Cash generated by operations 2 55,110 59,854 - 8 Earnings per ordinary share (diluted) in US cents 33.9 121.0 - 72 Dividend per ordinary share in pence 3 7.0 6.5 + 8 Average exchange rates 2012 2011 2010 2009 2008 Indonesian rupiah to US dollar US dollar to pound sterling 9,392 1.59 8,790 1.61 9,078 1.55 10,356 1.56 9,757 1.84 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 2012 Allocated area - Hectares Mature oil palm Immature oil palm (prior years) Oil palm development (current year) Reserve area 2 Total 20121 20111 2010 2009 2008 26,688 25,415 21,984 18,736 16,487 2,051 8,055 36,794 65,391 102,185 3,318 8,351 37,084 60,614 97,698 8,850 1,249 32,083 62,680 94,763 8,171 4,083 30,990 83,828 9,032 2,781 28,300 86,541 114,818 114,841 Production - Tonnes Oil palm fresh fruit bunch crop - group 597,722 607,335 518,742 490,178 450,906 Oil palm fresh fruit bunch crop - external 64,014 34,146 20,089 13,248 6,460 661,736 641,481 538,831 503,426 457,366 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 151,516 147,455 127,256 118,357 105,597 30,734 28,822 24,614 23,740 20,846 182,250 176,277 151,870 142,097 126,443 22.9% 4.6% 23.0% 4.5% 23.6% 4.6% 23.5% 4.7% 23.1% 4.6% 22.4 23.9 23.6 26.2 27.3 5.2 1.0 6.2 5.5 1.1 6.6 5.6 1.1 6.7 6.2 1.2 7.4 6.3 1.2 7.5 1. Before implementation of proposed exchange of land areas subject to overlapping mineral rights. 2. Includes conservation areas, roads and other infrastructure and areas available for planting and under negotiation. For the reasons stated on page 28 of the “Review of the group” section of this annual report, planned oil palm development is no longer disclosed separately but is included within the reserve area. 5 Crude palm oil monthly average price e n n o t / $ S U 1400 1200 1000 800 600 400 200 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Share performance graph REA Ordinary FT All Share 2008 2009 2010 2011 2012 200 x e d n I 100 0 6 Chairman’s statement Introduction Revenue for 2012 at $124.6 million was less than in 2011 ($147.8 million) with the reduction reflecting lower The “Review of the group” section of this annual report revenue from both the agricultural operations ($122.1 gives detailed information intended to assist shareholders million against $129.5 million) and the coal operations in understanding the group's business and strategic ($2.5 million against $18.2 million). In the agricultural objectives. Because the review is designed to provide a operations, this was the result of the trading factors reasonably complete and self-contained description of referred to above while, in the coal operations, it was the the group, it does, in many places, repeat what has been direct consequence of the suspension of the coal trading said in the reviews of the group contained in previous activities. annual reports. This “Chairman's statement” endeavours to be less repetitive and to provide a synopsis of the more Excluding movements on agricultural inventory, cost of significant matters noted in the review, with particular sales attributable to the agricultural operations amounted emphasis on developments that occurred during 2012 or to $59.5 million against $51.3 million. The increase are in prospect. Results reflected continuing cost inflation and cropping on a larger area. Under normal circumstances, it could have been expected that the increased cost of sales would have been offset by increased crop volumes but the Group profit before tax for 2012 at $30.6 million was combination of weather factors and village issues resulted some 52 per cent lower than the $64.2 million reported in the 2012 crop falling significantly short of budget and, for 2011. with most components of cost of sales being fixed costs, there was no commensurate reduction in cost of sales. In The significant fall in profits as compared with 2012 the coal operation, cost of sales reduced from the prior reflected the weather impact on crops in the first half and year $16.7 million to $4.0 million in line with the reduction the effect of lower CPO and CPKO prices during the year, in trading activity. combined with what will hopefully prove to be non- recurring losses arising from the decisions taken in IFRS fair value adjustments, aggregating $0.3 million in relation to the coal operations and from the village issues 2012, were significantly below the aggregate described under “Community relations” below. The adjustments of $11.4 million reported in the preceding following table provides estimates of the effect on profit year. The net gain from changes in the fair value of before taxation as respects each of the items concerned: biological assets ($6.0 million against $7.4 million in Agricultural operations Trading items: Value impact of lower prices on crop harvested Value impact of reduced crop due to weather Village disruptions: Value impact of reduced crop $’m (12.6) (5.6) (5.7) Value impact of reduced prices due to high FFA oil (6.6) 2011) reflected the further development of the group’s plantations while the loss arising from changes in the fair value of agricultural produce inventory ($5.7 million against a profit of $4.0 million in 2011) was the product of a small reduction in inventory volume over 2012 and the fall in CPO and CPKO prices during the year exacerbated by the need to allow for a discount on the closing inventory to reflect the high FFA content of that inventory. Coal operations Losses Provision against concessions (4.1) (3.0) (37.6) Administrative expenses for 2012 amounted to $18.9 million against $17.0 million in 2011. The increase was in 7 Chairman’s statement continued part the result of inflation, but also reflected costs of 64,014 tonnes of FFB from smallholders and other third management transition, costs incurred in connection with parties (2011: 34,146 tonnes). the resolution of village issues and a further provision of $1.0 million for additional funding of the group’s UK Rainfall across the estates averaged 3,241 mm for 2012, pension scheme following a recent triennial actuarial similar to the level of 3,414 mm for the previous year. A valuation of the scheme. widely predicted El Nino weather phenomenon did not Losses on the coal trading operations reflected provisions materialise. made against outstanding trading items following the Processing of the group’s own FFB production and the decision to suspend trading. In addition, a provision of $3 externally purchased FFB, together totalling 661,736 million has been made against the coal concessions. tonnes (2011: 641,481 tonnes) produced 151,516 tonnes of CPO (2011: 147,455 tonnes), 30,734 tonnes At the after tax level, profit fell to $17.7 million (2011: of palm kernels (2011: 28,822 tonnes) and 11,549 $45.6 million) while profit attributable to ordinary tonnes (2011: 10,815 tonnes) of CPKO reflecting shareholders was $11.3 million against $40.5 million. extraction rates of, respectively, 22.9 per cent for CPO Earnings per share amounted to US 33.9 cents (2011: (2011: 23.0 per cent), 4.6 per cent for kernels (2011: 4.5 US 121.0 cents). per cent) and 37.7 per cent for CPKO (2011: 38.4 per Adjustments for the non-cash components of operating cent). profit and for movements in working capital meant that Most of the crop shortfall against budget arose in the first cash generated by operations for 2012 amounted to half of 2012 and was attributable to a combination of $55.1 million, as compared with $59.9 million reported for delayed ripening of crops in the early part of the year 2011. The positive overall movement on working capital (reflecting the particular weather patterns of the latter was principally attributable to an increase in payables, a months of 2011) and crop losses resulting from significant proportion of which represented deferred harvesting disruptions generated by disputes with certain payments due in respect of the group’s development surrounding villages. It had been hoped that the second programme. Tax and interest payments remained at much half of the year would see at least a partial recovery of the the same levels as in the preceding year with the result crop shortfall of the first half but further disruptions by that net cash from operating activities for 2012 amounted villages meant that this recovery did not materialise. to $32.5 million against $33.8 million for 2011. Further information regarding disputes with villages is Agricultural operations Operational matters provided under “Community relations” below. Upgrading and expansion of the group’s oil mills is now substantially complete and has ensured that the group has, for the immediate future, sufficient processing The crop out-turn for 2012 amounted to 597,722 tonnes capacity to handle all crop from its own estates and from of oil palm fresh fruit bunches. This was a little below the the growing number of maturing smallholder plantings in FFB crop of 607,335 tonnes for the corresponding period the vicinity. The third, newest mill, which commenced in 2011 but some 12 per cent below the budgeted crop operation in September 2012 and incorporates a second for the year of 682,000 tonnes. The group purchased kernel crushing plant, has been designed to permit the 8 installation of a second processing line so as to double its generating capacity, which it will dedicate to PLN and capacity and thereby provide the ability to cope with which PLN will use to supply power to the villages further processing demands in the future. surrounding the group’s estates by way of a local grid to be constructed by PLN. Payment for the power so In February 2013 the company published its first carbon utilised will be made by PLN at a fixed rate determined by footprint report providing an assessment of the Indonesian state regulations. This equates to about $1 greenhouse gas emissions associated with the group’s million per megawatt year but it is not yet known what agricultural operations in 2011. The report identifies and utilisation PLN will make of the available capacity. PLN quantifies greenhouse gas emissions in the production of will also consider linking the national grid to the new local CPO and CPKO at the group's palm oil mills and related grid and may in that event be able to increase its power estate supply base and, going forward, will facilitate the capacity requirement to six megawatts. design and implementation of effective strategies for reducing the group’s greenhouse gas emissions as well There have recently been substantial increases in as providing a baseline against which progress in government directed minimum wage levels. A reasonable achieving such reductions can be monitored and reported. proportion of the group's employees are paid at a level The report is available for downloading from the above the minimum wage but the need to maintain company’s website at www.rea.co.uk. Following on from differentials makes it inevitable that the new minimum the carbon footprint report, the company is currently in the wage levels will result in a significant increase in the process of compiling its first standalone sustainability group's employment costs. In 2012, these represented report which is due to be published later in 2013. about one third of the cost of sales attributable to the The group’s two new methane capture plants were 2013 will therefore have a particular focus on labour commissioned in April and October 2012 respectively efficiency and, specifically, on reducing overtime working. group’s agricultural operations. Cost saving efforts in with methane from each plant currently driving two generators (each of one megawatt capacity). The Land allocations and development electricity generated from the captured methane now supplies electricity to a significant proportion of the The overall area of the group’s fully titled agricultural land group’s mills, offices and housing, thereby having a remained at 70,584 hectares with further land allocations substantial impact on the group’s consumption of diesel subject to the completion of titling totalling some 35,000 oil for power generation with material consequential hectares. Of the land not yet titled, some 15,000 savings in energy costs and in greenhouse gas emissions. hectares are conditional not only upon satisfaction of the normal titling requirements but also upon completion of a Current methane production has exceeded expectations necessary rezoning of the area concerned. and is averaging about four times that needed to drive the installed generators and this offers opportunities for Work is continuing to complete a conditional agreement generating additional returns from the investment made in between a group subsidiary and an Indonesian third party the plants. In furtherance of such returns, the group has company relating to overlapping mineral rights on certain recently reached an outline agreement with the land areas held by the group subsidiary. This would Indonesian state electricity company (“PLN”) under which increase the fully titled agricultural land held by the group the group will install an additional three megawatts of to 76,124 hectares. The delay in completing this 9 Chairman’s statement continued agreement has been caused by the need to obtain That situation changed during 2012 with disputes confirmation of the continuing validity of the land titles concentrated into two waves, the first in the second held by the company to be acquired pursuant to the quarter of the year running into early July and the second agreement. in the final weeks of the year and continuing into 2013. These disputes were more serious than those previously The directors believe that, of the prospective 76,124 experienced because of actions by villagers to enforce hectares of fully titled land, between 50,000 and 55,000 their position by stopping harvesting access to certain hectares will ultimately be plantable with oil palms. The areas of the group’s estates and blockading group oil remaining land allocations may in due course provide a mills to prevent processing of FFB. further 10,000 plantable hectares. The 2012 village dissatisfaction with the group covered a Areas planted and in the course of development as at 31 number of issues and different villages had different December 2012 amounted in total to some 37,000 claims. However, a common theme was a demand that hectares. Of this total, mature plantings comprised the group procure the land necessary to establish 26,688 hectares having a weighted average age of 10 additional cooperative smallholder oil palm plantings in years. A further 621 hectares planted in 2009 was each village. The acquisition of PT Persada Bangun Jaya scheduled to come to maturity at the start of 2013. The in July 2012 provided the group with sufficient land to total of 37,000 hectares includes 2,164 hectares (of satisfy, appropriately and in aggregate, outstanding village which 272 hectares were planted in 2008) to be demands for oil palm cooperative developments but did relinquished upon completion of the land settlement not, of itself, immediately resolve such demands and other arrangement described above. village claims. That was because resolution was complicated, as respects land allocations for cooperatives, Negotiations with villages in the next planned by the need for complete and accurate government development area of the subsidiary company PT Putra mapping of all village boundaries to provide a consistent Bongan Jaya are substantially complete and clearing of a basis for allocation between villages and, as respects substantial component of the 11,602 plantable hectares other claims, by past fraud by certain third party is expected to commence shortly. intermediaries who were legally appointed by villagers and entrusted with distributing land compensation to Community relations and smallholder schemes individual villagers. The group has always seen the maintenance of Substantial progress has been made since the beginning harmonious relations with, and the encouragement of of 2013 and settlement agreements in respect of most development within, the local communities in its areas of material issues were reached in late January or early operation as an essential component of its agricultural February with all of the larger villages that had land rights business. Inevitably in the period of over twenty years historically overlapping REA Kaltim and SYB land. since the group’s East Kalimantan operations were first Settlement discussions are continuing in respect of established, there have been occasional disagreements outstanding disputes. To date, agreements concluded between the group and the local communities but, until with villages have been adhered to but there have been recently, such disagreements have been minor, rapidly some subsequent disruptions by individual villagers. One resolved and without significant impact on the group. such disruption caused a harvesting blockage in one area 10 of the REA Kaltim estates for a period of nearly four a camera trap photograph of a baby sun-bear, as well as weeks during March and April 2013 but otherwise these the first record of an orang-utan in one of the northern later disruptions have been limited as to duration and estates, are encouraging signs of the ability of the group’s scale. All three mills have been operating normally since conservation reserves to support healthy populations of early February. these species. The current improved position has been reached at a A member of the Roundtable on Sustainable Palm Oil significant cost but that cost should not be without benefit (“RSPO”), the group has now achieved accreditation given that the funds committed to procuring additional under RSPO of its two older oil mills, and most of the cooperative oil palm developments will, in due course, group’s mature estates, as well as some of the provide a return to the group from further increases in smallholder oil palm plantings. It is planned to obtain group revenues from processing cooperative FFB. accreditation of the newly constructed oil mill by 2015. Moreover, the stronger relationships forged with the East As a further step in the process of RSPO accreditation, Kalimantan authorities during the period of the the group achieved certification of its supply chain under disruptions and the better mutual understanding achieved the RSPO Supply Chain Certification System (“SCCS”) between the group and its local communities should during 2012. This accreditation provides buyers of CPO enhance the group’s ability to continue the development and CPKO with the ability to identify oil purchased as of its East Kalimantan operations. coming from RSPO certified sources. Separately in 2012, the group also obtained International Sustainability and Plans for further expansion of the smallholder plasma Carbon Certification (“ISCC”), which allows the CPO schemes during 2012 were held up by the delays in produced from the estates of the group’s mature estates identifying and agreeing allocations of additional land and mills to be used to produce biofuel that meets the areas suitable for smallholder development. The plasma requirements of the European Union Renewable Energy scheme areas planted at 31 December 2012 amounted Directive. to some 2,900 hectares. With the further allocations of land now substantially agreed, the group expects a useful Coal and stone operations increase in the plasma areas during 2013. Conservation and accreditation The directors took the decision in mid 2012 that, for the time being, coal trading activities should be suspended and further capital committed to the coal operations The group continues to manage a network of should be limited and concentrated on maximising returns conservation reserves within its titled land areas with the from the concessions in which the group had already aim of conserving the natural biodiversity and ecosystem invested. functions of the landscapes in which the group operates. To date, over 20,000 hectares have been set aside as The group is in discussions with two third parties that conservation reserves. have coal mining interests adjacent to one of the coal concessions. A successful outcome to these discussions Camera trapping and other biodiversity surveys continue would result in one of the parties mining the concession to record the presence of orang-utans within the on a basis that would limit the group’s downside and conservation reserves. Sighting of a baby orang-utan and provide a return to the group that, at current coal prices 11 Chairman’s statement continued (which have risen to an extent from their lows of June existing 7.5 per cent dollar notes 2012/14 (“2012/14 2012), could reasonably be expected to recover the dollar notes”) and as to the balance by way of a placing. group’s investment and, if coal prices improve further, could yield a reasonable profit. A similar arrangement Following these transactions, group indebtedness and may be possible in relation to the other two coal related engagements at 31 December 2012 amounted to concessions and this could provide a better outcome than $163.5 million, made up of $15.9 million nominal of an outright sale of these concessions. On the coal trading 2012/14 dollar notes (carrying value: $15.5 million), side, steps are being taken to close out contractual $34.0 million nominal of 2017 dollar notes (carrying commitments made prior to the suspension of trading and value: $33.2 million), £34.5 million nominal of 9.5 per no new trades have been initiated. cent guaranteed sterling notes 2015/17 (“sterling notes”) (carrying value: $54.3 million), $8.4 million in The group remains confident of the economic viability of respect of the hedge of the principal amount of the its stone concession and work is continuing on plans to sterling notes, a term loan from an Indonesian bank of quarry the concession to provide stone for building and $36.1 million and other indebtedness comprising maintenance of infrastructure in the group’s agricultural drawings under working capital lines of $16.0 million. operations and for sale to users of stone in the area of Against this indebtedness, at 31 December 2012 the those operations. group held cash and cash equivalents of $26.4 million. In view of the uncertainties affecting the coal Recent years have seen substantial investment by the concessions, the group has made a provision of $3.0 group in FFB milling capacity. Final payments will fall due million against its investment in the concessions at 31 in 2013 for the newly completed third oil mill but current December 2012. Finance crop projections suggest that, apart from expanding the capacity of this third mill from 40 to 80 tonnes of FFB per hour, no further expenditure on milling capacity will be required until work commences on the construction of a In September 2012, 3.9 million new preference shares fourth mill to be brought into production in 2017 at the were issued for cash at a price of 105p per share by way earliest. of a placing to raise £4.0 million net of expenses. The proceeds of the placing of new preference shares were Significant expenditure was also incurred during 2012 on retained within the group to fund continuing development the provision of land to meet the cooperative smallholder of the agricultural operations. This issue was followed in development aspirations of the group’s local communities September 2012 by the issue of a further 2,004,872 new (as discussed under “Community relations” above). The preference shares by way of capitalisation of share directors do not believe that there will be a recurring premium account pursuant to the capitalisation issue to requirement for material expenditure on the provision of ordinary shareholders referred to under “Dividends” cooperative land (although there may be a requirement below. for the group to make short term advances to meet cooperative planting expenditure pending the refinancing In November 2012, $34.0 million of 7.5 per cent dollar of such expenditure by the banks funding the cooperative notes 2017 (“2017 dollar notes”) were issued as to some developments). $19 million by way of an exchange offer to holders of 12 As a result, group capital expenditure can, for the Strategic direction immediate future, be concentrated on extension planting and on the provision of the additional estate buildings and Early in 2012, the directors concluded that, given the general plant and equipment that become needed significant enlargement of the group’s operations over the following any expansion of the group’s planted hectarage. past decade, the continuing growth of the Indonesian This will involve the group in continuing capital economy and the progressive maturing of South East expenditure for several years to come but the directors Asian capital markets, there would be significant will set the extension planting programme at a level that advantages to the company and its shareholders in they reasonably expect that the cash resources available increasing local Indonesian participation in the ownership to the group can support. of the group’s agricultural operations. Accordingly, the directors have been proceeding with their previously The directors intend that further cash advances to the announced plans for the amalgamation of all of the coal and quarry operations should be limited and company’s Indonesian plantation subsidiaries into a single concentrated on realising value from the three existing sub-group headed by the company’s principal operating coal concessions and on bringing the stone quarry into subsidiary, PT REA Kaltim Plantations (“REA Kaltim”), economic production. Dividends with the aim that this be followed in due course by a public offering of a minority shareholding in REA Kaltim (probably 20 per cent) combined with a listing of REA Kaltim’s shares on the Indonesia Stock Exchange in The fixed semi-annual dividends on the 9 per cent Jakarta. cumulative preference shares that fell due on 30 June and 31 December 2012 were duly paid. An interim It had been hoped to complete the planned restructuring dividend in respect of 2012 of 3½p per ordinary share in Indonesia by 31 December 2012 but this did not prove was paid in January 2013 and the directors recommend possible because of delays in obtaining the necessary the payment of a final dividend in respect of 2012 of 3½p regulatory approvals from the Indonesian Investment per ordinary share to be paid on 26 July 2013 to ordinary Coordinating Board. Such approvals were required for shareholders on the register of members on 28 June the intra-group transfer of ownership to REA Kaltim of 2013. The total dividend payable per ordinary share five other existing subsidiaries of the company and, whilst during 2013 in respect of 2012 will thus amount to 7p. consents for three of these five transfers had been This compares with the total paid during 2012 in respect obtained by 31 December 2012, consents for the of 2011 of 6½p. remaining two were only received after that date. With all required consents now obtained, it should be possible to In addition, the company made a capitalisation issue of complete the restructuring in the near future. 2,004,872 new preference shares to ordinary shareholders on 28 September 2012 on the basis of 3 With the restructuring completed, there should be no new preference shares for every 50 ordinary shares held further technical hurdles to proceeding with the planned (2011: 2,004,872 new preference shares on the basis of public offering and listing of shares in REA Kaltim other 3 new preference share for every 50 ordinary shares than compliance with normal regulatory formalities and, in held). The directors will consider a further such issue particular, provision of audited financial statements for the during 2013 if they feel that this is merited by the group’s restructured REA Kaltim sub-group as of a date not more performance. 13 Chairman’s statement continued than six months earlier than the date of the public the marketability of the ordinary shares but, as mentioned offering. However, the recent village issues detailed under above, the directors are currently reviewing their strategic “Community relations” in “Agricultural operations” above plans including in respect of the listing. Therefore, in an have unfortunately had a negative impact on the crops effort to address in the short term what they see as a and profits of 2012 and the early months of 2013 (with mismatch between demand for and availability of ordinary the impact on 2013 greater in the local Indonesian shares, the directors are considering seeking shareholder accounts of REA Kaltim than in the consolidated approval for the company itself to buy back into treasury accounts of the group because the different accounting limited numbers of ordinary shares with the intention that, standards applied mean that the group has recognised in whenever a holding of a reasonable size has been 2012 the effect that the sale of high FFA oil held in accumulated, such holding be placed with one or more inventory at 31 December 2012 will have on 2013 sales new investors. proceeds whereas REA Kaltim has not). This may affect the pricing of an early public offering of shares in REA Board changes Kaltim. The directors do not believe that factors that should exist Singapore and Indonesia with overall local responsibility only in the short term and have now been largely resolved for the Indonesian operations, was appointed president should be allowed materially to compromise shareholder director of REA Kaltim during 2012 and a director of the Mark Parry, the group’s regional director based in value. They remain of the view that it remains desirable company on 1 January 2013. for the group to list REA Kaltim on the Indonesia stock exchange and are now reviewing their options for As previously announced, the four long serving pursuing this strategy, given the probable need to independent non-executive directors, Messrs Green- postpone its implementation until sufficient time has Armytage, Keatley, Letts and Lim, retired from the board elapsed for the proposed REA Kaltim group to have of the company at the end of 2012, and Ms Irene Chia reported figures that reflect normal cropping levels. was appointed as a new non-executive director in conjunction with Mr Parry’s appointment as executive The directors are aware that the market in the company's director. This has reduced the number of board members ordinary shares is at times limited, that purchases and from eight to six. Along with my remaining fellow sales of small numbers of shares can have a directors, I would like to record my appreciation of the disproportionate effect on the ordinary share price and significant contribution made to the group by the four that the spread between the bid and offer prices of the retiring directors and for their invaluable support over a ordinary shares is often large. The directors believe that number of years. there is potential demand for the company's ordinary shares but that this demand comes mainly from investors Corporate governance who wish to have holdings of a certain size and are generally not prepared to spend time accumulating such At the performance evaluation conducted in 2012, the holdings from the trickle of small offerings that are board as then constituted concluded that it was for the normally available. Should the Indonesian listing of REA time being continuing to perform effectively but that, Kaltim proceed, the directors hope that better analyst having decided to restructure the group’s Indonesian coverage of the company following the listing will improve plantation subsidiaries into a single sub-group headed by 14 REA Kaltim and to move towards a listing REA Kaltim on 2012), there is a concern that the discount will narrow as the Indonesia stock exchange, it would be appropriate, in a result of reducing soya oil prices rather than rising CPO due course, to make certain changes to the board. Those prices. Against this, there is now evidence of falling changes were implemented at the end of 2012 as stocks and past experience suggests that lower price described above and the directors consider that the new levels will lead to increased Indian and Chinese composition of the board is appropriate and effective for consumption. the current strategic direction of the company. Prospects East Kalimantan is a recently democratised and rapidly developing society and this has added a social dimension to the challenges of infrastructure and remote location Against the background of the continuing village issues in that the group has always faced. Nevertheless, East January and early February and the subsequent more Kalimantan does offer excellent conditions for the limited harvesting blockages, the FFB crop to the end of cultivation of oil palm and provides opportunity for further March 2013 amounted to 137,576 tonnes, against expansion of established oil palm estates. The directors 136,702 tonnes for the same period in 2012. The limited believe that the challenges are being surmounted, that harvesting blockages will also have some impact on the the group will be successful in taking advantage of the crops reported for April but, thereafter, if as is hoped the expansion opportunities and that there will be further agreements now reached in relation to village issues scope for enhancing returns through the now proven continue to be respected, the directors expect the group’s methane capture initiatives. This should ensure that the own FFB crops to return to more normal levels. The group will continue to accrue value from its oil palm effect of the disruptions to harvesting in 2012 is likely to operations which already represent a high quality large have affected the normal fruiting cycle so that it must be scale agricultural business. expected that monthly cropping levels may be below average for the next few months and above average for the closing months of 2013. A significant feature of 2012 was the increasing RICHARD M ROBINOW throughput of third party FFB. This provides the group with a valuable additional revenue stream, the benefit of Chairman 25 April 2013 which more than outweighs a slight negative impact on extraction rates. With the continuing expansion of smallholder plantings in the vicinity of the group's estates, further increases in third party FFB throughput can be expected going forward The CPO price currently stands at $830 per tonne. At this level, the price is at an unusually large discount to the soya oil price but, with reports of large current season plantings of soybean in both the United States and South America (spurred no doubt by the high soybean prices of 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 crude assist them in assessing how the directors have palm kernel oil (“CPKO”). A detailed description of the performed their duty of promoting the success of the group's oil palm activities is provided under “Agricultural company. 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 operation in Indonesia. statements, which have been included by the directors in Following this decision, the group 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 in 2010 started to develop an open cast coal mining statements should be treated with caution given the operation and coal trading activity based on these uncertainties inherent in any prognosis regarding the concessions. Subsequent events have shown that coal future and the economic and business risks to which the mining and trading activities have specific complexities group's operations are exposed. that are not shared by the group’s agricultural operations. The directors have therefore decided that, for the time In preparing this review, the directors have complied with being, further capital committed to the coal operations section 417 of the Companies Act 2006. They have also should be limited. Further information concerning the sought to follow best practice as recommended by the coal activities as well as a prospective stone quarry reporting statement on operating and financial reviews operation is provided under “Coal and stone operations” published by the Accounting Standards Board but this below. review may not comply with that reporting standard in all respects. The group and predecessor businesses have been involved for over one hundred years in the operation of This review has been prepared for the group as a whole agricultural estates growing a variety of crops in and therefore gives emphasis to those matters that are developing countries in South East Asia and elsewhere. significant to the company and its subsidiaries when Today, the group sees itself as marrying developed world taken together. The review is divided into five sections: capital and Indonesian opportunity by offering investors overview; agricultural operations; coal and stone in, and lenders to, the company the transparency of a operations; finances; and risks and uncertainties. company listed on a stock exchange of international standing and then using capital raised by the company (or with the company’s support) to develop natural resource based operations in Indonesia from which the group believes that it can achieve good returns. In this endeavour, the group’s inheritance from its past and its 16 recent track record represent significant intangible a view to utilising the group’s existing agricultural resources because they underpin the group’s credibility. management capacity to manage a larger business. This assists materially in sourcing capital, in negotiating Secondly, the group strives to manage its established with the Indonesian authorities in relation to project agricultural operations as productively as possible. development and in recruiting management of a high Ancillary to the first component of this approach, the calibre. group seeks to add to its land bank when circumstances are conducive to its doing so. To the extent that the coal Other resources important to the group are its established mining and stone quarry operations develop, the directors base of operations, an experienced management team intend that the group would similarly seek production cost familiar with Indonesian regulatory processes and social efficiencies in those operations by increasing volumes customs, a trained workforce and the group’s land and and focusing on productivity. concession rights. Objectives As a financial strategy, the group aims to enhance returns to equity investors in the company by procuring that a prudent proportion of the group’s funding requirements is The group’s objectives are to provide attractive overall met with prior ranking capital in the form of fixed return returns to investors in the shares and other securities of permanent preferred capital and debt with a maturity the company from the operation and expansion of the profile appropriate to the group's projected future cash group’s existing businesses and to foster economic flows. progress in the localities of the group's activities, while maintaining high standards of sustainability. Achievement Sustainability of these objectives is dependent upon, among other things, the group’s ability to generate the operating profits The group is committed to responsible management of that are needed to finance such achievement. the environmental and social consequences of its activities. As part of this commitment, in February 2013 CPO is a primary commodity and as such must be sold at the company published its first carbon footprint report a price that is determined by world supply and demand. providing an assessment of the greenhouse gas Such price fluctuates in ways that are difficult to predict emissions associated with the group’s agricultural and that the group cannot control. The group’s operations in 2011. The report identifies and quantifies operational strategy is therefore to concentrate on greenhouse gas emissions in the production of CPO and minimising unit production costs, without compromising CPKO at the group's palm oil mills and related estate on quality or its objectives as respects sustainable supply base and, going forward, will facilitate the design practices, with the expectation that, as a lower cost and implementation of effective strategies for reducing producer of a primary commodity, the group has greater the group’s greenhouse gas emissions as well as resilience to any downturn in price. providing a baseline against which progress in achieving such reductions can be monitored and reported. The In the agricultural operations, the group adopts a two report is available for downloading from the company’s pronged approach in seeking production cost efficiencies. website at www.rea.co.uk. First, the group aims to capitalise on its available resources by developing its land bank as rapidly as Following on from the carbon footprint report, the logistical, financial and regulatory constraints permit with company is currently in the process of compiling its first 17 Review of the group continued standalone sustainability report. This is due to be Kaltim’s shares on the Indonesia Stock Exchange in published later in 2013 and it is intended that it should Jakarta. establish a baseline against which both internal and external stakeholders can monitor the group’s The directors believe that establishing a more local profile sustainability performance. Diversification for the group and facilitating local Indonesian investment in the group’s plantation operations is likely to become an increasingly important factor in relation to land matters affecting the group. A listing of REA Kaltim in Indonesia The group recognises that its agricultural operations, of can be expected to encourage coverage of the group by which the total assets at 31 December 2012 represented South East Asian investment analysts and, as a listed some 90 per cent of the group’s total assets and which, in company, REA Kaltim should be treated as a local rather 2012, contributed all of the group’s profits, lie within a than foreign company for Indonesian regulatory purposes. single locality and rely on a single crop. This permits significant economies of scale but brings with it some It had been hoped to complete the planned restructuring risks. The coal and stone activities provide only a small in Indonesia by 31 December 2012 but this did not prove diversification and whilst further diversification would possible because of delays in obtaining the necessary provide the group with some offset against such risks, the regulatory approvals from the Indonesian Investment directors believe that, for the foreseeable future, the Coordinating Board. Such approvals were required for the interests of the group and its shareholders will be best intra-group transfer of ownership to REA Kaltim of five served by growing the existing operations. They therefore other existing subsidiaries of the company and, whilst have no plans for further diversification. consents for three of these five transfers had been Strategic direction obtained by 31 December 2012, consents for the remaining two were only received after that date. This will permit the restructuring to be completed in the near Early in 2012, the directors concluded that, given the future. significant enlargement of the group’s operations over the past decade, the continuing growth of the Indonesian With the restructuring completed, there should be no economy and the progressive maturing of South East further technical hurdles to proceeding with the planned Asian capital markets, there would be significant public offering and listing of shares in REA Kaltim other advantages to the company and its shareholders in than compliance with normal regulatory formalities and, in increasing local Indonesian participation in the ownership particular, provision of audited financial statements for the of the group’s agricultural operations. Accordingly, the restructured REA Kaltim sub-group as of a date not more directors have been proceeding with their previously than six months earlier than the date of the public announced plans for the amalgamation of all of the offering. However, the recent village issues detailed under company’s Indonesian plantation subsidiaries into a single “Community relations” in “Agricultural operations” above sub-group headed by the company’s principal operating have unfortunately had a negative impact on the crops subsidiary, PT REA Kaltim Plantations (“REA Kaltim”) with and profits of 2012 and the early months of 2013 (with the aim that this be followed in due course by a public the impact on 2013 greater in the local Indonesian offering of a minority shareholding in REA Kaltim accounts of REA Kaltim than in the consolidated (probably 20 per cent) combined with a listing of REA accounts of the group because the different accounting 18 standards applied mean that the group has recognised in whenever a holding of a reasonable size has been 2012 the effect that the sale of high FFA oil held in accumulated, such holding be placed with one or more inventory at 31 December 2012 will have on 2013 sales new investors proceeds whereas REA Kaltim has not). This may affect the pricing of an early public offering of shares in REA Management development Kaltim. Mark Parry, the group’s regional director based in The directors do not believe that factors that should only Singapore and Indonesia with overall local responsibility exist in the short term and have now been largely resolved for the Indonesian operations, was appointed president should be allowed materially to compromise shareholder director of REA Kaltim during 2012 and a director of the value. They remain of the view that it remains desirable company on 1 January 2013. The senior executive for the group to list REA Kaltim on the Indonesia stock management of REA Kaltim has been further expanded exchange and are now reviewing their options for during 2013 to date with the appointment of the pursuing this strategy, given the probable need to incumbent head of human resources to the board of REA postpone its implementation until sufficient time has Kaltim and the extension of his responsibilities to include elapsed for the proposed REA Kaltim group to have government and village relations, security, safety and reported figures that reflect normal cropping levels. conservation. The appointee not only brings particular expertise to the board but is an Indonesian national and The directors are aware that the market in the company's as such, together with the president commissioner who is ordinary shares is at times limited, that purchases and also an Indonesian national, complements the established sales of small numbers of shares can have a expatriate leadership of the president director and the disproportionate effect on the ordinary share price and chief operating and financial officers. that the spread between the bid and offer prices of the ordinary shares is often large. The directors believe that As a foreign investor in Indonesia, the group needs to there is potential demand for the company's ordinary remain aware that it is in essence a guest in Indonesia shares but that this demand comes mainly from investors and an understanding of local customs and sensitivities is who wish to have holdings of a certain size and are important. The group’s ability to rely on senior Indonesian generally not prepared to spend time accumulating such staff to handle its local interface is therefore a significant holdings from the trickle of small offerings that are asset upon which the group continues to build. This asset normally available. Should the Indonesian listing of REA is augmented by the local support and advice that the Kaltim proceed, the directors hope that better analyst group obtains from local advisers and from the local non- coverage of the company following the listing will improve controlling investors in, and local non-executive directors the marketability of the ordinary shares but, as mentioned of, the company's Indonesian subsidiaries. above, the directors are currently reviewing their strategic plans including in respect of the listing. Therefore, in an The directors believe that basing senior management in effort to address in the short term what they see as a the same time zone as the group’s operations facilitates mismatch between demand for and availability of ordinary management oversight and improves its effectiveness. shares, the directors are considering seeking shareholder They intend that, over time, overall executive responsibility approval for the company itself to buy back into treasury for the management of the group will progressively be limited numbers of ordinary shares with the intention that, transferred from the UK to Singapore and Indonesia and 19 Review of the group continued that following the eventual retirement of the company’s Following the weakening of the Indonesian rupiah against current managing director and chairman, the group’s the US dollar in the second half of 2011, which saw the London office will be reduced to a secretariat managing rupiah fall from Rp 8,500 = $1 at the end of the second the company’s London listing and liaising with its quarter to Rp 9,046 = $1 at 31 December 2011, the European shareholders. In the interim, the current currency declined further during 2012 to close the year at managing director and chairman will remain UK based Rp 9,670 = $1. Indonesian inflation over 2012 and have indicated their willingness to remain in office for amounted to 4.3 per cent as compared with 3.8 per cent a period sufficient to ensure continuity. over 2011. As previously announced, the four long serving New policies to increase local value-added were independent non-executive directors, Messrs Green- introduced by the Indonesian government during 2012. Armytage, Keatley, Letts and Lim, retired from the board These included a decrease in the export tax on refined of the company at the end of 2012, and Ms Irene Chia palm oil products and a ban, after a certain date, on the was appointed as a new non-executive director in export of certain mineral ores, both measures being conjunction with Mr Parry’s appointment as executive aimed at increasing downstream processing within director. This has reduced the number of board members Indonesia. The dissolution of oil and gas regulator, from eight to six. The Indonesian context BPMigas, is also seen as a move designed to enhance local control of natural resource assets. The Jakarta mayoral elections saw the replacement of the Domestic consumption accounts for 65 per cent of gross incumbent mayor by Joke Widodo, the former mayor of domestic product in Indonesia, a nation of some 240 Solo, whose candidacy was supported by the opposition million people. Whilst the global economic slowdown Gerinada Party led by Probowo Subianto, a prospective placed commodity prices under pressure, buoyant presidential candidate. A key component of the incoming consumer demand provided a buffer against the global mayor’s campaign was a commitment to infrastructural malaise and permitted Indonesia to record growth of 6.2 improvement. Jakarta is home to over 10 million people per cent for 2012, only slightly below the figure of 6.3 per and accounts for one sixth of Indonesia’s gross domestic cent reported in 2011. With the ratio of debt to gross product. As such, it is an important barometer of both domestic product remaining under good control and political sentiment and economic confidence. foreign currency reserves reported as $112 billion at 31 Presidential elections are due in mid 2014 while December 2012, the outlook for the economy remains gubernatorial elections in East Kalimantan will be held in positive. The World Bank Quarterly Report has its September 2013. baseline outlook at 6.4 per cent growth for 2013. According to this report, a worsening of global conditions Decisions during 2012 to proceed with several major new with a freezing of international financial markets infrastructural projects in East Kalimantan, including a contributing to a drop in trading partner growth and a container port in Balikpapan and an airport in the Berau further slowdown in exports could mean reduction in the district, should encourage continuing growth within the forecast to 4.7 per cent. A prolonged global downturn province. Less welcome has been the announcement of encompassing the major emerging economies could see a dramatic increase in the local minimum wage. Minimum a further reduction to 3.8 per cent. wage rates are published annually in each province (the “UMP” rate) and subsequently in each provincial regency 20 (the “UMK” rate). These rates vary markedly across Indonesian ports) above which a tariff of 7½ per cent Indonesia. The UMP and UMK increases for East applies plus an additional 1½ per cent for every $50 Kalimantan and for the Kutai Kartenegara regency (in increase over this base threshold up to a maximum 22½ which most of the group’s operations are located) were per cent at prices above $1,250 per tonne CIF Rotterdam. respectively 49 per cent and 52 per cent. These were at There have been calls in the Indonesian Parliament and the top end of increases announced across Indonesia. by the Indonesian palm oil producers’ association (“GAPKI”) for reductions in the Indonesian tariffs to match Indonesian production of CPO continues to grow with the tariff levels of Malaysia but there is as yet no 2012 production now estimated at around 28 million indication that such calls will result in any changes. tonnes, significantly ahead of Malaysia with an estimated 2012 production of 19 million tonnes. There is anecdotal Evaluation of performance evidence that increasing restrictions on expansion of oil palm plantations are having an impact and that this will In seeking to meet its expansion, efficiency and lead to a curtailment in the rate of growth of Indonesian sustainability objectives, the group sets operating CPO production over the coming few years. standards and targets for most aspects of its activities and regularly monitors performance against those Export duty differentials between refined palm oil standards and targets. For many aspects of the group's products and crude palm oil have been a key tool in activities, there is no single standard or target that, in promoting domestic refining in both Indonesia and isolation from other standards and targets, can be taken Malaysia. Since these duties also impact international as providing an accurate continuing indicator of progress. competitiveness, both Indonesia and Malaysia monitor In these cases, a collection of measures has to be their tariff rates closely in an attempt to ensure that they evaluated and a qualitative conclusion reached. retain competitiveness against each other and against competing vegetable oils in the world market. During The directors do, however, rely in the agricultural 2012, as international prices for CPO dropped and operations on regular reporting of certain key domestic stock levels increased significantly, Malaysia performance indicators that are comparable from one reviewed its long standing flat rate tariff on CPO exports year to the next. These indicators for any given period and in October 2012 announced a new CPO export tariff comprise: structure ranging from 4½ per cent, when the international price is at or above the equivalent of $725 per tonne (FOB Malaysian ports), to 8½ per cent, when the international price is at or above the equivalent of $1,125 per tonne (FOB Malaysian ports). These new tariffs were introduced with effect from 1 January 2013 and meant that there was no charge to export duty in January and February 2013, when the price fell below the $725 minimum. Indonesia has so far retained its established CPO export tariff scale with a base threshold of $750 per tonne CIF Rotterdam (equivalent to about $680 per tonne FOB • 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 CPKO extraction rates achieved; the first two of these are measured as the percentage by weight of CPO or palm kernels 21 Review of the group continued extracted from FFB processed and the third is Because of the group's material dependence on CPO measured as the percentage by weight of CPKO prices, which have a direct impact on revenues and on extracted from palm kernels crushed. periodic revaluations of biological assets, in targeting return on total equity the directors set a norm that they Of these indicators, the first provides a measure of the hope will represent an average of the annual returns group's performance against its expansion objective. The achieved over a period of seven years. second and third indicators are measures of field and mill efficiency and, as such, provide a basis for assessing the Percentages for the above two indicators for 2012 and extent to which the group is achieving its objective of comparable figures for 2011 (derived from figures maximising output from its operations. Quantifications of extracted from the audited consolidated financial the above indicators for 2012 and comparable statements of the company) are provided under “Group quantifications for 2011 (in both cases as sourced from results” and “Financing policies” in “Finances” below. As the group's internal management reports) are provided with key performance indicators for the agricultural under “Land development” and “Crops and extraction operations and for the same reason, the directors have rates” in “Agricultural operations” below. In the past, the concluded that no targets for key performance indicators group has published future targets for the key indicators of financial performance should be published in future. but, in view of the regulatory restrictions on forward looking statements that are expected to apply to the Pending finalisation of the indicators to be covered in the group if there is a public offering of securities in REA sustainability report referred to under “Sustainability” Kaltim, the directors have concluded that no such targets above, the directors continue to rely principally on should be published in future. qualitative rather than quantitative assessments in relation to environmental and social performance. The qualitative While the former coal trading operations remain commentary under “Employees” and “Responsible suspended and stone quarry operations have not yet agricultural practice” in “Agricultural operations” below started, the directors do not consider it appropriate to does however include quantitative data on examination maintain any key performance indicators for those results in the group’s primary schools, incidence of vector operations. borne diseases, serious accidents sustained, pollution of water courses and substitution of organic for inorganic Key indicators used by the directors in evaluating the fertiliser. Specific quantitative data on diesel and petrol group's financial performance for any given period consumption per tonne of CPO produced is no longer comprise: included as information provided in the carbon footprint reports, the first of which was published in February 2013 • return on adjusted equity, which is measured as profit as noted under “Sustainability” above, is considered to before tax for the period less amounts attributable to offer a more meaningful assessment of the company’s preferred capital expressed as a percentage of greenhouse gas emissions. 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. Identification, assessment, management and mitigation of the risks associated with environmental, social and governance matters forms part of the group’s system of internal control for which the board of the company has ultimate responsibility. The board discharges that 22 responsibility as described in the “Corporate governance” cent by Indonesian local investors. Pursuant to the group section of this annual report. Material risks and related restructuring referred to under “Strategic direction” in policies regarding environmental, social and governance “Overview” above, the 95 per cent ownership of each of matters are described under “Risks and uncertainties” these subsidiaries is being transferred to REA Kaltim, with below and under “Employees”, “Community relations”, each of the local investors retaining their respective 5 per “Community development”, “Conservation”, “Smallholder cent ownership. schemes”, “Responsible agricultural practice” and “Carbon footprint” in “Agricultural operations” below. The latter It was agreed during 2012 to acquire a further Indonesian sections also detail the group’s successes and failures in company, PT Persada Bangun Jaya (“PBJ2”), with environmental, social and governance areas and the additional land allocations. Upon completion of necessary measures taken in response to failures. Independent legal formalities, it is intended that PBJ2 should be owned verification of the group’s performance in these areas is as to at least 95 per cent by KKS and as to the balance provided as described under “Accreditation” in by a local investor. “Agricultural operations” below. Agricultural operations Structure Land areas The operations of REA Kaltim are located some 140 kilometres north west of Samarinda, the capital of East Kalimantan, and lie either side of the Belayan river, a All of the group's agricultural operations are located in tributary of the Mahakam, one of the major river systems East Kalimantan and have been established pursuant to of South East Asia. The KKS and SYB areas are an understanding dating from 1991 whereby the East contiguous with the REA Kaltim areas so that the three Kalimantan authorities undertook to support the group in areas together form a single site. All of these areas fall acquiring, for its own account and in co-operation with within the Kutai Kartanegara district of East Kalimantan. local interests, substantial areas of land in East The PBJ area sits some 70 kilometres to the south of the Kalimantan for planting with oil palms. REA Kaltim areas in the West Kutai district of East Kalimantan while the CDM and KMS areas are located in The oldest planted areas, which represent the core of the close proximity of each other in the East Kutai district of group’s operations, are owned through REA Kaltim in East Kalimantan less than 30 kilometres to the east of the which a group company holds a 100 per cent economic REA Kaltim areas. There are three strips of land interest. With the REA Kaltim land areas approaching full pertaining to PBJ2, two of these lie adjacent to the land utilisation, over the four year period from 2005 to 2008 areas held by REA Kaltim and KKS, while the third the company established or acquired several additional borders the PBJ land area. Indonesian subsidiaries, each potentially bringing with it a substantial allocation of land in the vicinity of the REA At present, the REA Kaltim, SYB, KKS, CDM and KMS Kaltim estates. These additional subsidiaries comprise areas are most readily accessed by river but a road bridge PT Cipta Davia Mandiri (“CDM”), PT Kartanegara over the Mahakam at Kota Bangun, completed in 2005, Kumalasakti (“KKS”), PT Kutai Mitra Sejahtera (“KMS”), may eventually be linked up to provide road access. The PT Putra Bongan Jaya (“PBJ”) and PT Sasana Yudha PBJ area is easily accessible by road. In order to improve Bhakti (“SYB”). Each of these subsidiaries is currently the road link between REA Kaltim and the KMS and CDM owned as to 95 per cent by group companies and 5 per areas, a new bridge across the Senyiur River was 23 Review of the group continued constructed during 2012. Unfortunately the bridge was A particular complication since the end of 2009 has been subsequently washed away and a replacement bridge is a requirement to meet new Ministry of Forestry now being built further downstream. regulations so that any company proposing to clear land, in respect of which HGU certificates have not already Although the 1991 understanding established a basis for been obtained, must first obtain a timber cutting permit the provision of land for development by or in cooperation (“izin pemanfaatan kayu” or “IPK”). As pre-requisites to with the group, all applications to develop previously the issue of an IPK, the zoning of the land to be covered undeveloped land areas have to be agreed by the by the IPK has to be checked to confirm that it has been Indonesian Ministry of Forestry and to go through a titling earmarked for plantation development and the land and permit process. This process begins with the grant of concerned then has to be surveyed by representatives of an allocation of Indonesian state land by the Indonesian the Ministry of Forestry to establish the stand of local authority responsible for administering the land area commercial timber (if any). For areas in respect of which to which the allocation relates (an “izin lokasi”). HGU certificates have already been obtained, a timber Allocations are normally valid for periods of between one utilisation permit (“surat keterangan syah kayu bulat” or and three years but may be extended if steps have been “SKSKB”) is needed, the issue of which involves a shorter taken to obtain full titles. process than the issue of an IPK. After a land allocation has been obtained (either by direct During 2012, the overall area of the group’s fully titled grant from the applicable local authority or by acquisition agricultural land remained at 70,584 hectares (pending from the original recipient of the allocation or a previous implementation of the SYB conditional land settlement assignee), the progression to full title involves arrangements agreed in 2011 and as referred to below), environmental and other assessments to delineate those comprising 9,784 hectares held by CDM, 7,321 hectares areas within the allocation that are suitable for held by KMS, 11,602 hectares held by PBJ, 30,106 development, settlement of compensation claims from hectares held by REA Kaltim and 11,771 hectares held local communities and other necessary legal procedures by SYB. that vary from case to case. The titling process is then completed by a cadastral survey (during which boundary In addition, at 31 December 2012, the group held land markers are inserted) and the issue of a formal registered allocations subject to completion of titling totalling land title certificate (an “hak guna usaha” or “HGU”). 31,601 hectares, comprising 3,061 hectares in CDM, Once full title has been obtained, central government and 12,050 hectares in KKS, 2,212 hectares in SYB and local authority permits are required for the development of 7,537 hectares in PBJ2. It is intended that application will fully titled land. These permits are often issued in stages. be made for a renewed allocation in respect of a further 6,741 hectares at CDM, where the existing allocation In the group’s experience, the land titling and permit recently lapsed. A substantial proportion of the PBJ2 process, which was never straightforward, has become land allocation will be transferred to smallholder more complicated in recent years. This has followed the cooperatives as discussed under “Community relations” devolution of significant authority in relation to land below. The KKS allocation is conditional not only upon matters from the Indonesian central government to satisfaction of the normal titling requirements but also Indonesian provincial and district authorities. This has upon completion of a necessary rezoning of the area resulted in an increase in the number of official bodies concerned. involved in the titling process. 24 Work is continuing with a view to completing the general vicinity of its existing land allocations and is conditional settlement agreement between SYB and an currently negotiating to acquire an area of approximately Indonesian third party company relating to overlapping 800 hectares close to KMS. With land prices rising and mineral rights on certain land areas held by SYB. Under increasing interest in plantation development, land is the agreement, SYB would swap 3,557 hectares of fully much less available than was the case in 1991 when the titled land, the subject of the claims, for 9,097 hectares of group was first established in East Kalimantan. Moreover, fully titled land held by another company, PT Prasetia the Indonesian government is now applying a “use it or Utama (“PU”), the whole of the issued share capital of lose it” policy to land. Pursuant to this policy, land which would be transferred to SYB, and would also allocations and titles may be rescinded if the land relinquish its 2,212 hectares land allocation that is still concerned is not utilised within a reasonable period for subject to completion of titling. The PU land is located on the purposes for which it was allocated. The group must the southern side of the Belayan River opposite the therefore be careful in expanding its land bank to ensure retained SYB northern areas and is linked by a that it can demonstrate clear plans for the development of government road to the southern REA Kaltim areas. The all of its undeveloped land holdings. continuing delay in completing these arrangements has been caused by the need to obtain comfort as to the Land development continuing validity of the land titles held by PU. Areas planted and in the course of development as at 31 Subject to completion of the agreed SYB settlement December 2012 amounted in total to some 37,000 arrangements, the fully titled land areas held by the group hectares. Of this total, mature plantings comprised would increase to 76,124 hectares, while the land 26,688 hectares having a weighted average age of 10 allocations still subject to titling would reduce to 25,562 years. A further 621 hectares planted in 2009 was hectares. Titling of the remaining land allocations may be scheduled to come to maturity at the start of 2013. The expected to result in full titles being granted to only part total of 37,000 hectares includes 2,164 hectares (of of the allocated areas as land the subject of conflicting which 272 hectares was planted in 2008) to be claims or deemed unsuitable for oil palm cultivation may relinquished by SYB upon completion of the SYB land be excluded. Moreover, not all of the areas in respect of swap arrangement described under “Land areas” above. which full HGU titles are issued can be planted with oil palms. Some fully titled land may be unsuitable for Reserve land held by the group only becomes available planting, a proportion will be set aside for conservation for development when the titling process has proceeded and a further proportion is required for roads, buildings to a point at which the group has been granted and other infrastructural facilities. The directors believe development and necessary land clearing licences, and that of the prospective 76,124 hectares of fully titled land compensation agreements have been reached with those between 50,000 and 55,000 hectares will ultimately be local villagers who have claims in respect of their previous plantable with oil palms. The remaining land allocations use of the land. The group’s target for new development may in due course provide a further 10,000 plantable during 2012 was delayed because a decision was taken hectares. against the background of the issues that the group had been experiencing with villages surrounding the REA In addition to actively pursuing the titling of its land Kaltim and SYB estates that development in new areas, allocations, the group continues to look at acquiring such as those held by PBJ and CDM, should not start until further areas suitable for planting with oil palms within the the group had ensured that, to the maximum extent 25 Review of the group continued reasonably practicable, compensation due to affected processed into CPO and palm kernels. The oldest mill villagers had been settled and registered with the dates from 1998 and a major overhaul initiated in 2010, appropriate Indonesian authorities. Issues with villages involving the upgrading of machinery and the installation are discussed in detail under “Community relations” of a new boiler to restore the effective mill capacity to 80 below. tonnes per hour, is now substantially complete. The second oil mill, which was brought into production in Negotiations with villages adjacent to PBJ are 2006, was expanded during 2010 to increase capacity substantially complete and clearing for further expansion from 60 to 80 tonnes per hour. The newest mill, which in the substantial plantable areas held by PBJ is expected commenced operation in September 2012, has a current to commence shortly. Negotiations are continuing with capacity of 40 tonnes per hour. With this new mill and the villages adjacent to CDM with a view to achieving recent upgrading of the other two mills, the group should, sufficient agreement regarding village compensation to for the immediate future, have sufficient processing permit resumption of land clearing on the CDM areas in capacity to handle all crop from its own estate and from the near future. It is intended to complete the planting out the growing number of maturing smallholder plantings in of some 5,000 hectares of KMS (being areas already the vicinity. The newest mill has been designed to permit prepared for planting during 2011) by mid 2013, the installation of a second processing line which would although a minor proportion of this area is likely to be double the mill’s capacity to 80 tonnes per hour and transferred to a village cooperative as explained under thereby provide the ability to cope with further processing “Community relations” below. demands. Although costs are rising, at current cost levels and CPO Once the plantings currently underway at KMS and prices, extension planting in areas adjacent to the existing planned for CDM reach a certain level of maturity, a developed areas still offers the prospect of good returns. further oil mill is likely to be needed to process the Accordingly, it remains the policy of the directors that, additional FFB production from these new areas. subject to financial and logistical constraints, the group Because the PBJ areas are some distance away from the should continue its expansion and should aim over time to group’s other planted areas, it will not be possible to plant with oil palms all suitable undeveloped land available process fruit from PBJ in any of the group’s three existing to the group (other than areas set aside by the group for mills or prospective fourth mill. It is planned that early fruit conservation). Such expansion will, however, involve a from PBJ will be sold to neighbouring mills but as FFB series of discrete annual decisions as to the area to be production from PBJ grows, it is likely that PBJ will need planted in each forthcoming year and the rate of planting its own oil mill. The directors do not currently foresee may be accelerated or scaled back in the light of either of the two further oil mills that may eventually be prevailing circumstances. Moreover, the group’s capacity needed being required before 2017. for extension development is likely to remain dependent upon the rate at which the group can make additional land Each of the group's two newer oil mills incorporates, areas available for planting. Processing and transport facilities within the overall facility, a palm kernel crushing plant in which palm kernels are further processed to extract the CPKO that the palm kernels contain. The processing of kernels into CPKO avoids the material logistical The group currently operates three oil mills in which the difficulties and cost associated with the transport and sale FFB crops harvested from the mature oil palm areas are of kernels. Each kernel crushing plant has a final design 26 capacity of 150 tonnes of kernels per day which is allow onshore transhipment of palm products to ocean sufficient to process kernel output from the group’s three going vessels. This facilitates palm product shipments to oil mills. Total installed capacity is presently 250 tonnes Europe when differentials between European and South per day. East Asian prices for CPO and CPKO make such shipments worthwhile, as for example may be the case The group maintains a fleet of barges for transport of when oil has been segregated and certified by CPO and CPKO. The fleet is used in conjunction with internationally recognised bodies as sustainably tank storage adjacent to the oil mills and a transhipment produced. The Balikpapan facilities are to be enhanced terminal owned by the group downstream of the port of by the construction during 2013 of a CPO refinery under Samarinda. The fleet now comprises one barge of 4,000 a joint venture arrangement between two major tonnes, which the group time charters, and a number of international oil traders and this will provide a further smaller barges, ranging between 750 and 2,000 tonnes, option for sale of CPO delivered to Balikpapan. The which are owned by the group. The smaller barges can group can transport oil by barge direct to Balikpapan from be used for transporting CPO and CPKO from the upriver its upstream oil storage tanks and the voyage time is operations to points downstream for transfer either to the significantly shorter than the voyage time to Sabah. transhipment terminal for subsequent collection by buyers Delivery to Balikpapan rather than Sabah therefore or directly to buyers’ own vessels. The 4,000 tonne barge means that more efficient use can be made of the group’s is equipped for sea voyages and can be used to make larger barge and the costs of transhipping in Samarinda deliveries to customers in other parts of Indonesia and can be reduced. overseas. On occasions, the group also time charters barges for additional shipments and to provide temporary During periods of lower rainfall (which normally occur for storage if required. short periods during the drier months of May to August of each year), river levels on the upper part of the Belayan The directors believe that flexibility of delivery options is become volatile and CPO and CPKO at times have to be helpful to the group in its efforts to optimise the net transferred by road from the mills to a point some 70 prices, FOB port of Samarinda, that it is able to realise for kilometres downstream where year round loading of its produce. Moreover, the group’s ability itself to deliver barges of up to 2,000 tonnes is possible. The group owns CPO and CPKO allows the group to make sales without a riverside site in this downstream location and intends to the collection delays sometimes experienced with FOB develop its own permanent loading facilities on the site for buyers. Typically, in recent years, over half of the group's use during dry periods once the local government has CPO production has been sold for delivery to ports in East completed the construction of suitable access roads. The Malaysia employing the group’s largest barge almost group is also investigating the possibility of using exclusively in sailing between Samarinda and Sabah. alternative routes (by obtaining licences to access third However, the pattern of the group’s sales is changing party owned roads) for the transfer of palm products to following the recent construction of bulking facilities in downstream loading points so that, as volumes increase, the major sea port of Balikpapan and the group is now the group can continue to evacuate all palm product selling increasing volumes of CPO for delivery to output promptly during drier periods. Balikpapan. The new Balikpapan facilities provide better access to the currently follows the Belayan River to Kota Bangun local CPO market than is available from Samarinda and (where the Belayan joins the Mahakam River), and then The river route downstream from the mature estates 27 Review of the group continued the Mahakam through Tenggarong, the capital of the months of 2011) and crop losses resulting from Kutai Kartanegara regency, Samarinda, the East harvesting disruptions generated by disputes with certain Kalimantan provincial capital, and ultimately through the surrounding villages. It had been hoped that the second Mahakam’s mouth into the Makassar Straits. An half of the year would see at least a partial recovery of the alternative route for evacuating CPO and CPKO, which crop shortfall of the first half but further disruptions by will also be used for the newer estates in KMS and CDM, villages meant that this recovery did not materialise. is via the Senyiur River which joins the Mahakam between Further information regarding disputes with villages is Kota Bangun and Tenggarong. provided under “Community relations” below. Crops and extraction rates A significant feature of 2012 was the increasing throughput of third party FFB. This provides the group FFB crops for the years from 2008 to 2012 are shown in with a valuable additional revenue stream, the benefit of the “Key statistics” section of this annual report. The crop which more than outweighs a slight negative impact on out-turn for 2012 amounted to 597,722 tonnes of FFB . extraction rates. With the continuing expansion of This was a little below the FFB crop of 607,335 tonnes smallholder plantings in the vicinity of the group's estates, for the corresponding period in 2011 but some 12 per further increases in third party FFB throughput can be cent below the budgeted crop for the year of 682,000 expected going forward. tonnes. The group purchased 64,014 tonnes of FFB from smallholders and other third parties (2011: 34,146 Against the background of the continuing village issues in tonnes). January and early February and the subsequent more limited harvesting blockages (all as referred to under Rainfall across the estates averaged 3,241 mm for 2012, “Community relations” below), the FFB crop to the end of similar to the level of 3,414 mm for the previous year. The March 2013 amounted to 137,576 tonnes, against widely predicted El Nino weather phenomenon did not 136,702 tonnes for the same period in 2012. The limited materialise. harvesting blockages will also have some impact on the crops reported for April but, thereafter, if as is hoped the Processing of the group’s own FFB production and the agreements now reached in relation to village issues externally purchased FFB, together totalling 661,736 continue to be respected, the directors expect the group’s tonnes (2011: 641,481 tonnes) produced 151,516 own FFB crops to return to more normal levels. The tonnes of CPO (2011: 147,455 tonnes), 30,734 tonnes effect of the disruptions to harvesting in 2012 is likely to of palm kernels (2011: 28,822 tonnes) and 11,549 have affected the normal fruiting cycle so that it must be tonnes (2011: 10,815 tonnes) of CPKO reflecting expected that monthly cropping levels may be below extraction rates of, respectively, 22.9 per cent for CPO average for the next few months and above average for (2011: 23.0 per cent), 4.6 per cent for kernels (2011: 4.5 the closing months of 2013. In view of the regulatory per cent) and 37.7 per cent for CPKO (2011: 38.4 per restrictions on forward looking statements that would be cent). expected to apply to the group if certain of the strategic options referred to under “Strategic direction” in Most of the crop shortfall against budget arose in the first “Overview” above were to be pursued, the directors have half of 2012 and was attributable to a combination of concluded that no forecast of crops for the year or target delayed ripening of crops in the early part of the year extraction rates should be published. (reflecting the particular weather patterns of the latter 28 Markets competitive advantage within the vegetable oil and animal fat complex. Within vegetable oil markets, CPO should According to Oil World, worldwide consumption of the 17 also continue to benefit from health concerns in relation major vegetable and animal oils and fats increased by to trans-fatty acids. Such acids are formed when 3.75 per cent to 182.7 million tonnes in the year to 30 vegetable oils are artificially hardened by partial September 2012. The increased consumption was hydrogenation. Poly-unsaturated oils, such as soybean reflected in increased world production during the same oil, rape oil and sunflower oil, require partial hydrogenation period of 182.9 million tonnes with CPO accounting for before they can be used for shortening or other solid fat 51.5 million tonnes of this (28.2 per cent of the total). applications but CPO does not. Vegetable and animal oils and fats have conventionally In recent years, bio-fuel has become an important factor been used principally for the production of cooking oil, in the vegetable oil and animal fat markets, not so much margarine and soap. Consumption of these basic because of the oil and fats that it currently consumes, commodities correlates with population growth and, in although this is not insignificant, but because the size of less developed areas, with per capita incomes and thus the energy market means that bio-fuel can provide a economic growth. Demand is therefore driven by the ready outlet for large volumes of oils and fats over a short increasing world population and economic growth in the period when surpluses in supply depress prices to levels key markets of India and China. Vegetable and animal oils at which bio-fuel can be produced at a cost that is and fats can also be used to provide bio-fuels and, in competitive with prevailing petroleum oil prices. There is particular, bio-diesel. According to Oil World, bio-fuel a growing body of evidence that, in recent years, production during the year to 31 December 2012 is vegetable oil and petroleum oil prices have moved in estimated to have accounted for some 13 per cent of all tandem and that petroleum oil prices create a floor for vegetable and animal oil and fat produced. vegetable and animal oil and fat prices at the level at which such oils and fats can be converted to bio-fuel at an The principal competitors of CPO are the oils from the overall cost (net of any available subsidies) that is annual oilseed crops, the most significant of which are competitive with the prevailing price of petroleum oil. soybean, oilseed rape and sunflower. Because these oilseeds are sown annually, their production can be rapidly The directors believe that demand for, supply of and adjusted to meet prevailing economic circumstances with consequent pricing of, vegetable and animal oils and fats high vegetable oil prices encouraging increased planting will ultimately be driven by fundamental market factors. and low prices producing a converse effect. Accordingly, However, they also recognise that normal market in the absence of special factors, pricing within the mechanisms can be affected by government intervention. vegetable oil and fat complex can be expected to oscillate It has long been the case that some areas (such as the about a mean at which adequate returns are obtained EU) have provided subsidies to encourage the growing of from growing the annual oilseed crops. oilseeds and that such subsidies have distorted the natural economics of producing oilseed crops. More Since the oil yield per hectare from oil palms (at between recently there have been actions by governments four and seven tonnes) is much greater than that of the attempting to reduce dependence on fossil fuels. These principal annual oilseeds (less than one tonne), CPO can have included steps to enforce mandatory blending of be produced more economically than the principal bio-fuel as a fixed minimum percentage of all fuels and competitor oils and this provides CPO with a natural subsidies to support the cultivation of crops capable of 29 Review of the group continued being used to produce bio-fuel. Concerns as to the side the balance of 35 per cent was exported. The proportion effects of such actions in reducing food availability and in of local sales was higher than for 2011 and partly reflects encouraging deforestation may limit further measures to the development of the local market and modifications to encourage the production of bio-fuel but the directors the tariff structure of the Malaysian market, hitherto the consider it likely that measures already in place will group’s principal export market, where as noted under remain in force for some time to come. “The Indonesian context” in “Overview” above, duties have been brought into line with those in Indonesia. As a A graph of CIF Rotterdam spot CPO prices for the last ten consequence, the differential between FOB prices years, as derived from prices published by Oil World, is realisable for CPO in the local and international markets shown in the “Key statistics” section of this annual report. has narrowed. With production volumes increasing, the The monthly average price over the ten years has moved group is broadening its customer base to ensure that it between a high of $1,292 per tonne and a low of $330 can access both domestic and export markets. per tonne. The monthly average price over the ten years as a whole has been $725 per tonne. A complicating factor in 2012, was the impact of the delays to harvesting caused by the village disruptions After opening 2012 at $1,065 per tonne, CIF Rotterdam, referred to under “Crops and extraction rates” above. the CPO price weakened during the second half of the These meant that significant volumes of FFB were year to a low of $745 per tonne but then recovered harvested late with a negative impact both on extraction slightly to end the year at $810 per tonne. Prices have rates and on the free fatty acid (“FFA”) content of CPO appreciated a little from this level in 2013 to-date and production. The sales volumes and prices achievable for currently stand at $830 per tonne. The weaker price high FFA oil produced during the closing months of 2012 levels now being seen may be attributed to a combination were materially lower than the prices that might otherwise of higher stock levels at origin, and concern that the have been expected to be realised for the CPO current world economic situation may reduce production of that period. consumption of CPO and other vegetable oils in industrial applications such as bio-diesel. The current CPO price is In past years, the CPKO price has almost always been at at an unusually large discount to the soya oil price but, a premium to the CPO price and CPKO has been an with reports of large current season plantings of soybean important second product for the group. Over the course in both the United States and South America (spurred no of 2012, the CPKO premium disappeared and, in recent doubt by the high soybean prices of 2012), there is a months, CPKO has been at a discount to the CPO price. concern that the discount will narrow as a result of CPKO is similar to coconut oil and the anomalous recent reducing soya oil prices rather than rising CPO prices. pricing of CPKO is attributed to unusually good harvests Against this, there is now evidence of falling stocks and of coconuts in the Philippines and other coconut past experience suggests that lower price levels will lead producing areas. Exports of CPKO represented 31 per to increased Indian and Chinese consumption. cent of CPKO sales by volume in 2012 against 38 per cent in 2011. Revenues In 2012, approximately 65 per cent by volume of group are comprehensive and standard for each of the markets CPO sales was made to the local Indonesian market and into which the group sells. The group therefore has no CPO and CPKO sales are made on contract terms that 30 current need to develop its own terms of dealing with sold further Greenpalm certificates in respect of some customers. 19,000 tonnes of 2012 production of CPO. During 2012, the group completed the RSPO supply As noted under “The Indonesian context” in “Overview” chain certification (“SCCS”) and obtained International above, Indonesia continues to impose a sliding scale of Sustainability and Carbon Certification (“ISCC”) referred duty on exports of CPO The progressive nature of the to under “Accreditation” below, enabling it to sell some of duty means that the Indonesian state takes an its production as certified sustainable oil. There are four increasingly large part of the benefit of prices above models established by RSPO for the marketing of oil from $750 per tonne CIF Rotterdam. Although local sales do RSPO certified sources: “identity preserved”, not attract export duty, arbitrage between the local and “segregated”, “mass balance” and “book and claim”. international markets ensures that the price differential These differ in the extent to which buyers of CPO and between the markets is normally an almost exact CPKO obtain delivery of identifiable sustainable oil. reflection of the additional imposts incurred on exports. Under the identity preserved and segregated models, oil delivered is fully identified as sustainable (with the identity As a general rule, all CPO and CPKO produced by the preserved model further requiring that the delivered oil is group is sold on the basis of prices prevailing immediately identified as coming from a specific mill). Under the mass ahead of delivery but, on occasions when market balance model, certified and uncertified oil can be mixed conditions appear favourable, the group may make and the proportion of the mix representing certified oil can forward sales at fixed prices. The fact that export duty is be delivered as sustainable oil. With the book and claim levied on prices prevailing at date of delivery, not on prices model, RSPO certified producers do not deliver realised, does act as a disincentive to making forward sustainable oil to buyers but “book” the volume of their fixed price sales since a rise in CPO prices prior to CPO and CPKO production and are awarded “Greenpalm delivery of such sales will mean that the group will not certificates” in exchange. These certificates can then be only forego the benefit of a higher price but may also pay sold to end users of CPO and CPKO who wish to support export tax on, and at a rate calculated by reference to, a RSPO but do not wish to complicate their supply chains higher price than it has obtained. When making forward by sourcing oil only from RSPO certified producers. fixed price sales, the group would not normally commit a volume equivalent to more than 60 per cent of its Existing logistics for storage and transportation make it projected CPO or CPKO production for a forthcoming difficult for the group to sell its output under the RSPO period of twelve months. No deliveries were made identity preserved and segregated models but sales may against forward fixed price sales of CPO or CPKO during now be made under the mass balance model. The group 2012 and the group currently has no sales outstanding made its first sales of ISCC certified oil during the last few on this basis. months of 2012 comprising 44,000 tonnes of CPO and also sold Greenpalm certificates in respect of 56,051 The average prices per tonne realised by the group in tonnes of CPO and 9,250 tonnes of CPKO. Sales of respect of 2012 sales of CPO and CPKO, adjusted to certified sustainable CPO and CPKO can command FOB, Samarinda, and net of export duty were, premium prices as well as broadening the potential respectively, $800 (2011: $861) and $862 (2011: market for the group’s oil production in both the local and $1,194). export markets. In the first quarter of 2013, the group 31 Review of the group continued Costs electricity company (“PLN”) under which the group will install an additional three megawatts of generating The group's revenue costs principally comprise: direct capacity, which it will dedicate to PLN and which PLN will costs of harvesting, processing and despatch; direct costs use to supply power to the villages surrounding the of upkeep of mature areas; estate and central overheads group’s estates by way of a local grid to be constructed by in Indonesia; the overheads of the UK head office; and PLN. Payment for the power so utilised will be made by financing costs. The group’s strategy, in seeking to PLN at a fixed rate determined by Indonesian state minimise unit costs of production, is to maximise yields regulations. This equates to about $1 million per per hectare, to seek efficiencies in overall costs and to megawatt year but it is not yet known what utilisation PLN spread central overheads over as large a cultivated will make of the available capacity. PLN will also consider hectarage as possible. linking the national grid to the new local grid and may in that event be able to increase its power capacity The level of rainfall in the areas of the agricultural requirement to six megawatts. operations provides the group with some natural advantage in relation to crop yields. The group Whilst the transaction agreed with PLN offers immediate endeavours to capitalise on this advantage by constantly returns for limited further investment (estimated at $1 striving to achieve economic efficiencies and best million per megawatt of installed capacity), the group is agricultural practice. In particular, careful attention is also considering a project to use methane as an given to ensuring that new oil palm areas are planted with alternative fuel source for vehicles and other diesel or high quality seed from proven seed gardens and that all petrol powered equipment. Preliminary research oil palm areas receive the upkeep and fertiliser that they indicates that such a project would be feasible using need. existing well established technology and would offer the prospect of attractive returns. It would, however, require The group’s two new methane capture plants (described initial capital investment of approaching $10 million. If under “Carbon footprint” below) were commissioned in the group is successful in securing further profitable uses April and October 2012 respectively. Methane from each for methane, methane production could be increased by plant is currently driving two generators (each of one installing a further methane capture plant in the third, megawatt capacity). The power from these generators is recently commissioned, mill. having a substantial impact on the group’s consumption of diesel oil for power generation with material Other cost saving initiatives that have been implemented consequential savings in energy costs. In addition, the by the group in recent years include measures to reduce group is accruing carbon credits amounting to some the use of pesticides, partial substitution of inorganic 31,057 for 2012 which are expected to be realised later fertiliser with natural fertiliser, increased mechanical in 2013 at a price agreed at the outset of the methane handling of FFB collection and transport, and the plant project. Current methane production is averaging establishment of an “in house” road maintenance about four times that needed to drive the installed capability. Development of the stone quarry concession, generators and this offers opportunities for generating described under “Coal and stone operations” below, additional returns from the investment made in the plants. should permit further economies in respect of building and maintenance of the group’s infrastructure. In furtherance of such returns, the group has recently reached an outline agreement with the Indonesian state 32 As noted under “The Indonesian context” in “Overview” The group has established a number of new initiatives for above, there have recently been substantial increases in 2013. These include a review of salary structures to government directed minimum wage levels. A reasonable ensure consistency against industry benchmarks proportion of the group's employees are paid at a level throughout the group hierarchy, formal processes for above the minimum wage but the need to maintain performance evaluation (including employee feedback) differentials makes it inevitable that the new minimum and individual development programmes to facilitate wage levels will result in a significant increase in the effective succession planning and promotion, and an group's employment costs. In 2012, these represented employee satisfaction survey in order to make continuing about one third of the cost of sales attributable to the improvements to the working environment. group’s agricultural operations. Cost saving efforts in 2013 will therefore have a particular focus on labour Having available staff in the numbers and with the skills efficiency and, specifically, on reducing overtime working. and commitment that are required is vital to the group in Employees its efforts to establish best practice in all aspects of its agricultural activities. In most years, graduates from Indonesian universities are recruited to join a twelve By the end of 2012, the workforce numbered over 7,000. month training programme organised by the group's training school that provides grounding in the technical Following the reorganisation of the human resources aspects of oil palm estate management. Those department (completed in 2011) and the appointment of successfully completing the programme are offered new management, the process of developing a more management positions. consistent and formal approach to the management of human resources continued throughout 2012. Work Wherever possible, the group fills available staff positions commenced on establishing a comprehensive employee by internal promotion. The continuing expansion of the database, incorporating, in addition to personal data and agricultural operations gives the group the ability to offer salaries, information on the allocation of benefits and graduates the prospect of an attractive career path. facilities, such as housing, training and development, Hitherto, graduate intake has focused on those holding productivity, performance and absenteeism. A dedicated agricultural and engineering qualifications but, as the manager is now responsible for human resource matters group’s requirements for more sophisticated within each subsidiary company helping to enhance administrative data and financial systems develop, operational practices and to improve productivity. recruitment is broadening to include a wider spectrum of graduates, with qualifications in finance, accounting and Phasing in of a performance management system linked office administration. to key performance indicators and a competitive remuneration structure continued during 2012 and the Continued general and competency based training is system should be applicable to all staff levels by 2014. provided for staff at all levels to support the requirements There are formal processes for recruitment, particularly associated with external accreditations, which are integral for key managerial positions, where psychometric testing to the daily operations of group, as well as for practical is used to support the selection and hiring decisions. Exit purposes. Regular programmes are constructed by, and interviews are also conducted with departing staff to operated out of, the group's own training school. These ensure that management can address any significant are supplemented by external management development issues. 33 Review of the group continued courses and attendance at industry conferences. A wide open not only to the group's employees and their variety of topics is covered including work ethics and dependants but also to members of the local company values, health and safety, sustainability, communities. The group actively supports measures to communication skills and English language courses. The control endemic diseases and to further the education of group continues to take total quality management its workforce in hygiene and similar health matters. No initiatives with the aim of further improving the incidents of vector borne diseases (such as dengue fever effectiveness of the group’s operations. and malaria) in which infection occurred on the group’s estates were reported during 2012. Almost all members of the workforce and their dependants are housed in group housing in a network of The group has health and safety policies that are clearly villages across the group estates. Group housing is communicated to all employees and are managed extended as the workforce expands. Villages are through regular training as well as meetings on each equipped with potable water and electricity and provided operating unit attended by management and employee with a range of amenity buildings including mosques, representatives. Senior management is ultimately churches, shops, schools and crèches. accountable to the group managing director for all health and safety matters and appropriate action is taken to A trust funded by the group operates a network of primary remedy any deficiencies identified. There were no serious schools and crèches across the group's estates for over accidents during 2012. 2,000 children. The group also provides support to state secondary schools serving the children of the group's During 2012, the group committed to strengthening, and employees. In 2012, 158 pupils from the group’s primary investing further in, its occupational health and safety schools sat examinations for entry to state secondary practices. Following an independent review of the schools and a 100 per cent pass rate was achieved existing occupational health and safety management (2011: 143 pupils and 100 per cent). As the workforce system, improvements have been, and continue to be, expands and the number of children graduating from made to align existing procedures with international primary schools grows, the group is exploring the standards of best practice, guided by the requirements of possibility of providing estate secondary schools, where the internationally recognised occupational health and local state secondary schools may be insufficient. Initially, safety standard OSHAS 18001. The group aims to be use would be made of existing classrooms within the certified to be in full compliance with this standard by estate primary schools but in due course there may be a 2015. requirement for additional estate school facilities. The availability of suitable schooling is essential for attracting The group promotes a policy for the creation of equal and and retaining staff in the remote locations of the group’s ethnically diverse employment opportunities, including operations. with respect to gender, and encourages the establishment of forums in which employees or their The group runs its own health service with a resident representatives can have free and open dialogue with the doctor, medical clinics on each established estate and a group’s management. In 2012, the group established a central clinic as well as, from 2013, a resident dentist. It gender committee to ensure that the gender policy is also has partnership links with larger hospitals in properly implemented. For a second year, in 2012 one of Samarinda and Jakarta. The estate and central clinics are the group subsidiaries received an award for the provision 34 of equal opportunities for female workers from the local experienced because of actions by villagers to enforce government. their position by stopping harvesting access to certain areas of the group’s estates and blockading group oil Community relations mills to prevent processing of FFB. The group’s estate areas are surrounded by a network of The 2012 village dissatisfaction with the group covered a villages and sub-villages (with the latter administered number of issues and different villages had different through the villages). claims. However, a common theme was a demand that the group procure the land necessary to establish The group has always seen the maintenance of additional cooperative smallholder oil palm plantings in harmonious relations with, and the encouragement of each village. This demand was based on 2007 development within, the local communities in its areas of Indonesian legislation (the “2007 legislation”) that operation as an essential component of its agricultural requires that any company receiving a land allocation for business. As explained under “Land areas” above, all new oil palm development after the date on which the plantation development by the group involves payment of applicable legislation became effective must provide land compensation to affected local villages as well as for, and develop, smallholder oil palm plantings equal to consultation with the surrounding communities to identify 20 per cent of the area to be planted with oil palm by the overlapping land use rights and ensure that these are company, such plantings to be owned and paid for (from transferred to the group in a way that meets legal funding organised by the company) by co-operatives from requirements (and in recent years, since the the villages whose land use rights overlap with the establishment of RSPO, the requirements of RSPO). company’s land titles. Thereafter the group provides assistance with community development projects and supports the local communities Substantially all the REA Kaltim and SYB plantings are on in establishing smallholder plantings of oil palms. A land allocated prior to the 2007 legislation and, whilst the significant proportion of the group’s workforce is drawn group has to-date successfully supported smallholder from the local communities and there is regular development, such developments have been almost interaction at a social level between the group’s staff and entirely on land provided by villagers and, the group has employees and members of the local communities. not hitherto, as a general rule, itself provided land for smallholder plantings by villages surrounding the REA Inevitably in the period of over twenty years since the Kaltim and SYB estate areas. Legal advice has confirmed group’s East Kalimantan operations were first that the group is under no obligation to do so. established, there have been occasional disagreements Nevertheless, the group has for some time recognised between the group and the local communities but until that it should endeavour to meet the expectations of recently, such disagreements have been minor, rapidly villagers who have difficulty understanding why villages resolved and without significant impact on the group. adjacent to newer oil palm developments are entitled to That situation changed during 2012 with disputes be given land while they are not. It did, however, take time concentrated into two waves, the first in the second to identify and acquire suitable land for cooperative quarter of the year running into early July and the second development and the resultant delay has certainly in the final weeks of the year and continuing into 2013. exacerbated and may well have provoked the village These disputes were more serious than those previously problems experienced by the group. 35 Review of the group continued The acquisition of PBJ2 in July 2012 provided the group early February. Maintenance of this much improved with sufficient land to meet the smallholder development situation will be subject to continued adherence by obligations to which the group would have been subject villages to the terms of the agreements reached with had the REA Kaltim and SYB estates been developed them and satisfactory resolution of the few remaining after the 2007 legislation was enacted but did not, of unresolved issues and of any new issues that may itself, immediately resolve outstanding village demands surface. for oil palm cooperative developments and other village claims. That was because such resolution was The current improved position has been reached at a complicated, as respects land allocations for cooperatives, significant cost but that cost should not be without benefit by the need for complete and accurate government given that the funds committed to procuring additional mapping of all village boundaries to provide a consistent cooperative oil palm developments will, in due course, basis for allocation between villages and, as respects provide a return to the group from further increases in other claims, by past fraud by certain intermediaries who group revenues from processing cooperative FFB. were legally appointed by villagers and entrusted with Moreover, the stronger relationships forged with the East distributing land compensation to individual villagers. Kalimantan authorities during the period of the disruptions and the better mutual understanding achieved Fortunately, the group received excellent support from the between the group and its local communities should local authorities who assisted with mediation and, where enhance the group’s ability to continue the development necessary, police intervention. It is clear that village of its East Kalimantan operations. actions interfering with the normal running of the group’s estates are illegal but both the police and the group were It is clear that the group and the villages around its concerned to achieve resolutions of outstanding issues by estates are interdependent. The group requires the dialogue rather than force and to retain a situation in acceptance of its operations by the villages while the which, notwithstanding the issues, discussion remained villages are reliant upon the group as an employer, as a possible between the group and the various villages market for services and produce, and as a purchaser of without mutual antipathy. smallholder grown FFB. Villages will benefit further from the group’s activities once the recent agreement to supply Substantial progress has been made since the beginning power to PLN, as described under “Costs” above, has of 2013 and settlement agreements in respect of most been implemented as this will provide the villages with material issues were reached in late January or early access to electricity generated by the group’s methane February with all of the larger villages that had land rights capture plants. Whilst it is probably inevitable that there historically overlapping REA Kaltim and SYB land. will on occasions in the future be issues between the Settlement discussions are continuing in respect of group and surrounding villages, the directors hope that outstanding disputes. To-date agreements concluded with a better appreciation of the symbiotic relationship with villages have been adhered to but there have been between the group and the villages, such issues will be some subsequent disruptions by individual villagers. One more readily resolved than was the case with the issues such disruption caused a harvesting blockage in one area that arose during 2012. of the REA Kaltim estates for a period of nearly four weeks during March and April 2013 but otherwise these Against the background of the 2012 issues, the group later disruptions have been limited as to duration and reviewed the organisational structure and responsibilities scale. All three mills have been operating normally since of the departments dealing with the local communities 36 and increased the allocation of resources to this area of “Program Pemberdayaan Masyarakyat Desa” or “PPMD”. the group’s business. The head of corporate affairs has Under this scheme, individual smallholders cultivate oil now been appointed to the board of REA Kaltim and has palm on their own plot of, typically, two hectares. The extended his responsibilities to include overall group provides technical advice and supplies the responsibility for smallholder schemes, land smallholders with seedlings, fertilisers and herbicides on compensation, village liaison and community deferred terms on the basis that when a smallholder’s oil development. In addition, a new head of village affairs, palm plantings reach maturity, all FFB produced will be based on the plantations, is being appointed with sold to the group for processing and the group will, on an responsibility for coordinating the daily activities of these agreed basis, recover from the amounts payable for the departments and ensuring their close interaction with the FFB, the deferred amounts owed to the group. Some local communities. Community development 1,561 hectares of smallholder plantings across 13 local villages have been established following this model. In addition, the group now treats as if they were PPMD plantings a further 795 hectares of smallholder plantings Community development assistance provided by the originally developed under a government scheme for group comprises infrastructural and other general which the group has effectively assumed responsibility. assistance to the local communities. While continuing to support established smallholdings Infrastructural assistance includes the provision of access developed under the PPMD scheme, since 2009 the to electric power, assistance with repairs of village roads group’s efforts to procure further smallholder and bridges, schools and community buildings and the development have been concentrated on encouraging the provision of water for daily domestic use. Other forms of formation of local village cooperatives to develop oil palm general assistance include donations to support the on larger areas pursuant to what are known as “plasma celebration of religious festivals and regular fogging for schemes”. Under the plasma scheme model, the land mosquitoes in areas of the surrounding communities to areas for development are provided by or allocated to reduce the incidence of vector borne diseases in those village cooperatives but the development is managed by communities. Smallholder schemes the group for a fee, with the advantage that development and production standards similar to those of the group can be established in the plasma areas. The costs of development are borne by the cooperatives but with The availability of the group’s oil mills to process FFB funding from local external sources, supplemented if harvested from plantings in the vicinity of the group’s necessary by the group and provided on terms that FFB estates provides an opportunity for the local communities produced by the cooperatives will be sold to the group to further their economic progress by developing and that the group will ensure that, out of the proceeds of smallholdings of oil palms in areas surrounding the such sale, the cooperatives meet their debt service group's estates. The group established its first obligations in respect of the external funding. smallholder scheme in 2000 and continues to support and invest in the development of smallholder plantings. Plans for further expansion of the plasma schemes during 2012 were held up by delays in identifying and agreeing Prior to 2009, the group’s smallholder support was allocations of additional land areas suitable for provided to individuals pursuant to a scheme known as smallholder development (as further discussed under 37 Review of the group continued “Community relations” above). The plasma scheme areas the group will benefit from the additional throughput in its planted at 31 December 2012 amounted to some 2,900 oil mills that will result from the processing of FFB from hectares. With the further allocations of land that have the plantings. now been substantially agreed, the group expects a useful increase in the plasma areas during 2013. Conservation It was originally planned that cooperative members would The group continues to manage a network of form the core labour force for the plasma scheme conservation reserves within its titled land areas with the developments but, with urban migration reducing village aim of conserving the natural biodiversity and ecosystem numbers, the cooperative members available to work on functions of the landscapes in which the group operates. the plasma schemes have proved insufficient to provide Conservation reserves are designated on the basis of more than a minor proportion of the workforce needed to environmental impact and high conservation value maintain and harvest the scheme plantings. The balance assessments, which are conducted by both the group’s of the required workforce is therefore being supplied by conservation department (known as “REA Kon”) and the group from its own labour force. Whilst the group external experts prior to each new agricultural levies an appropriate charge for this service, it means that development undertaken by the group. To date, over the group now sizes its labour force at a level sufficient to 20,000 hectares have been set aside as conservation operate not only its own estates but also the plasma reserves. schemes. The group will be expanding the estate worker housing and facilities to accommodate the additional The activities of REA Kon cover three distinct areas as permanent workers. follows: Financing for the group supported plasma schemes • a biodiversity programme, which aims to compile initiated to-date has been agreed with a local comprehensive species inventories and implement development bank in the form of fifteen year loans long-term species monitoring programmes to inform secured on the land and assets of the schemes and the management actions necessary to maintain and guaranteed by the group. These facilities are designed to enhance the natural biodiversity of the landscape; finance most of the initial development costs of the schemes but will be supplemented to the extent necessary by funds advanced by the group. There are currently three facilities in place for the current schemes. Whilst the group views its support for smallholder oil palm plantings in the local communities adjacent to its operations as part of its social responsibility to those communities, the expansion of smallholder plantings in the vicinity of the group’s mills will be mutually beneficial to the communities and the group. The communities will benefit from the significant economic development generated as a result of the smallholder plantings while • a community programme, which aims to engage with and educate the communities living in and around the group’s oil palm concessions to reduce the negative environmental impacts of the oil palm activities and to promote the sustainable use of natural resources; and • a plantation programme to monitor and reduce the environmental impact of the group’s operations and of the people living in and around the plantation in order to maintain the integrity of the conservation reserves and the quality of the human and natural environment. 38 Surveys conducted by REA Kon, together with The water quality of rivers which flow through the assessments undertaken by visiting scientists and conservation reserves, as well as other key environmental students, have to date confirmed the presence in the parameters which indicate the health of these habitats, conservation reserves of a total of 495 species (66 are monitored on a monthly basis. A key component of species of mammals, 185 species of birds, 53 species of REA Kon’s efforts to reduce the negative environmental reptiles, 32 species of amphibians, 84 species of fish and impacts of the people living within and around the group’s 75 species of invertebrates). These species include 76 plantations is the provision of weekend long conservation that are listed on the International Union for the education camps for children from estate and local village Conservation of Nature’s (“IUCN”) Red List of Threatened schools. These camps aim to educate and enthuse the Species as being in the categories of “Near Threatened”, local population about the importance of protecting the “Vulnerable”, “Endangered” and “Critically Endangered”. conservation reserves and the species that inhabit them. In 2012, REA Kon’s community team held five Camera trapping and other biodiversity surveys continue conservation education camps, and visited a number of to record the presence of orang-utans within the village schools in the vicinity of the group’s new conservation reserves. Sighting of a baby orang-utan and developments. a camera trap photograph of a baby sun-bear, as well as the first record of an orang-utan in SYB northern estate, In 2009, the group established Yayasan Ulin (“YU”) are encouraging signs of the ability of the group’s (meaning the Ironwood Foundation) as an Indonesian conservation reserves to support healthy populations of charitable foundation, with a feeder charity registered in these species. REA Kon maintains a nursery of native the UK. The aim of the YU is to promote and facilitate the timber and fruiting tree species, which it uses to enrich protection of certain habitats of importance for both the natural habitat within the conservation reserves biodiversity conservation. The majority of YU’s activities and the estate villages. In 2012, some 650 seedlings have to date focused on the Mesangat wetlands in Kutai from REA Kon’s nursery were distributed for enrichment Timur district, East Kalimantan. This valuable wetland planting. ecosystem, which is known to support a number of Critically Endangered and Endangered species, overlaps REA Kon continues to provide small grants and field with and extends into the landscape surrounding the assistance to enable undergraduate students from local CDM land areas. Research by both local and international universities to conduct final year research projects within scientists has concentrated on identifying and developing the group’s conservation reserves in an effort to an understanding of the population status and ecology of encourage young Indonesian scientists to study the the rare, threatened and endangered species that inhabit relationship between oil palm and biodiversity. In 2012, six these wetlands, monitoring the harvesting of fish and undergraduate students and one postgraduate student reptiles by the local community and implementing from universities in Samarinda, Jakarta and Yogykarta schemes to encourage sustainable use of these natural participated in this programme. In addition, REA Kon resources. assisted two postgraduate students from Utrecht University in the Netherlands in conducting biomass Responsible agricultural practice assessments within the conservation reserves as part of their postgraduate research projects. The group operates a zero burning policy in relation to land development and, in dry periods, maintains active fire 39 Review of the group continued patrols in an effort to limit the risks of accidental fires. inorganic fertiliser amounted to 9,654 hectares in 2012 Corridors are used to separate all plantings from water (2011: 9,636 hectares) and is projected to amount to courses and the latter are regularly monitored to ensure close to 11,000 hectares in 2013. that they are not contaminated by leaching of fertilisers and chemicals. The group actively promotes integrated Handling arrangements are designed to ensure that no pest management throughout its operations. Wherever CPO, CPKO or oil mill effluent passes into water courses. possible, natural predators are preferred to pesticides for On one occasion in 2012, during very heavy rains, an pest control. Selective varieties of flowering plants have effluent pond within one composting area overflowed but been planted throughout the group’s estates to promote the overflow was contained within the perimeter drains the population of wasps, the natural predators of around the composting area. There were no reported bagworm and caterpillars. incidents of accidental spillage into water courses during 2012. Steps are being taken to educate and incentivise As noted under “Costs” above, the group has the group’s resident workforce and its dependants to endeavoured in recent years to reduce its dependence on segregate domestic waste so as to permit recycling of inorganic fertiliser by developing organic fertilisers. Two organic and plastic waste. During 2011, the group 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 and fixes nitrogen but is also a prolific generator of acquired a heavy duty plastic macerating unit. This is used for shredding larger clean plastic containers into flakes for onward sale and the resultant proceeds are used to sponsor special events for the workforce and its dependants. vegetative matter that acts as a soil improver. This Fibre extracted during the milling of oil palm fruit is used promotes oil palm growth, particularly in the immature to fuel oil mill boilers from which steam is generated. The phase. Composting of processing waste produces a steam is then used to drive steam turbines for generating nutrient rich compost that can be applied in the oil palm electricity. This electricity is sufficient to power not only areas in substitution for inorganic fertiliser. the group’s oil mills and the kernel crushing plants but also to provide power to several estate villages. Composting is effected by delivering all empty fruit bunches and oil mill effluent (in the latter case after Carbon footprint treatment in methane recovery lagoons and/or mill effluent ponds) to a composting contractor at sites The company published its first carbon footprint report in adjacent to the group’s oil mills. The contractor takes title February 2013. This report identifies and quantifies the to these residues and manages the composting process. greenhouse gas emissions associated with the longer This takes 45 days and involves seeding the residues with established component of the group’s agricultural an accelerant of micro-organisms (supplied by the operations. The carbon footprint report will facilitate the contractor), mixing the residues and macerating the mix design and implementation of strategies for further to encourage biodegradation. The contractor then sells reducing emissions in the future, as well as providing a the resultant compost back to the group at an agreed baseline against which progress in reducing greenhouse price with a guaranteed minimum nutrient content. The gas emissions can be monitored and reported. area in respect of which compost substituted for 40 Although steam generated electricity from the oil mills is Accreditation effective in meeting a proportion of the group’s energy needs, the available power is not sufficient for all villages The group seeks to follow international and industry and power can anyway only be provided by this means standards of best practice throughout its operations. The when the mills are running. Accordingly, in an effort group is a member of the Roundtable on Sustainable significantly to reduce the group’s greenhouse gas Palm Oil (“RSPO”), which has produced a set of eight emissions and thereby reduce its carbon footprint, the principles and 39 criteria for the sustainable production of group has constructed two methane capture plants which palm oil, defined as production which is “legal, were commissioned in, respectively, April and October economically viable, environmentally appropriate and 2012. The plants lead to a reduction in greenhouse gas socially beneficial”. To obtain RSPO certification, in two ways: first, methane emissions from anaerobic members are required to comply with RSPO principles digestion in the open mill effluent ponds are lower and, and criteria and to have their operations audited by RSPO secondly, less diesel oil is required to generate power. approved independent auditors. The directors believe that the group's operational practices have always been Each methane capture plant is adjacent to an existing oil of a high standard but the RSPO certification process mill and is based around a lagoon sealed by a cover requires that such operational practices are embedded in fabricated from high density polyethylene sheeting. After formal systems and are subject to controls that are initial cooling, mill effluent passes to the lagoon, which is auditable. equipped with a liquid agitation system designed to accelerate the anaerobic digestion of the effluent. The The group has now achieved RSPO certification of the methane released during the digestion process is two REA Kaltim oil mills, all of the REA Kaltim estates and captured under the lagoon cover, passed through a the SYB Tepian estate, as well as some of the smallholder biological scrubber and used to fuel biogas powered oil palm plantings. It is planned to obtain certification of generators. Methane that is surplus to the current the newly constructed SYB oil mill by 2015. Development requirements for electricity generation is flared off. The of KMS has been carried out in accordance with the digested effluent is discharged from the lagoon to the RSPO New Plantings Procedures. As a further step in the existing mill effluent ponds and subsequently passed to process of RSPO certification of its operations, the group the composting process. The electricity generated from achieved certification of its supply chain under the RSPO the captured methane supplies a significant proportion of Supply Chain Certification System (“SCCS”) during 2012. the group’s mills, offices and housing, thereby eliminating This certification provides buyers of CPO and CPKO with the requirement for diesel generated electricity in these the ability to identify oil purchased as coming from RSPO areas. certified sources, thereby permitting the group to sell it production as certified under the RSPO “mass balance” Performance of the methane capture plants has model. The “mass balance model” is one of the four exceeded expectations and, as discussed under “Costs” mechanisms established by RSPO for the marketing of oil above, measures are being taken to make more from RSPO certified sources as described under productive use of surplus methane. “Revenues” above. Separately in 2012, the group also obtained International Sustainability and Carbon Certification (“ISCC”), which 41 Review of the group continued allows the CPO produced from the REA Kaltim estates original cost. In the meanwhile, the concession holding and mills to be used to produce biofuel that meets the companies are financed by loan funding from the group requirements of the European Union Renewable Energy on terms such that no dividends or other distributions or Directive. In addition to verifying that biofuel feed stocks payments may be paid or made by the concession holding have been produced, processed and transported in companies to the local partners without the prior accordance with a series of sustainability criteria, this agreement of KCC. certification scheme requires members of the supply chain to demonstrate that the net greenhouse gas Operating activities emissions associated with the production and use of this biofuel will be lower than if the equivalent amount of During 2010 and 2011, the group started to develop an energy was generated by fossil fuels. ISCC certified CPO open cast coal mining operation and coal trading activity generally commands a small price premium in Europe based on the three coal concessions. Subsequent events over CPO that has not been ISCC certified. showed that coal mining and trading have specific complexities that are not shared by the group’s All of the operations of REA Kaltim and the northern agricultural operations. Moreover, coal prices fell estates of SYB have been certified or recertified, as significantly between early 2011 and mid 2012. The appropriate, as ISO 14001 compliant. directors therefore decided in mid 2012 that, for the time Coal and stone operations Concessions and structure being, coal trading activities should be suspended and further capital committed to the coal operations should be limited and concentrated on maximising returns from the concessions in which the group had already invested. The group holds rights in respect of three coal mining The group is in discussions with two third parties in concessions and a stone deposit, all of which are located relation to the coal concession at Kota Bangun. Both in East Kalimantan in Indonesia. Stone quarrying is such parties have coal mining interests adjacent to the classified as a mining activity for Indonesian licensing group’s concession. A successful conclusion to the purposes and is therefore subject to the same regulatory discussions would result in one of the parties mining the regime as coal mining. concession on a basis that would limit the group’s downside and provide a return to the group that, at A UK subsidiary company, KCC Resources Limited current coal prices (which have risen to an extent from (“KCC”) acts as the co-ordinating company for the coal their lows of June 2012), could reasonably be expected and stone interests via a 95 per cent owned Indonesian to recover the group’s investment and, if coal prices subsidiary company, PT KCC Resources Indonesia improve further, could yield a reasonable profit. A similar (“KCCI”), which is five per cent owned by local partners. arrangement may be possible in relation to the other two The mining concessions and stone deposit are held by coal concessions, which are in the southern part of East Indonesian concession holding companies, which are Kalimantan. The group had previously thought that an currently wholly owned by the group's local partners but outright sale of these two concessions might be with the group having the right, subject to satisfaction of preferable to such an arrangement but is now inclining to certain conditions, to acquire 95 per cent of each of the the view that retention of the concessions with a third concession holding companies at the local partners’ party mining arrangement may provide a better final outcome. 42 In view of the uncertainties affecting the coal financial statements in US dollars. The company concessions, the group has made a provision of $3 million continues to prepare its individual financial statements in against its investment in the concessions at 31 December sterling and in accordance with UK Generally Accepted 2012. Accounting Practice. Accordingly, the company’s individual financial statements are presented separately On the coal trading side, steps are being taken to close from the consolidated financial statements. out contractual commitments made prior to the suspension of trading and no new trades are being The accounting policies applied under IFRS are set out in initiated. Prior to the suspension, the group had made the “Accounting policies (group)” section of this annual one significant shipment of traded coal. As noted in the report. The accounting policy relating to biological assets half yearly report for 2012, the buyer for this shipment (comprising oil palm plantings and nurseries) is of repudiated its contractual obligations and this meant that particular importance. Such assets are not depreciated the group had to sell the shipment elsewhere at a loss. but are instead restated at fair value at each reporting The group is pursuing recovery of this loss but has date and the movement on valuation over the reporting provided against it to the extent of $0.8 million in the period, after adjustment for additions and disposals, is results to 31 December 2012. taken to income. Deferred tax is provided or credited as appropriate in respect of each such movement. The group remains confident of the economic viability of its stone concession and work is continuing on plans to As in previous years, the fair value of the biological assets quarry the concession to provide stone for the group’s at 31 December 2012 has been derived by the directors agricultural operations and for sale to users of stone in on a discounted cash flow basis by reference to the FFB the area of those operations. Sustainable practices projected to be harvested from the group's oil palms over the full remaining productive lives of the palms and an estimated profit margin per tonne of FFB so harvested. Such estimated unit margin is based on an average of The group remains committed to observing international historic FFB profit margins for the 20 years to 2012 standards of environmental and corporate social practice buffered to restrict the implied annual movement in such in its coal mining and stone quarry activities. Health and estimated unit margin to 5 per cent and to prevent any safety procedures have been established to protect and change in estimated unit margin that runs contrary to the safeguard the welfare of all persons involved and, upon trend in current margins. For this purpose, the historic resumption of existing, or commencement of any new, profit margin for each applicable year has been derived activities, suitable measures would be designed to ensure either from the budgeted unit cost of FFB production and the proper management of waste water and land areas the actual historic average of CPO prices (FOB Port of affected by these activities. Finances Accounting policies Samarinda and net of export duties) for such year or, for earlier years for which such detailed information is not available, an appropriate estimate of the historic profit margin for the year. The discount rates used for the purposes of the biological The group reports in accordance with International asset revaluation at 31 December 2012 were 15 per cent Financial Reporting Standards (“IFRS”) and presents its for the estates owned by the company’s two principal 43 Review of the group continued subsidiaries, REA Kaltim and SYB, and 18 per cent for all Correction of previous accounting error other group companies (2011: 16 per cent and 17½ per cent for, respectively, REA Kaltim and SYB, and 19 per After discussion with the Financial Reporting Council’s cent for all other group companies). The reduction in Conduct Committee, the group has concluded that it has discount rates is designed to reflect appropriately the been incorrectly applying cash flow hedge accounting to improved credit rating now accorded to Indonesian certain cross-currency interest rate swaps. sovereign exposures as well as a perceived reduction in the risks of achieving future harvests of fresh fruit The background to this error is that during 2007 and bunches (“FFB”) on the SYB estates following the 2008 the company’s subsidiary, REA Finance B.V. completion of the group’s third oil mill which is owned by (“REAF”) issued £37 million nominal of guaranteed SYB. sterling notes 2015/17 (“sterling notes”) and lent the resultant proceeds to REA Kaltim and SYB on terms that The directors recognise that the IFRS accounting policy in were substantively back to back with the terms of the relation to biological assets does have theoretical merits sterling notes. The latter companies entered into cross- in charging each year to income a proper measure of currency interest rate swaps to hedge against US dollars capital consumed (so that, for example, a fair distinction is their sterling interest and principal exposure in respect of drawn each year between the cost of the shortening life their borrowings from REAF. Later these arrangements expectancy of younger plantings still capable of many were restructured in some respects but in a way that did years of cropping and that of older plantings nearing the not materially affect the commercial substance of the end of their productive lives). It does, nevertheless, arrangements. concern the directors that no estimate of fair value can ever be completely accurate (particularly in a business in The group considered that the underlying commercial which selling prices and costs are subject to very material reality of these arrangements was that the sterling notes fluctuations). Moreover, in the case of the group’s had been issued to finance its US dollar denominated biological assets, small differences in valuation plantation business in Indonesia and that, in group terms, assumptions can have a quite disproportionate effect on the cross currency interest rate swaps in the Indonesian results. The directors therefore welcome the forthcoming subsidiaries were hedging a group exchange rate issue by the International Accounting Standards Board of exposure between a sterling liability (in the form of the an exposure draft outlining possible amendments to IAS sterling notes) and US dollar assets in the Indonesian 41 (the standard that imposes the current policy on subsidiaries. On this basis, the directors designated the biological assets) and hope that this will result in an cross-currency interest rate swaps as hedges of the eventual reversion to the accounting policies that were sterling notes and treated them for accounting purposes widely applied by plantation companies prior to the as hedges eligible for cash flow hedge accounting. introduction of IAS 41. Interpretations of IAS 39 published during 2008 in IFRIC The biological assets in the group balance sheet at 31 16 concluded that a group could not have a functional December 2012 amounted to $266 million. An increase currency and that cash flow hedge accounting could not or reduction of $5 per tonne in the estimated profit be applied to a hedge of a group’s presentational margin used for the purpose of the valuation (namely currency. The functional currency of REAF is sterling $55.2 per tonne of FFB) would increase or reduce the while the functional currency of both REA Kaltim and SYB valuation by approximately $26 million. 44 is US dollars. This means that, whilst the cross-currency interest rate swaps can be treated within REA Kaltim and SYB as fully effective cash flow hedges of those companies’ sterling borrowings, at the group level the swaps represented hedges of the group’s presentational currency. The group‘s application of cash flow hedge accounting in respect of the swaps was therefore incorrect. Agricultural operations Trading items: Value impact of lower prices on crop harvested Value impact of reduced crop due to weather Village disruptions: Value impact of reduced crop $’m (12.6) (5.6) (5.7) Value impact of reduced prices due to high FFA oil (6.6) The consequential corrections needed have been booked Coal operations Losses in the accompanying financial statements for 2012 and Provision against concessions (4.1) (3.0) (37.6) the differences in profit before tax, tax, profit for the period and the component of that profit attributable to non-controlling interests that would have been reported for the years 2009 to 2011 had the correct accounting treatment been applied are detailed in note 33 to the accompanying financial statements. The adjustments detailed in note 33 have no implications for the cash flows reported from 2009 to 2011 because the adjustments relate to exchange translation and mark to market differences that do not impact cash. Group results Group operating profit for 2012 amounted to $37.8 million and profit before tax to $30.6 million. The comparable figures for the preceding year were, respectively, $72.7 million and $64.2 million. The significant fall in profits as compared with 2012 reflected the weather impact on crops in the first half and the effect of lower CPO and CPKO prices during the year, combined with what will hopefully prove to be non- recurring losses arising from the decisions taken in relation to the coal operations and from the village issues described under “Community relations” in “Agricultural operations” above. The following table provides estimates of the effect on profit before taxation as respects each of Revenue for 2012 at $124.6 million was less than in 2011 ($147.8 million) with the reduction reflecting lower revenue from both the agricultural operations ($122.1 million against $129.5 million) and the coal operations ($2.5 million against $18.2 million). In the agricultural operations, this was the result of trading factors referred to above while, in the coal operations, it was the direct consequence of the suspension of the coal trading activities as discussed under “Operating activities” in “Coal operations” above. Excluding movements on agricultural inventory, cost of sales attributable to the agricultural operations amounted to $59.5 million against $51.3 million. The increase reflected continuing cost inflation and cropping on a larger area. Under normal circumstances, it could have been expected that the increased cost of sales would have been offset by increased crop volumes but, as already noted, the combination of weather factors and village issues resulted in the 2012 crop falling significantly short of budget and, with most components of cost of sales being fixed costs, there was no commensurate reduction in cost of sales. In the coal operation, cost of sales reduced from the prior year $16.7 million to $4.0 million in line with the reduction in trading the items concerned: activity. 45 Review of the group continued IFRS fair value adjustments, aggregating $0.3 million in dividends between the Indonesian subsidiaries and the 2012, were significantly below the aggregate UK parent group and, secondly, the group elected not to adjustments of $11.4 million reported in the preceding take credit for deferred tax on losses of the coal year. The net gain from changes in the fair value of operations (being losses that could not be offset against biological assets ($6.0 million against $7.4 million in the profits of the agricultural operations). 2011) reflected the further development of the group’s plantations while the loss arising from changes in the fair At the after tax level, profit fell to $17.7 million (2011: value of agricultural produce inventory ($5.7 million $45.6 million) while profit attributable to ordinary against a profit of $4.0 million in 2011) was the product shareholders was $11.3 million against $40.5 million. of a small reduction in inventory volume over 2012 and Earnings per share amounted to US 33.9 cents (2011: the fall in CPO and CPKO prices during the year US 121.0 cents). exacerbated by the need to allow for a discount on the closing inventory to reflect the high FFA content of that The group’s target long term average annual return on inventory. adjusted equity is 20 per cent. The return achieved for 2012 was 11 per cent (2011: 28 per cent). Administrative expenses for 2012 amounted to $18.9 million against $17.0 million in 2011. The increase was in During the first half of 2012, the Indonesian Tax Court part the result of inflation, but also reflected costs of handed down judgements on the remaining elements of management transition, costs incurred in connection with the 2006 Indonesian assessment of tax which had been the resolution of village issues and a further provision of disputed by REA Kaltim. The Tax Court found in favour of $1.0 million for additional funding of the group’s UK REA Kaltim on certain elements and against it on others. pension scheme following a recent triennial actuarial A repayment of tax amounting to some $1.2 million was valuation of the scheme. Before deduction of the interest made to REA Kaltim. Later in 2012 both parties lodged component added to biological assets, interest payable in appeals to the Indonesian Supreme Court with each party 2012 amounted to $12.5 million (2011: $14.1 million). appealing against certain of the Tax Court’s findings Interest cover for 2012 (measured as the ratio of against it. earnings before interest, tax, depreciation and amortisation, biological gain and provision against coal REA Kaltim’s appeal against an Indonesian assessment concessions to interest payable) was 3.1 (2011: 5.2). of tax on its 2008 profits continues. The 2008 assessment seeks to deny tax relief claimed in respect of Losses on the coal trading operations reflected provisions mark to market losses on cross currency interest rate made against outstanding trading items following the swaps entered into by REA Kaltim to hedge, against US decision to suspend trading. In addition, a provision of $3 dollars, the group’s sterling liability in respect of part of million has been made against the coal concessions. the group’s outstanding 9.5 per cent sterling notes 2015/17. Hearing of the appeal was completed in Taxation for 2012 was lower than in the preceding year October 2012. An early judgement is thought to be ($12.9 million against $18.6 million in 2011), as a result unlikely. of the reduced profit before tax, but the group tax rate rose from 28.9 per cent to 42.1 per cent mainly for two The 2006 and 2008 disputed tax assessments were both reasons: first, there was no reduction in the amount of paid in full ahead of the appeals. The group has Indonesian withholding tax incurred on intra-group previously provided in full against the 2006 assessment 46 and as to $5.5 million (representing at the time need to fund this expenditure constrains the rates at approximately half of the tax demanded) against the which the directors feel that they can prudently declare, or 2008 assessment. The aggregate amount provided has recommend the payment of, ordinary dividends. They been retained but has been reallocated to provide a full believe that capitalisation issues of new preference provision against those components of the 2006 shares to ordinary shareholders provide a useful assessment as respects which REA Kaltim is appealing mechanism for augmenting returns to ordinary findings against it by the Tax Court and a provision of shareholders in periods in which good profits are approximately 75 per cent against the 2008 assessment. achieved but demands on cash resources limit the scope Some $600,000, representing components of the 2006 for payment of cash dividends. The directors will consider assessment as respects which REA Kaltim is not a further such issue during 2013 if they feel that this is appealing findings against it by the Tax Court, has been merited by the group’s performance. written off by the group within the 2012 tax charge. No credit has been taken for interest due REA Kaltim on tax Looking forward, if as is planned REA Kaltim becomes repayments already received in relation to the 2006 listed on the Indonesia Stock Exchange, it is expected assessment as such interest will only become payable that the future planned expansion of the agricultural after receipt by REA Kaltim of final judgement from the operations will permit REA Kaltim to distribute each year Supreme Court confirming the repayments concerned. around one third of its after tax profits. The directors then Dividends intend that the company should adopt a policy of distributing to its ordinary and preference shareholders a large proportion of its share of the REA Kaltim dividends. The fixed semi-annual dividends on the 9 per cent cumulative preference shares that fell due on 30 June Capital structure and 31 December 2012 were duly paid. An interim dividend in respect of 2012 of 3½p per ordinary share The group is financed by a combination of debt and was paid in January 2013 and the directors recommend shareholder funds. Total shareholder funds less non- the payment of a final dividend in respect of 2012 of 3½p controlling interests at 31 December 2012 amounted to per ordinary share to be paid on 26 July 2013 to ordinary $313.0 million as compared with $300.7 million at 31 shareholders on the register of members on 28 June December 2011. Non-controlling interests at 31 2013. The total dividend payable per ordinary share December 2012 amounted to $2.0 million (2011: $2.2 during 2013 in respect of 2012 will thus amount to 7p. million). This compares with the total paid during 2012 in respect of 2011 of 6½p. In addition, the company made a In September 2012, 3.9 million new preference shares capitalisation issue of 2,004,872 new preference shares were issued for cash at a price of 105p per share by way to ordinary shareholders on 28 September 2012 on the of a placing to raise £4 million net of expenses. The basis of 3 new preference shares for every 50 ordinary proceeds of the placing of new preference shares were shares held (2011: 2,004,872 new preference shares on retained within the group to fund continuing development the basis of 3 new preference share for every 50 ordinary of the agricultural operations. This issue was followed in shares held). September 2012 by the issue of a further 2,004,872 new preference shares by way of capitalisation of share The continuing development of the group’s agricultural premium account pursuant to the capitalisation issue to operations requires major capital expenditure and the ordinary shareholders referred to under “Dividends” above. 47 Review of the group continued In November 2012, $34.0 million of 7.5 per cent dollar 2017). As a result, and subject to any further purchases notes 2017 (“2017 dollar notes”) were issued as to some and cancellations, slightly under $1 million of the $19 million by way of an exchange offer to holders of outstanding 2012/14 dollar notes will fall due for existing 7.5 per cent dollar notes 2012/14 (“2012/14 repayment at the end of 2013 and the balance at the end dollar notes”) and as to the balance by way of a placing. of 2014. The 2017 dollar notes are repayable on 30 Following these transactions, group indebtedness and June 2017. related engagements at 31 December 2012 amounted to The sterling notes are issued by REA Finance B.V., a $163.5 million, made up of $15.9 million nominal of wholly owned subsidiary of the company, are guaranteed 2012/14 dollar notes (carrying value: $15.5 million), by the company and another wholly owned subsidiary of $34.0 million nominal of 2017 dollar notes (carrying the company, R.E.A. Services Limited (“REAS”), are value: $33.2 million), £34.5 million nominal of 9.5 per secured principally on unsecured loans made by REAS to cent guaranteed sterling notes 2015/17 (“sterling Indonesian plantation operating subsidiaries of the notes”) (carrying value: $54.3 million), $8.4 million in company and, save to the extent previously redeemed or respect of the hedge of the principal amount of the cancelled, are repayable by three equal annual sterling notes as described below, a term loan from an instalments commencing 31 December 2015. Indonesian bank of $36.1 million and other short term indebtedness comprising drawings under working capital The group has entered into a long term sterling US dollar lines of $16.0 million. Against this indebtedness, at 31 debt swap to hedge against US dollars the sterling liability December 2012, the group held cash and cash for principal and interest payable in respect of the entire equivalents of $26.4 million. original issue of the sterling notes (but in the case of interest only as respects interest payments falling due up The group has no material contingent indebtedness save to 31 December 2015). that, in connection with the development of oil palm plantings owned by village cooperatives and managed by The term loan from an Indonesian bank comprises the the group, the group has, as noted under “Smallholder equivalent of $36.0 million drawn by SYB from PT Bank schemes” in “Agricultural operations” above, guaranteed DBS Indonesia (“DBS”) under an Indonesian rupiah the bank borrowings of the cooperatives concerned, the denominated amortising loan facility of Rp 350 billion outstanding balance of which at 31 December 2012 was ($38.6 million) agreed with DBS during 2011. The loan equivalent to $10.5 million. is secured on the assets of SYB and is guaranteed by the company and REA Kaltim. The aggregate outstanding The 2012/14 and 2017 dollar notes are unsecured balance of the loan at 31 December 2012 is repayable as obligations of the company. The 2012/14 dollar notes follows: 2014: $2.7 million; 2015: $6.3 million; and 2016 are repayable by three instalments commencing 31 and thereafter: $27.0 million. December 2012 but repayment obligations are reduced to the extent that notes have been previously redeemed Group cash flow or cancelled. A substantial nominal amount of the original issue of 2012/14 dollar notes has now been purchased Group cash inflows and outflows are analysed in the and cancelled (including the $19.0 million nominal of the consolidated cash flow statement. Cash and cash notes acquired under the exchange offer for dollar notes equivalents reduced over 2012 from $30.6 million to 48 $26.4 million. The reduction of $4.0 million (excluding the and titling related to land added through the acquisition of negative impact of $0.2 million from the effect of PT Persada Bangun Jaya (see note 12 to the financial exchange rate movements) represented that component statements) and expenditure in connection with the titling of the net outflow on investing activities that was not of this land and its allocation to smallholder cooperatives. covered by the combination of net cash from operating activities and net cash from financing activities. The net cash inflow on financing activities of $36.2 million (2011: $11.6 million) was made up of net inflows of $6.5 As noted under “Group results” above, operating profit for million (2011: $24.3 million) from issue of new 2012 amounted to $37.8 million as compared with $72.7 preference shares and $33.6 million from the issue of million in the preceding year. Adjustments for the non- new dollar notes (after deduction of the aggregate net cash components of operating profit and for movements costs incurred in the purchase and sale and the purchase in working capital meant that cash generated by and cancellation of existing dollar notes), net additions to operations for 2012 amounted to $55.1 million, a small bank debt of $25.4 million (2011: $9.2 million) and decrease from the $59.9 million reported for 2011. The outflows in respect of dividend payments and US dollar positive overall movement on working capital was redemptions of $10.1 million and $19.0 million principally attributable to an increase in payables, a respectively (2011, outflows in respect of dividend significant proportion of which represented deferred payments and redemptions of sterling and dollar notes of payments due in respect of the group’s development respectively: $7.9 million and $13.9 million). programme. Tax and interest payments remained at much the same levels as in the preceding year with the Liquidity and financing adequacy result that net cash from operating activities for 2012 amounted to $32.5 million against $33.8 million for 2011. As noted above, at 31 December 2012, the group held cash and cash equivalents of $26.4 million. The group’s Investing activities for 2012 involved a net outflow of agricultural operations continue to generate substantial $72.6 million (2011: $51.0 million). This represented positive cash flows. During 2013, the group has arranged new investment totalling $73.0 million (2011: $53.9 an increase in the working capital line with DBS by the million), offset by inflows from interest and minor items of equivalent of $15 million. $0.4 million (2011: $2.9 million). The new investment comprised expenditure of $65.3 million (2011: $37.5 Recent years have seen substantial investment by the million) on further development of the group's agricultural group in FFB milling capacity. Final payments will fall due operations, $2.2 million (2011: $6.7 million) on land rights in 2013 for the newly completed third oil mill but current and titling, $1.6 million on the acquisition of a new crop projections suggest that, apart from expanding the subsidiary and $3.9 million (2011: $9.7 million) on the capacity of this third mill from 40 to 80 tonnes of FFB per coal and stone operations, with activity in respect of coal hour, no further expenditure on milling capacity will be operations halted during the year. required until work commences on the construction of a fourth mill to be brought into production in 2017 at the The increased level of expenditure on the agricultural earliest. operations reflected the payments made during the year for work on construction of the group’s new oil mill and Significant expenditure was also incurred during 2012 on methane capture plants. The expenditure on land rights the provision of land to meet the cooperative smallholder 49 Review of the group continued development aspirations of the group’s local communities The group's oil palms fruit continuously throughout the (as discussed under “Community relations” in “Agricultural year and there is therefore no material seasonality in the operations” above). The directors do not believe that funding requirements of the agricultural operations in there will be a recurring requirement for material their ordinary course of business. It is not expected that expenditure on the provision of cooperative land the coal and stone operations will cause any material (although there may be a requirement for the group to swings in the group’s utilisation of cash for the funding of make short term advances to meet cooperative planting its routine activities. expenditure pending the refinancing of such expenditure by the banks funding the cooperative developments). Financing policies As a result, group capital expenditure can, for the The directors believe that, in order to maximise returns to immediate future, be concentrated on extension planting holders of the company's ordinary shares, a proportion of and on the provision of the additional estate buildings and the group's funding needs should be met with prior general plant and equipment that become needed ranking capital, namely borrowings and preference share following any expansion of the group’s planted hectarage. capital. The latter has the particular advantage that it This will involve the group in continuing capital represents relatively low risk permanent capital and to the expenditure for several years to come but the directors extent that such capital is available, the directors believe will set the extension planting programme at a level that that it is to be preferred to debt. they reasonably expect that the cash resources available to the group can support. This should ensure that cash Insofar as the group does have borrowings, the directors availability remains adequate to meet the group’s believe that the group’s interests are best served if the commitments. borrowings are structured to fit the maturity profile of the assets that the borrowings are financing. Since oil palm The directors intend that further cash advances to the plantings take nearly four years from nursery planting to coal and stone operations should be limited and maturity and then a further period of three to four years to concentrated on realising value from the three existing full yield, the directors aim to structure borrowings for the coal concessions and on bringing the stone quarry into group’s agricultural operations so that shorter term bank economic production. debt is used only to finance working capital requirements, while debt funding for the group's extension planting The group's financing is materially dependent upon the programme is sourced from issues of medium term listed contracts governing the sterling and dollar notes. There debt securities and borrowings from development are no restrictions under those contracts, or otherwise, on institutions. the use of group cash resources or existing borrowings and facilities that the directors would expect materially to The directors believe that the group’s existing capital impact the planned development of the group. Under the structure is consistent with these policy objectives but terms of the DBS working capital line and amortising loan recognise that the planned further development of the facility, REA Kaltim and SYB are restricted to an extent in group, and the inevitable shortening of the maturity profile the payment of interest on borrowings from, and on the of the group’s current indebtedness caused by the payment of dividends to, other group companies but the passage of time, mean that further action will be required directors do not believe that the applicable covenants will to ensure that the group’s capital structure continues to affect the ability of the company to meet its cash meet the objectives. Specifically, the directors consider obligations. 50 that it will be prudent, when market conditions permit, to The group regards the US dollar as the functional retire existing shorter dated debt and to replace it with currency of most of its operations and has, until recently, preference share capital or debt of a longer tenor. sought to ensure that, as respects that proportion of its investment in the group's operations that is met by Whilst the group’s extension planting programme can borrowings, it has no material currency exposure against always be scaled back, once areas have been planted the US dollar. Accordingly, where borrowings were with oil palms, some or all of the benefits of the incurred in a currency other than the dollar, the group investment made in such areas will be lost if the areas are endeavoured to cover the resultant currency exposure by not maintained. Commodity markets are inherently way of a debt swap or other appropriate currency hedge. volatile and the directors believe that it is prudent for the The receipt by REA Kaltim during 2011 of an Indonesian group to have available some cash cushion to ensure that tax assessment seeking to disallow for tax purposes when new areas are planted, those areas can be brought losses on currency hedges (as referred to in “Group to maturity even if CPO and CPKO prices fall. results” above) has called into question the wisdom of this policy and, for the moment at least, the group has decided Net debt at 31 December 2012 was 43.5 per cent of not to hedge its rupiah borrowings. The group has never total shareholder funds against a level of 32 per cent at covered, and does not intend in future to cover, the 31 December 2011. The directors intend at least to currency exposure in respect of the component of the maintain the overall amount of the group’s prior ranking investment in its operations that is financed with sterling capital (other than short term borrowings under working denominated shareholder capital. capital lines) but would expect that, with growth in the net assets attributable to ordinary shareholders, prior ranking The group's policy is to maintain a cash balance in sterling capital will, over time, fall as a percentage of equity (used sufficient to meet its projected sterling expenditure for a in this context to refer to funds attributable to ordinary period of between six and twelve months and a cash shareholders). If debt continues over time to be replaced balance in Indonesian rupiahs of up to the amount of its by preference capital, net debt as a percentage of Indonesian rupiah borrowings but, otherwise, to keep all shareholder funds may be expected to fall to an even cash balances in US dollars. greater extent. Principal risks and uncertainties The sterling notes and the two series of dollar notes carry interest at fixed rates of, respectively, 9.5 and 7.5 per cent The group’s business involves risks and uncertainties. per annum. Interest is payable by SYB under the DBS Those risks and uncertainties that the directors currently amortising term loan at a floating rate equal to Jakarta consider to be material are described below. There are or Inter Bank Offered Rate plus a margin. may be other risks and uncertainties faced by the group As a policy, the group does not hedge its exposure to they are unaware, that may have a material adverse that the directors currently deem immaterial, or of which floating rates but, insofar as is commercially sensible, impact on the group. borrows at fixed rates. A one per cent increase in the floating rates of interest payable on the group’s floating Where risks are reasonably capable of mitigation, the rate borrowings at 31 December 2012 would have group seeks to mitigate them. Beyond that, the directors resulted in an annual cost to the group of approximately endeavour to manage the group’s finances on a basis that $522,000 (2011: $290,000). leaves the group with some capacity to withstand adverse 51 Review of the group continued impacts from identified areas of risk but such diseases with a consequential negative impact on crop. management cannot provide insurance against every Agricultural best practice can to some extent mitigate this possible eventuality. risk but it cannot be entirely eliminated. Agricultural operations Other operational factors Certain of the risks identified below in relation to the The group’s agricultural productivity is dependent upon agricultural operations are described as risks affecting necessary inputs, including, in particular, fertiliser and fuel. crop. Any loss of crop or reduction in the quality of Whilst the directors have no reason to anticipate harvest will reduce revenues and thus negatively impact shortages in the availability of such inputs, should such cash flow and profitability. Climatic factors shortages occur over any extended period, the group’s operations could be materially disrupted. Equally, increases in input costs are likely to reduce profit margins. Although the group's agricultural operations are located After harvesting, FFB crops become rotten if not in an area of high rainfall with sunlight hours well suited to processed within a short period. Processing of over-ripe the cultivation of oil palm, climatic conditions vary from FFB usually results in the production of CPO that has an year to year and setbacks are possible. above average free fatty acid content and is saleable only at a discount to normal market prices. Any hiatus in FFB Unusually high levels of rainfall can disrupt estate collection or processing may therefore lead to a loss of operations and result in harvesting delays with loss of oil crop and/or a reduction in the quality and value of the palm fruit or deterioration in fruit quality. Unusually low resultant CPO. The group endeavours to maintain levels of rainfall that lead to a water availability below the resilience in its palm oil mills with each of the mills minimum required for the normal development of the oil operating separately and some ability within each mill to palm may lead to a reduction in subsequent crop levels. switch from steam based to biogas or diesel based Such reduction is likely to be broadly proportional to the electricity generation but such resilience would be size of the cumulative water deficit. Over a long period, inadequate to compensate for any material loss of crop levels should be reasonably predictable but there processing capacity for anything other than a short time can be material variations from the norm in individual period. years. The group has bulk storage facilities within its main area Low levels of rainfall can also disrupt and, in an extreme of agricultural operations and at its transhipment terminal situation (not to date experienced by the group) could downstream of the port of Samarinda. Such facilities and bring to a standstill the river transport upon which the the further storage facilities afforded by the group’s fleet group is critically dependent for estate supplies and the of barges have hitherto always proved adequate to meet evacuation of CPO and CPKO. In that event, harvesting the group’s requirements for CPO and CPKO storage. may have to be suspended and crop may be lost. Nevertheless, disruptions to river transport between the Cultivation risks main area of operations and the port of Samarinda (such as occurred in 2011 when a bridge over the Mahakam river at Tenggarong collapsed), or delays in collection of As in any agricultural business, there is a risk that the CPO and CPKO from the transhipment terminal, could group's estate operations may be affected by pests and result in a group requirement for CPO and CPKO storage 52 exceeding the available capacity. This would be likely to either restrictions on the export of CPO and CPKO or very force a temporary cessation in FFB processing with a high duties on export sales of such oil. The directors resultant loss of crop. believe that when such measures materially reduce the profitability of oil palm cultivation, they are damaging not The group maintains insurance for the agricultural only to large plantation groups but also to the large operations to cover those risks against which the number of smallholder farmers growing oil palm in directors consider that it is economic to insure. However, Indonesia and to the Indonesian economy as a whole no assurance can be given that such insurance is in fact (because CPO is an important component of Indonesia's adequate, will continue to be available or that it will be US dollar earning exports). The directors are thus hopeful available at economically reasonable premia. Certain that future measures affecting sales of CPO and CPKO risks (including the risk of crop loss through fire and other will not result in uneconomic profit margins. perils potentially affecting the planted areas on the group's estates), for which insurance cover is either not Above average CPO and CPKO prices during 2007 and available or would in the opinion of the directors be the early months of 2008 and again more recently from disproportionately expensive, are not insured. These risks 2010 to 2012 did not lead to a re-imposition of export are mitigated to the extent reasonably feasible by restrictions. Instead, the Indonesian government management practices but an occurrence of an adverse continues to allow the free export of CPO and CPKO but uninsured event could result in the group sustaining has introduced a sliding scale of duties on exports. material losses with a consequential negative impact on cash flows and profitability. Produce prices World markets for CPO and CPKO may be distorted by the imposition of import controls or taxes in consuming countries. The directors believe that the imposition of such controls or taxes on CPO or CPKO will normally The profitability and cash flow of the agricultural result in greater consumption of alternative vegetable oils operations depend upon world prices of CPO and CPKO within the area in which the controls or taxes have been and upon the group's ability to sell these products at price imposed and the substitution outside that area of CPO levels comparable with such world prices. and CPKO for other vegetable oils. Should such arbitrage fail to occur or prove insufficient to compensate for the CPO and CPKO are primary commodities and as such are market distortion created by the applicable import affected by levels of world economic activity and factors controls or taxes, selling prices for the group’s CPO and affecting the world economy, including levels of inflation CPKO could be depressed. and interest rates. This may lead to significant price swings although, as noted under “Markets” in “Agricultural Expansion operations” above, the directors believe that such swings should be moderated by the fact that the annual oilseed The group is planning further extension planting of oil crops account for the major proportion of world vegetable palm. The directors hope that unplanted land held by or oil production and producers of such crops can reduce or allocated to the group will become available for planting increase their production within a relatively short time ahead of the land becoming needed for development and frame. that the development programme can be funded from available group cash resources and future operational In the past, in times of very high CPO prices, the cash flows, appropriately supplemented with further debt Indonesian authorities have for short periods imposed funding or capital raised from further issues of preference 53 Review of the group continued shares and the planned issue of shares in REA Kaltim to includes substantial areas of unspoilt primary rain forest local Indonesian investors. Should, however, land or cash inhabited by diverse flora and fauna. As such, the group, availability fall short of expectations and the group be in common with other oil palm growers in Kalimantan, unable to secure alternative land or funding, the extension must expect scrutiny from conservation groups and could planting programme, upon which the continued growth of suffer adverse consequences if its environmental policies the group’s agricultural operations will in part depend, were to be singled out for criticism by such groups. may be delayed or curtailed. An environmental impact assessment and master plan Any shortfall in achieving planned extensions of the was constructed using independent environmental group's planted areas would be likely to impact negatively experts when the group first commenced agricultural the annual revaluation of the group's biological assets, the operations in East Kalimantan and this plan is updated movements arising from which are dealt with in the regularly to reflect modern practice and to take account of group's income statement. Whilst this would not affect changes in circumstances (including planned additions to the group's underlying cash flow, it could adversely affect the areas to be developed by the group). Substantial market perceptions as to the value of the company's conservation reserves have been established in areas securities. already developed by the group and further reserves will be added as new areas are developed. The group actively Environmental, social and governance practices manages these reserves and endeavours to use them to conserve landscape level biodiversity as detailed under The group recognises that the agricultural operations are “Conservation” in “Agricultural operations” above. both a large employer and have significant economic importance for local communities in the areas of the The group is committed to sustainable development of oil group’s operations. This imposes environmental, social palm and adopts the measures described under and governance obligations which bring with them risks “Responsible agricultural practice” in “Agricultural that any failure by the group to meet the standards operations” above to mitigate the risk of its operations expected of it may result in reputational and financial causing damage to the environment or to its neighbours. damage. The group seeks to mitigate such risks by The group supports the principles and criteria established establishing standard procedures to ensure that it meets by RSPO and has obtained RSPO certification for most of its obligations, monitoring performance against those its current operations. standards and investigating thoroughly and taking action to prevent recurrence in respect of any failures identified. Community relations The group's existing agricultural operations and the The agricultural operations of the group can be seriously planned expansion of those operations are based on land disrupted by any material breakdown in relations between areas that have been previously logged and zoned by the the group and the host population in the area of the Indonesian authorities as appropriate for agricultural operations. The group endeavours to mitigate this risk by development on the basis that, regrettable as it may be liaising regularly with representatives of surrounding from an environmental viewpoint, the logging has been so villages and by seeking to improve local living standards extensive that primary forest is unlikely to regenerate. through mutually beneficial economic and social Such land areas fall within a region that elsewhere interaction between the local villages and the agricultural 54 operations. In particular, the group, when possible, gives Should there be a recurrence of disruptions at the level priority to applications for employment from members of and of the intensity sustained during 2012, the group the local population and supports specific initiatives to could again suffer material negative impacts. encourage local farmers and tradesmen to act as suppliers to the group, its employees and their Coal and stone operations dependents and (as described under “Smallholder schemes” in “Agricultural operations” above) to promote Following the directors’ decision to suspend the group’s smallholder development of oil palm plantings. coal trading activities, to limit, for the time being, further capital committed to the coal mining operations and to The group's agricultural operations are established in a maximise returns from the concessions in which the relatively remote and sparsely populated area, which was group has already invested, the directors believe that the for the most part unoccupied prior to the establishment of most material risk attaching to the group’s coal and stone the group's first operations. However, some areas of land operations is the risk that those operations prove not to were previously used by local villagers for the cultivation be fully viable and that a proportion of the capital invested of crops. Accordingly, when acquiring such areas, the in the operations is lost. To the extent that the operations group negotiates with, and pays compensation to, the continue and the concessions are brought, or brought affected parties and, as respects developments initiated back, into production, the more material risks specific to since 2007 (in compliance with Indonesian legislation such operations that the directors currently foresee are as enacted in that year) procures land for the establishment described below. of cooperative smallholder schemes for such parties. Operational risks The negotiation of compensation payments can involve a considerable number of local individuals with differing Delivery volumes from the group’s concessions will be views and this can cause difficulties in reaching dependent upon efficiency of production and this can be agreement with all affected parties. There is also a risk disrupted by external factors outside the group’s control that, after an agreement has been completed, a party to such as the heavy rains that are common in East the agreement may become disaffected with the terms Kalimantan. Heavy seas can cause delays to the barging agreed or the manner in which the agreement has been of coal and stone to point of sale. Failure to achieve implemented and may seek to repudiate the agreement. budgeted delivery volumes increases unit costs and may result in operations becoming unprofitable. Whilst As explained under “Community relations” in “Agricultural weather related impacts cannot be avoided, the group will operations” above, prior to 2012 such difficulties and risk seek to mitigate such risks by using experienced periodically caused disruptions but the group had been contractors, supervising them closely and taking care to successful in managing such periodic disruptions so as to ensure that they have equipment of capacity appropriate limit their negative impact. This situation changed during for the planned delivery volumes. 2012 and the disruptions sustained during 2012 and January 2013 had a material negative impact on the Traded coal delivery volumes are dependent upon group. Negotiations concluded in January and early supplier and customer performance of contract February 2013 should have resolved the material known obligations. The group endeavours to ensure such issues but only the passage of time will confirm this. performance by exercising care in the selection of 55 Review of the group continued suppliers and customers and direct supervision of operations. Nevertheless, the group could sustain deliveries but such efforts may not always be sufficient to reputational damage as a result of environmental avoid material contractual disputes such as has occurred criticisms of the mining industry in Indonesia as a whole. in relation to one shipment made in 2012. Mining plans are based on geological assessments and the group seeks to ensure the accuracy of those Currency assessments by drilling ahead of any implementation of General the plans. Nevertheless, geological assessments are CPO and CPKO are essentially dollar based commodities. extrapolations based on statistical sampling and may As a result, the group's revenues and the underlying value prove inaccurate to an extent. In that event, unforeseen of the group's operations are principally US dollar extraction complications can occur and may cause cost denominated. Moreover, substantial proportions of the overruns and delays. Price risk group’s borrowings and costs are US dollar denominated or hedged against or linked to the US dollar. Accordingly, the principal currency risk faced by the group The profitability and cash flow of any future coal is that those components of group costs and funding that production is likely to depend upon world prices of coal arise in, or are denominated in, in Indonesian rupiah and and the group's ability to sell its coal at price levels sterling and, as respects group funding, are not hedged comparable with such world prices. Coal is a primary against the US dollar, may, if such currencies strengthen commodity and as such is affected by levels of world against the US dollar, negatively impact the group’s economic activity and factors affecting the world financial position in US dollar terms. economy, including levels of inflation and interest rates. This may lead to significant price swings. As respects costs and share capital, the directors consider that this risk is inherent in the group's business Coal is sold on the basis of its calorific value and other and structure and the group does not therefore normally aspects of its chemical composition. Supply and demand hedge against such risk. As respects borrowings, for specific grades of coal and consequent pricing may hedging may itself give rise to risks given the contention not necessarily reflect overall coal market trends and the of the Indonesian tax authorities (as referred to under group may be adversely affected if it is unable to supply “Group results” in “Finances” above) that mark to market coal within the specifications that are at any particular losses in Indonesia on hedging derivatives may not be time in demand. deducted from chargeable profits for Indonesian tax purposes. The directors believe that, pending clarification Environmental, social and governance practices of this issue, it is better for the group to accept some currency risks in respect of borrowings than to constrain The areas that the group proposes to mine or quarry are the group either to borrow only in US dollars (which may not large and the group is committed to international limit the group’s ability to borrow or require it to borrow on standards of best environmental and social practice and, terms that are in the directors’ opinion sub-optimal as in particular, to proper management of waste water and respects tenor, covenants or cost) or to hedge all non US reinstatement of mined areas on completion of mining dollar borrowings against the US dollar. 56 Counterparty risk the terms of the licences, that it holds, licensing rules change frequently and boundaries of large land areas are Export sales of CPO and CPKO are made either against not always clearly demarcated. There is therefore always letters of credit or on the basis of cash against a risk that the group may inadvertently, and to a limited documents. However, domestic sales of CPO and CPKO extent, conduct operations for which it does not hold all may require the group to provide some credit to buyers. necessary licences or operate on land as respects which The position as respects future sales of coal will be it does not have all necessary permits. similar. Purchase contracts for coal concluded prior to suspension of the coal trading activities have required the The UK Bribery Act 2010, which applies worldwide to group to part pay ahead of delivery. The group seeks to interests of UK companies, has created an offence of limit the counterparty risk that credit to buyers and failure by a commercial organisation to prevent a bribe prepayments entail by effective credit controls. Such being paid on its behalf. Such failure may be defended if controls include regular reviews of buyer creditworthiness the organisation has “adequate procedures” in place to and limits on the term and amount of credit that may be combat bribery and the group has established appropriate extended to any one buyer and in total. procedures. The group has traditionally had strong Regulatory exposure controls in this area because the group operates predominantly in Indonesia, which has been classified as relatively high risk by the International Transparency Changes in existing, and adoption of new, laws and Corruption Perceptions Index. regulations affecting the group (including, in particular, laws and regulations relating to land tenure and mining Country exposure concessions, work permits for expatriate staff and taxation) could have a negative impact on the group’s All of the group's operations are located in Indonesia. The activities. The directors are not currently aware of any group is therefore significantly dependent on economic specific changes that would adversely affect the group to and political conditions in Indonesia. In the late 1990’s, in a material extent. common with other parts of South East Asia, Indonesia experienced severe economic turbulence and there have Many of the licences, permits and approvals held by the been subsequent occasional instances of civil unrest, group are subject to periodic renewal. Renewals are often attributed to ethnic tensions, in certain parts of often subject to delays and there is always a risk that a Indonesia. In the recent past, Indonesia has been stable renewal may be refused or made subject to new and the Indonesian economy has continued to grow. conditions. Agricultural land and mining rights and interests held by the group are subject to the satisfaction Freedom to operate in a stable and secure environment is of various continuing conditions, including conditions critical to the group and the existence of security risks in requiring utilisation of the rights and, as respects Indonesia should never be ignored. However, the group agricultural land, conditions requiring the group to has always sought to mitigate those risks and has never, promote smallholder developments of oil palm. since the inception of its East Kalimantan operations in 1989, been adversely affected by regional security Although the group endeavours to ensure that its problems. activities are conducted only on the land areas, and within 57 Review of the group continued Although there can be no certainty as to such matters, the Eurozone directors are not aware of any circumstances that would lead them to believe that, under current political The directors are conscious of the possibly heightened conditions, any government authority would impose financial risks currently prevailing in relation to the exchange controls or otherwise seek to restrict the Eurozone and to banks. The group has no direct group's freedom to manage its operations. The exposures to the Eurozone but would clearly be affected Indonesian government has recently introduced a “use it by any consequential impact on demand for CPO and or lose it” policy in respect of registered titles to CPKO that could follow a financial collapse in the undeveloped land. This could result in registered titles to Eurozone or other major economic area. The group is the group’s undeveloped land areas being revoked careful in its commitments and is ready to scale these although the directors do not believe that this will happen back rapidly should the need arise. With regard to banks, if development of such areas proceeds as planned. the board endeavours to ensure that the group’s liquid Miscellaneous relationships funds are deposited in a manner likely to minimise the risk of loss. A significant proportion of the group’s deposits are placed with banks that are majority owned by The group is materially dependent upon its staff and sovereign governments. By order of the board R.E.A. SERVICES LIMITED Secretary 25 April 2013 employees and endeavours to manage this dependence as detailed under “Employees” in “Agricultural operations” above. Relationships with shareholders in Indonesian group companies are also important to the group. The group endeavours to 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. Should such efforts fail and a breakdown in relations result, the group would be obliged to fall back on enforcing, in the Indonesian courts, the agreements governing its arrangements with its local partners with the uncertainties that any juridical process involves. Failure to enforce the agreements relating to the mining concessions in which the group holds interests could have a material negative impact on the value of the coal and stone operations because the concessions are at the moment legally owned by the group's local partners and, if the arrangements with those partners were successfully to be repudiated (an eventuality that the directors consider highly unlikely), the group could lose its entire interest in the concessions. 58 Directors Richard Robinow Chairman (67) David Blackett Senior independent non-executive director (62) Mr Robinow was appointed a director in 1978 and has been chairman since 1984. After early investment banking experience, he has been involved for nearly 40 years in the plantation industry. He is non-executive but devotes a significant proportion of his working time to the affairs of the group. 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 (64) 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. Mark Parry Executive director (52) Mr Parry was appointed an executive director on 1 January 2013. Mr Parry joined the group in May 2011, as the group’s regional director based in Singapore, and was appointed president director of REA Kaltim in July 2012. He worked for 10 years as a surveyor and engineer in the mining and oil and gas industries and, following completion of an MBA at the London Business School, spent 15 years with an international bank, ultimately as managing director, project finance. He established and ran a private consultancy business for two years prior to joining the group. 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. Irene Chia Independent non-executive director (72) Ms Chia was appointed a non-executive director on 1 January 2013. Ms Chia has extensive corporate, investment and entrepreneurial experience in Asia, the USA and the UK. A graduate in economics and formerly a director of one of the Jardine Matheson Group companies, Ms Chia now lives in Singapore and is currently self- employed with Far Eastern interests in consulting, property and financial investment as well as in the charitable sector. David Killick, FCIS Independent non-executive director (75) 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. He 59 Directors’ report The directors present their annual report on the affairs of ordinary shares on 25 January 2013 and the board the group, together with the financial statements and recommends that a final dividend in respect of the year of auditor’s reports, for the year ended 31 December 2012. 3½p per share be paid on 26 July 2013 to ordinary Principal activities and business review 2013. Resolution 3 in the company’s notice of 2013 shareholders on the register of members on 28 June annual general meeting (the “Notice”) set out at the end The group is principally engaged in the cultivation of oil of this document, which will be proposed as an ordinary palms in the province of East Kalimantan in Indonesia and resolution, deals with the payment of this dividend. in the production of crude palm oil (“CPO”) and crude palm kernel oil (“CPKO”). In addition, the group holds rights in Going concern basis respect of three coal mining concessions and a stone deposit located in East Kalimantan. The group's business activities, together with the factors likely to affect its future development, performance and A review of the activities and planned future development of position are described in the “Review of the group” the group, together with the principal risks and uncertainties section of this annual report which also provides (under facing the group, is provided in the accompanying the heading “Finances”) a description of the group's cash “Chairman’s statement” and “Review of the group” sections flow, liquidity and financing adequacy, and treasury of this annual report which are incorporated by reference in policies. In particular, the review highlights the risks this “Directors’ report”. In particular, the “Review of the associated with village disruptions. In addition, note 22 to group” includes information as to group policy and the consolidated financial statements includes objectives regarding the use of financial instruments. information as to the group's policy, objectives and Information as to such policy and objectives and the risk processes for managing its capital; its financial risk exposures arising is also included in note 22 to the management objectives; details of its financial consolidated financial statements. instruments and hedging activities; and its exposures to credit and liquidity risks. The group does not undertake significant research and development activities. Details of significant events since 31 December 2012 are contained in note 41 to the consolidated financial statements. Results and dividends The results are presented in the consolidated income statement and notes thereto. The fixed annual dividends on the 9 per cent cumulative preference shares that fell due on 30 June and 31 December 2012 were duly paid. A first interim dividend in respect of 2012 of 3½p per share was paid on the Although the group has indebtedness, the vast majority of that indebtedness is medium term and the group is reliant on short term borrowing facilities to only a limited extent. The directors fully expect such short term facilities to be renewed. Moreover, the group’s operations are generating significant positive cash flows and, whilst it is planned to utilise those cash flows to fund capital expenditure, a large proportion of such capital expenditure is discretionary and could be cancelled should the need arise. As a consequence, the directors believe that the group is well placed to manage its business risks successfully. After making enquiries, the directors have a reasonable expectation that the company and the group have adequate resources to continue in operational existence 60 for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the financial statements. proposed as ordinary resolutions, deal with the re-election of the above named directors. Charitable and political donations The directors consider that, following the changes to the board at the end of 2012, the composition of the board is appropriate and effective for the current strategic During the year the group made no charitable donations direction of the company. The board therefore to persons ordinarily resident in the United Kingdom and recommends (each affected director abstaining from no political donations. The group provided support for such conclusion as it applies to himself) the re-election of conservation activities in East Kalimantan. Supplier payment policy 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 non-executive directors offering It is the company’s policy to establish appropriate themselves for re-election that, following formal payment terms and conditions for dealings with suppliers performance evaluations, each such individual's and to comply with such terms and conditions. The performance continues to be effective and to holding company itself does not have trade creditors. demonstrate commitment to the role assumed, including Directors commitment of time for board and committee meetings and, where applicable, other assigned duties. The directors are listed in the “Directors” section of this Directors’ interests annual report which is incorporated by reference in this “Directors’ report”. All the directors served throughout At 31 December 2012, the interests of directors 2012, save for Mr Parry and Ms Chia who were appointed (including interests of connected persons as defined in respectively as an executive director and a non-executive section 96B (2) of the Financial Services and Markets Act director with effect from 1 January 2013. Four long- 2000 of which the company is, or ought upon reasonable serving non-executive directors, Messrs Green-Armytage, enquiry to become, aware) in the 9 per cent cumulative Keatley, Letts and Lim, who served throughout 2012, preference shares of £1 each and the ordinary shares of retired on 31 December 2012. Mr Parry and Ms Chia 25p each of the company were as follows: hold office until the forthcoming annual general meeting and, being eligible, offer themselves for re-election. Mr Killick retires at the forthcoming annual general meeting and, being eligible, offers himself for re-election, such retirement being in compliance with the company’s articles of association providing for the rotation of directors. Mr Robinow retires at the forthcoming annual general meeting and, being eligible, offers himself for re- election, such retirement being in compliance with the provisions of the UK Corporate Governance Code requiring the annual re-election of non-executive R M Robinow D J Blackett I Chia J M Green-Armytage * J R M Keatley * D H R Killick L E C Letts * C L Lim * J C Oakley M A Parry directors who have served as such for more than nine * retired 31 December 2012 years. Resolutions 4 to 7 in the Notice, which will be Preference shares Ordinary shares - 10,005,833 250,000 - 13,288 92,519 - - - 90,704 680,878 30,000 21,480 108,008 - - 41,457 - 442,493 5,088 61 Directors’ report continued There have been no changes in the interests of the Control and structure of capital directors between 31 December 2012 and the date of this report. Directors’ indemnities Details of the company’s share capital and changes in share capital during 2012 are set out in note 31 to the company’s financial statements. At 31 December 2012, the preference share capital and the ordinary share Qualifying third party indemnity provisions (as defined in capital represented, respectively, 85.7 and 14.3 per cent section 234 of the Companies Act 2006) were in force of the total issued share capital. for the benefit of directors of the company and of other members of the group throughout 2012 and remain in The rights and obligations attaching to the ordinary and force at the date of this report. Substantial shareholders 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 As at the date of this report, the company had received are summarised in note 31 to the company’s financial notifications required by The Disclosure Rules and statements. Transparency Rules of the Financial Services Authority from the following persons of voting rights held by them On a show of hands at a general meeting of the company, as shareholders through the holdings of ordinary shares every holder of shares and every duly appointed proxy of indicated: Number % the resolution before the meeting, shall have one vote. On a holder of shares, in each case being entitled to vote on Emba Holdings Limited 9,957,500 29.80 a poll, every holder of shares present in person or by proxy Prudential plc and certain subsidiaries 6,043,129 18.09 and entitled to vote on the resolution the subject of the Alcatel Bell Pensioenfonds VZW 4,167,049 12.47 poll shall have one vote for each share held. Holders of Artemis UK Smaller Companies 1,919,400 5.74 preference shares are not entitled to vote on a resolution In addition, the company had been notified that the above notice of the meeting, the dividend on the preference interest of Prudential plc group of companies includes shares is more than six months in arrears or the resolution 6,021,116 ordinary shares (18.02 per cent) in which is for the winding up of the company or is a resolution M&G Investment Funds 3 is also interested. directly and adversely affecting any of the rights and proposed at a general meeting unless, at the date of The shares held by Emba Holdings Limited (“Emba”) are for the exercise of voting rights and for the appointment included as part of the interest of Mr R M Robinow shown of a proxy or proxies to vote in relation to any resolution privileges attaching to the preference shares. Deadlines under “Directors’ interests” above. By deeds dated 24 November 1998 and 10 April 2001, Emba has agreed that it will not undertake activities in conflict with those of the group and that it will deal with the group only on a basis that is appropriate between a listed company and its subsidiaries, on the one hand, and a significant shareholder in a listed company, on the other hand. to be proposed at a general meeting are governed by the company’s articles of association and prevailing legislation and will normally be as detailed in the notes accompanying the notice of the meeting at which the resolution is to be proposed. 62 There are no restrictions on the size of any holding of The 7.5 per cent dollar notes 2012/14 (“2012/14 dollar shares in the company. Shares may be transferred either notes”) and the 7.5 per cent dollar notes 2017 (“2017 through the CREST system (being the relevant system as dollar notes”) of the company (together, the “dollar notes”) defined in the Uncertificated Securities Regulations 2001 and the 9.5 per cent guaranteed sterling notes 2015/17 of which CRESTCo Limited is the operator) where held in of REA Finance B.V. (“sterling notes”) (which are uncertificated form or by instrument of transfer in any guaranteed by the company) are transferable either usual or common form duly executed and stamped, through the CREST system where held in uncertificated subject to provisions of the company’s articles of form or by instrument of transfer in any usual or common association empowering the directors to refuse to register form duly executed in amounts and multiples, in the case any transfer of shares where the shares are not fully paid, of the dollar notes, of $1 and, in the case of the sterling the shares are to be transferred into a joint holding of notes, of £1,000. There is no maximum limit on the size more than four persons, the transfer is not appropriately of any holding in either case. supported by evidence of the right of the transferor to make the transfer or the transferor is in default in Significant holdings of preference shares, dollar notes compliance with a notice served pursuant to section 793 and sterling notes shown by the register of members and of the Companies Act 2006. The directors are not aware registers of dollar and sterling noteholders at 31 of any agreements between shareholders that may result December 2012 were as follows: 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 company in general meeting by special resolution. The articles of association may be amended only by a special resolution of the company in general meeting and, where such amendment would modify, abrogate or vary the class rights of any class of shares, with the consent of that class given in accordance with the company’s articles of association and prevailing legislation. 2012/14 2017 Preference Dollar Dollar Sterling notes shares notes notes ‘000 $’000 $’000 £’000 Bank of New York (Nominees) Limited Euroclear Nominees Limited EOC01 acct HSBC Global Custody Nominee (UK) Limited 641898 Account KBC Securities NV Client Acct – – – 4,477 – – – NCB Trust Limited Bearnet Acct - 12,145 Rulegale Nominees Limited JAMSCLT Account 6,873 Securities Services Nominees Limited 2300001 Account State Street Nominees Limited OM04 Account – – – – – – – – 9,840 – 4,667 11,169 – – – – – – – 3,495 5,500 A change of control of the company would entitle holders of the sterling notes and certain holders of the dollar notes to require repayment of the notes held by them as detailed in notes 24 and 25 to the consolidated financial statements. At the date of this report, there are no outstanding share options held by directors or employees. 63 Directors’ report continued Awards to senior group executives under the company’s (being the maximum amount of shares in the capital of long term incentive plans will vest and may be encashed the company that the company may allot) from within one month of a change of control as detailed under £60,250,000 to £75,250,000 by the creation of “Long term incentive plans” in the “Directors’ 15,000,000 9 per cent cumulative preference shares of remuneration report” section of this annual report. The £1 each ranking pari passu in all respects with the directors are not aware of any agreements between the existing preference shares and representing 30 per cent company and its directors or between any member of the of the existing authorised preference share capital. group and a group employee that provides for compensation for loss of office or employment that As indicated in the “Review of the group” section of this occurs because of a takeover bid. annual report, the directors believe that capitalisation issues of new preference shares to ordinary shareholders Treasury shares and power to repurchase shares provide a useful mechanism for augmenting returns to ordinary shareholders in periods in which good profits are No shares of the company are at present held in treasury. achieved but demands on cash resources limit the scope for payment of cash dividends. The directors also believe The company’s articles of association permit the purchase that, when circumstances permit, it is sensible to replace by the company of its own shares subject to prevailing legislation which requires that any such purchase, if a market purchase, has been previously authorised by the company in general meeting and, if not, is made pursuant to a contract of which the terms have been authorised by a special resolution of the company in general meeting. There is no authority extant for the purchase by the company of its own shares but as explained under “Strategic direction” in “Overview” in the “Review of the group” section of this report, the directors intend to seek shareholder authority for the company to buy back into group debt funding with preference capital. The proposed creation of additional preference shares is designed to give the company sufficient authorised but unissued preference capital to permit the directors to issue preference shares for these purposes without further approval (other than 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). If the intended listing of PT REA Kaltim Plantations on the Indonesia Stock Exchange (as referred to in the “Review treasury limited numbers of ordinary shares with the of the group” section of this annual report) proceeds and intention that, whenever a holding of a reasonable size it is decided that the listing should be accompanied by a has been accumulated, such holding will be placed with scrip issue of preference shares, the directors would one or more new investors. A circular detailing the expect to seek specific shareholder authorisation for that proposals and seeking the requisite authority should be issue. despatched to shareholders in the near future. 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 Authorities to allot share capital At the annual general meeting held on 10 June 2012, shareholders authorised the directors under the provisions of section 551 of the Companies Act 2006 to allot ordinary shares or 9 per cent cumulative preference 64 shares within specified limits. Replacement authorities empower the directors to make issues of ordinary shares are being sought at the forthcoming annual general for cash other than by way of a rights issue or open offer meeting (resolutions 11 and 12 set out in the Notice) to up to a maximum nominal amount of £417,681 authorise the directors (a) to allot and to grant rights to (representing 5 per cent of the issued ordinary share subscribe for, or to convert any security into, shares in the capital of the company at the date of this report). The capital of the company (other than 9 per cent cumulative company has not within the three years preceding the preference shares) up to an aggregate nominal amount of date of this report issued any ordinary shares for cash, £1,896,363.75 (being all of the unissued ordinary share relying on the annual general disapplication of statutory capital of the company and representing 22.7 per cent of pre-emption rights pursuant to section 571 of the the issued ordinary share capital at the date of this Companies Act 2006. report), and (b) subject to the passing of resolution 10 set out in the Notice, to allot and to grant rights to subscribe The foregoing powers (if granted) will expire on the date for, or to convert any security into, 9 per cent cumulative of the annual general meeting to be held in 2014 or on preference shares in the capital of the company up to an 30 June 2014 (whichever is the earlier). aggregate nominal amount of £15,000,000 (being the additional preference share capital proposed to be General meeting notice period created at the forthcoming annual general meeting and representing 30 per cent of the issued preference share At the forthcoming annual general meeting, a resolution capital of the company at the date of this report). (resolution 14 set out in the Notice) will be proposed to authorise the directors to convene a general meeting The new authorities, if provided, will expire on the date of (other than an annual general meeting) on 14 clear days' the annual general meeting to be held in 2014 or on 30 notice (subject to due compliance with requirements for June 2014 (whichever is the earlier). Save in relation to electronic voting). The authority will be effective until the the preference shares as indicated under “Increase in date of the annual general meeting to be held in 2014 or share capital” above, the directors have no present on 30 June 2014 (whichever is the earlier). This intention of exercising these authorities. resolution is proposed following legislation which, Authority to disapply pre-emption rights 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 obliged to comply with certain technical requirements of the Companies Act 2006 which can create problems with regard to fractions and overseas shareholders. In addition, the resolution to provide these powers (resolution 13 set out in the Notice) will, if passed, notwithstanding the provisions of the company's articles of association and in the absence of specific shareholder approval of shorter notice, has increased the required notice period for general meetings of the company to 21 clear days. While the directors believe that it is sensible to have the flexibility that the proposed resolution will offer, to enable general meetings to be convened on shorter notice than 21 days, this flexibility will not be used as a matter of routine for such meetings, but only where the flexibility is merited by the business of the meeting and is thought to be to the advantage of shareholders as a whole. 65 Directors’ report continued By order of the board R.E.A. SERVICES LIMITED Secretary 25 April 2013 Recommendation The board considers that increasing the authorised share capital of the company by the creation of the additional preference shares proposed as detailed under “Increase in share capital”, granting the directors the authorities and powers as detailed under “Authorities to allot share capital” and “Authority to disapply pre-emption rights” and the proposal to permit general meetings (other than annual general meetings) to be held on just 14 clear days' notice as detailed under “General meeting notice periods” above are all in the best interests of the company and shareholders as a whole and accordingly the board recommends that shareholders vote in favour of the resolutions10 to 14 as set out in the notice of the forthcoming annual general meeting. Auditor Each director of the company at the date of approval of this report has confirmed that, so far as he is aware, there is no relevant audit information of which the company's auditor is unaware; and that he has taken all the steps that he ought to have taken as a director in order to make himself aware of any relevant audit information and to establish that the company's auditor is aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006. Deloitte LLP have expressed their willingness to continue in office as auditor and resolutions to re-appoint them and to authorise the directors to fix their remuneration will be proposed at the forthcoming annual general meeting. Resolutions 8 and 9 set out in the Notice, each of which will be proposed as ordinary resolutions, relate to the re- appointment and remuneration of the auditor. 66 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 UK Corporate Governance Code issued in 2010 by the Financial Reporting Council (the “Code”) provide a widely endorsed model for achieving this. The directors are also mindful of the revised Code issued in 2012 for reporting periods beginning on or after 1 October 2012. The Code is 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 individual is appropriate right, when circumstances of the company, not to comply with certain Code principles and to explain why. Throughout the year ended 31 December 2012, the company was in compliance with the provisions set out in the Code. the to it Board of directors Four long serving independent non-executive directors, Messrs Green-Armytage, Keatley, Letts and Lim, retired from the board of the company at the end of 2012, and, on 1 January 2013, Ms Irene Chia was appointed as a new non-executive director and Mr Parry as a new executive director. As a result, the board currently comprises two executive directors and four 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 strategic planning and decision making for the long-term success of the company in the context of the company’s obligations and responsibilities both as the owner of 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 that 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 leadership and management of the board in discharging its duties; the managing director has responsibility for the executive management of the group. Neither has unfettered powers of decision. All of the non- executive directors, with the exception of the chairman, are considered by the board to be independent directors. 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. It is now the policy of the company that the board should in future be refreshed on the basis that length of service by independent non-executive directors will be limited to nine years. 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 Mr Robinow, who absented himself from the discussion in this respect. Such notifications relate to Mr Robinow’s interests as a shareholder in or a director 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. 67 Corporate governance continued Board responsibilities Performance evaluation The board is responsible for the proper management of the company. 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 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 to meet the group’s objectives and for reviewing performance, financial controls, risk and compliance with the group’s policy and procedures with respect to bribery. The company carries appropriate insurance against legal action against its directors. The current policy was in place throughout 2012 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. 68 A formal internal evaluation of the performance of the board, the committees and individual directors is undertaken annually. Balance of powers, contribution to strategy, efficacy and accountability to stakeholders are reviewed by the board as a whole and 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, and setting appropriate commercial and social responsibility objectives to the adequacy and timeliness of information made available to the board. At the performance evaluation conducted in 2012, the board as then constituted concluded that it was for the time being continuing to perform effectively but that, having decided to restructure the group’s Indonesian plantation subsidiaries into a single sub-group headed by the principal operating subsidiary, PT REA Kaltim Plantations (“REA Kaltim”), and to list REA Kaltim on the Indonesia stock exchange, it would be appropriate, in due course, to make certain changes to the board. Those changes were implemented at the end of 2012 as described under “Board of directors” above. Professional development and advice In view of their previous relevant experience and, in some cases, length of service on the board, all directors are familiar with the financial and operational characteristics of the group’s activities. Directors are required to ensure that they maintain that familiarity and keep themselves fully cognisant of the affairs of the group and matters affecting its operations, 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, regulatory, operational and political 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. Newly appointed directors receive induction on joining the board and steps are taken to ensure that they 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 directors, unless travelling, are normally present at full board meetings. 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, who served during 2012, at the regular and “ad hoc” board meetings held in 2012 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 * * retired 31 December 2012 Regular Ad hoc meeting meeting 4 4 4 4 4 4 4 3 1 1 1 1 1 1 0 0 In addition, during 2012, there were three meetings of the audit committee, one meeting of the remuneration committee and two meetings 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, it is impractical to fix meeting dates to ensure that all directors are able to attend each meeting. 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) and Mr D J Blackett. The committee is responsible for submitting recommendations for the appointment of directors for approval by the full board. In making such recommendations, the committee pays due regard to the group’s open policy with respect to diversity, including gender. During the year, in response to an invitation from the board to make a recommendation for the appointment of a non-executive director, as four long-serving directors were retiring at the end of 2012, the committee recommended the appointment of Ms Irene Chia. In establishing the criteria for this appointment, the committee concurred with the view of the board that, 69 Corporate governance continued given the specific nature and location of the group’s operations and taking into consideration the intention to reduce the size of the board following the proposed listing in Jakarta, the prospective director should have skills and experience relevant to the plantation industry and Indonesian commerce. The committee also agreed that, given the specialist nature of the knowledge required, it was not considered appropriate to advertise the position widely or to employ consultants. Instead a short list of prospective was assembled and put forward to the committee, taking into consideration the specific qualifications required as well as recent guidelines for such appointments. Ms Chia, who has relevant experience and a good understanding and knowledge of the business environment in Indonesia, was selected from this short list. Audit committee The audit committee 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 auditor, their remuneration and terms of engagement; and • reviewing and monitoring the independence of the external auditor and the effectiveness of the audit process. 70 The audit committee also monitors the engagement of the auditor to perform non-audit work. During 2012, the only non-audit work undertaken by the auditor 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 auditor). The audit committee considered that the nature and scope of, and remuneration payable in respect of, these engagements were such that the independence and objectivity of the auditor was not impaired. The members of the audit committee discharge their responsibilities by informal discussions between themselves, by meetings with the external auditor, the internal auditors in Indonesia and management and by consideration of reports by management, the Indonesian internal audit function and the external auditor and by holding at least three formal meetings in each year. The audit committee has recommended to the board of the company that it should seek the approval of the company's shareholders for the reappointment of the company's current auditor. That recommendation reflected an assessment of the qualifications, expertise, resources and independence of the auditor based upon reports produced by the auditor, the committee's own dealings with from the auditor 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 auditor. 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 auditor in connection with the financial statements are detailed in the “Directors’ responsibilities” section of this report and in the auditor’s report. The directors endeavour to ensure that there is satisfactory dialogue, based on mutual understanding, between the company and its shareholder body. The annual report, interim communications, periodic press releases and such circular letters to shareholders as circumstances may require are intended to keep shareholders informed as to progress in the operational activities and financial affairs of the group. In addition, within imposed by considerations of confidentiality, the company engages with institutional and other major shareholders through regular meetings and other contact in order to understand their concerns. The views of shareholders are communicated to the board as a whole to ensure that the board maintains a balanced understanding of shareholder opinions and issues arising. limits the All ordinary shareholders may attend the company’s annual and other general meetings and put questions to 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. 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. 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 as soon as practicable after the meeting. its commitment The company maintains a corporate website at “www.rea.co.uk”. This website has detailed information on, and photographs illustrating various aspects of, the to including group’s activities, sustainability, conservation work and managing its carbon footprint. The website is updated regularly and includes information on the company’s share price and the price of crude palm oil. The company’s results and other news releases issued via the London Stock Exchange’s Regulatory News Service are published on the “Investors” section of the website and, together with other relevant documentation concerning the company, are available for downloading. Internal control The board is responsible for the group’s system of internal control and for reviewing its effectiveness. The 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 was in place throughout 2012 and up to the date of approval of this report and which is in accordance with the current guidance on internal control (the Turnbull Guidance) and is mindful of the proposed update to such guidance. 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. 71 Corporate governance continued 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 who report to the head of the Singapore regional office and 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. Monthly meetings are held between management in London and Indonesia by way of conference call, of which minutes are taken and circulated, to consider operational matters. At least four supervisory visits are made each year to the overseas operations by the managing director and other directors also make periodic visits to these operations. Such visits are reported on and reviewed by the non- exective directors at the regular board meetings. In addition the president director of REA Kaltim visits the operations in Indonesia on a regular basis and has a continuing dialogue with the managing director and with other members of the board. Policies and procedures in respect of bribery are in place for all of the group’s operations in Indonesia as well as in the UK. These include detailed guidelines and reporting requirements, the development of a comprehensive continuous training programme for all management and employees and a process for on-going monitoring and review. The group also seeks to ensure that its partners abide by its ethical principles. 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 2012 (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. Subsequently, the board was made aware that, in connection with issues that have arisen between the group and villages in areas neighbouring the group’s operations (as detailed under “Community relations” in “Agricultural operations” in the “Review of the group” section of this annual report), on certain occasions unauthorised commitments have been made to villages. Action has been taken to reconfirm that all such commitments must be recorded in writing and signed only with the specific authority of the group’s regional director. The November 2012 review, as amended by this subsequent finding and action, has been reconfirmed for the purpose of this annual report. 72 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 RICHARD M ROBINOW 25 April 2013 Chairman 73 Directors’ remuneration report Introduction The committee does not use independent consultants but takes into account the views of the chairman and This report has been prepared in accordance with managing director. Neither the chairman nor the Schedule 8 to The Large and Medium-sized Companies managing director plays a part in the discussion of his and Groups (Accounts and Reports) Regulations 2008 own remuneration. (the “Accounting Regulations”) made pursuant to the Companies Act 2006 (the “Act”). The report also meets Remuneration policy the relevant requirements of the Listing Rules of the Financial Services Authority and describes how the board The committee sets the remuneration and benefits of the has applied the principles relating to directors’ chairman and the executive directors. The committee is remuneration set out in the UK Corporate Governance also responsible for the long term incentive arrangements Code issued in 2010 by the Financial Reporting Council for key senior executives in Indonesia. (the “Code”). The directors are aware of the draft revised regulations for directors’ remuneration reports published In setting remuneration and benefits, the committee by the Department for Business, Innovation and Skills and considers the achievement of each individual in attaining will adopt the revised regulations when they have been the objectives set for that individual (including objectives finalised and are in force. relating to sustainability and matters of governance as well as to overall corporate performance) against the As required by the Act, a resolution to approve this report prevailing business environment, the responsibilities will be proposed at the annual general meeting at which assumed by the individual and, where the role is part time, the accompanying financial statements are laid before the the time commitment involved. The committee draws on company’s members. data of the remuneration of others performing similar functions in similarly sized organisations and in similar The Act requires the auditor to report to the company’s business organisations. Account is taken of the members on certain parts of this report and to state remuneration both of senior employees of the group who whether in their opinion those parts of the report have are not directors and of staff across the group’s been properly prepared in accordance with the operations generally. Due allowance is made for Accounting Regulations. The report has therefore been differences in remuneration applicable to different divided into separate sections for audited and unaudited geographical locations. The committee aims to set information. Unaudited information The remuneration committee performance related remuneration on a basis that promotes the long-term success of the company while 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 2012 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 company and its shareholders. In framing its policy on 74 performance related remuneration (which is payable only In the past, executive directors were eligible to join the to executive directors), the committee follows the REA Pension Scheme. That scheme is now closed to provisions of schedule A to the Code. new members and, as explained in more detail under “Director’s pension arrangements – Mr J C Oakley” below, The committee considers all proposals for executive Mr Oakley is no longer an active member of the scheme. directors to hold outside directorships. Such directorships Mr Parry is based in Singapore and any future executive are normally permitted only if considered to be of value to directors of the company would be likely to be based in the group and on terms that any remuneration payable will Singapore or Indonesia. Accordingly, it is no longer the be accounted for to the group. policy of the company to offer pensionable remuneration Remuneration of executive directors to directors. Matters particularly taken into account in setting Mr The policy on remuneration of executive directors is that Oakley’s basic salary for 2012 were the general level of basic remuneration of each executive director should salary increases in the group for both employees and comprise an annual salary and certain benefits-in-kind, managers in the UK and Indonesia (where a substantial principally a company car. In addition, an executive part of Mr Oakley’s responsibilities are discharged), the director should be paid performance related bonuses. rate of inflation and confirmation that Mr Oakley’s salary These are to be awarded annually in arrears on a was reasonable by comparison with the salaries of discretionary basis taking into account the progress of the managing directors of listed companies of a size or group during the relevant year and the contribution to business similar to that of the group. Specifically with progress that a director is assessed by the committee to respect to Mr Oakley’s salary for 2012, the committee have made against specific commercial and other took account of the growth of the group’s oil palm objectives for that year. Bonuses should not normally operations and the commensurate increase in Mr exceed 50 per cent of salary and are paid in cash. Oakley’s workload, the profitability of the group and the continuing creation of value for shareholders. Prior to January 2013, the company had only one executive director and, given that the business of the Specific achievements reflected in the bonus paid to Mr group is inherently long term and not susceptible to Oakley in 2012 (being in respect of 2011 performance) influence by short term decision making, it was not included progress in achieving the group’s planned thought necessary to establish a longer term incentive expansion of its plantation business, the strengthening of pay arrangement for just one long serving director. the expatriate management team (including the Following the appointment of a second director, Mr Parry, recruitment of a new regional director based in to the board with effect from 1 January 2013, the Singapore), initiatives with respect to sustainability and directors are now giving consideration to some form of responsible agricultural practice, and progress in longer term incentive scheme which will be performance developing robust systems of group reporting and in related and will be proposed to shareholders for approval managing governance and compliance matters. Account in due course. The criteria against which annual bonuses was taken of the disappointing performance of the new are awarded in any event include aspects of progress that coal sub-group but it was noted that overall the group promote the longer term success of the group. results for 2011 were good. 75 Directors’ remuneration report continued The committee has agreed that Mr Oakley should be paid increased from £20,000 per annum to £22,000 per a bonus of £105,000 during 2013 in respect of 2012. In annum with effect from 1 January 2012. setting this bonus, the committee noted the completion and successful commissioning of the group’s two new Service contracts methane plants, leading to a substantial reduction in diesel consumption across the operations with The company’s current policy on directors’ service consequential savings in energy costs going forward, contracts is that contracts should have a notice period of completion and commissioning of the third oil mill, further not more than one year and a maximum termination certification under RSPO with respect to the supply chain payment not exceeding one year’s salary. No director has and the successful development of the executive a service contract that is not fully compliant with this management team in Singapore and Indonesia. The policy. committee also noted the exceptional stress caused by the village disruptions which contributed to the shortfall in Mr Oakley has two service agreements whereby his budgeted production for 2012 as described in the working time and remuneration are shared between two “Review of the group”. Against this, the committee took employing companies to reflect the division of his account of the coal operations which had fallen short of responsibilities between different parts of the group. expectations. Each contract may be terminated by either party by giving notice to the other party of not less than six months. At Continuing performance objectives for the executive 31 December 2012, the unexpired term under each directors take into consideration the company’s long term contract remained as six months. There are no provisions agricultural objectives, including increased crop levels, for compensation for early termination save that Mr plantings and cost efficiencies, further initiatives with Oakley would be entitled to a payment in lieu of notice if respect to sustainability, including reporting of the group’s due notice had not been given. carbon footprint and the development of strategies for managing and reducing greenhouse gas emissions in Mr Parry’s service contract may be terminated by either future. party by giving notice to the other party of not less than three months. At 31 December 2012, the unexpired term Remuneration of non-executive directors under Mr Parry’s contract remained as three months. There are no provisions for compensation for early The remuneration of non-executive directors other than termination save that Mr Parry would be entitled to a the chairman is determined by the board within the limits payment in lieu of notice if due notice had not been given. set by the articles of association, no director taking part in the determination of his own remuneration. The level of Performance graph remuneration is determined having regard to that paid by comparable organisations and to the time commitments A performance graph is shown in the “Key statistics” expected. No non-executive director has any entitlement section of this annual report. This compares the to remuneration on a basis related to performance. performance of the company’s ordinary shares (measured Following the approval of shareholders granted at the by total shareholder return) with that of the FTSE all share 2011 annual general meeting to increase the service fees index for the period from January 2008 to December of each director, non-executive remuneration was 2013. The FTSE all share index has been selected as 76 there is no index available that is specific to the activities Each plan provided that the vesting of a participants’ of the company. Long term incentive plans potential entitlements to notional ordinary shares would be determined by key performance targets with each performance target measured on a cumulative basis over the applicable performance period. For both plans, this A first long term incentive plan (the “first plan”) was period has now ended. Under the first plan, there were established in 2007 and a second similar plan (the three key performance targets with each target governing “second plan”) was put in place in 2009. The first and the vesting of one third of each potential entitlement. The second plans (together the “plans”) were designed to three targets related to total shareholder return, cost per provide incentives, linked to the market price performance tonne of crude palm oil produced and annual planting rate of ordinary shares in the company, to a small number of achieved. Under the second plan there were two key key senior executives in Indonesia with a view to their performance targets with each target governing the participating over the long term in value created for the vesting of one half of each potential entitlement. The two group. No director was eligible to participate under either targets related to total shareholder return and cost per plan. The first plan period commenced on 1 January tonne of crude palm oil produced. Under each plan there 2007 and ended on 31 December 2010 and the second were threshold, target and maximum levels of plan period commenced on 1 January 2009 and ended performance determining the extent of vesting in relation on 31 December 2012 (the “performance periods”). As to each performance target. Targets were subject to noted under “Remuneration of executive directors” above, adjustment at the discretion of the remuneration the directors are giving consideration to a further long committee where, in the committee’s opinion, warranted term incentive scheme. by actual performance. Under the existing plans, participants were awarded The exercise of vested entitlements is dependent upon potential entitlements over notional ordinary shares of the continued employment with the group. If a participant company. These potential entitlements then vested to an with a vested entitlement leaves, the participant may extent that was dependent upon the achievement of exercise a vested entitlement within six months of leaving. targets. Vested entitlements may be exercised in whole or part at any time within the six years following the date In the event of a change in control of the company as a upon which they vest. On exercising a vested entitlement, result of a takeover offer or similar corporate event, a participant will receive a cash amount for each ordinary vested entitlements will be exercisable for a period of one share over which the entitlement is exercised, equal to the month following the date of the change of control or excess (if any) of the market price of an ordinary share on other relevant event (as determined by the remuneration the date of exercise over 414.69p in the case of the first committee). plan and 224.82p in case of the second plan, being the market prices of an ordinary share on the dates with At 31 December 2012, entitlements to a total of 36,002 effect from which the plans were agreed after adjustment notional ordinary shares had vested under the first plan. for subsequent variations in the share capital of the Because the performance period for the second plan company in accordance with the rules of the plans. ended only on 31 December 2012, the vested entitlements under that plan have still to be determined but they will not exceed the potential maximum total entitlement of 41,188 ordinary shares. On the basis of 77 Directors’ remuneration report continued the market price of the ordinary shares on 31 December scheme of which details are given in note 38 to the 2012 of 432.5p per share, the total gain to participants in consolidated financial statements. Mr Oakley elected to respect of their vested entitlements under the first plan become a pensioner member of the scheme on 31 July would have been £6,412 and under the second plan 2009. In recognition of Mr Oakley’s withdrawal from would have been £85,540 were it to be determined that ordinary membership of the scheme ahead of attaining the potential entitlements had vested in full. the age of 65, the company is paying Mr Oakley an Audited information amount in lieu of the pension contributions that the company would otherwise have paid to the pension scheme. The amount in lieu payable in 2012 was Directors’ remuneration £59,000 (2011: £56,000). The following table shows details of the remuneration of Director’s pension entitlement - Mr J C Oakley individual directors holding office during the year ended 31 December 2012 (with comparative totals for 2011): Details of Mr Oakley’s annual pension entitlement and of the transfer value of that entitlement are set out below. 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* 2012 Total £’000 £’000 £’000 197 315 5 184 202 499 2011 Total £’000 193 414 24 22 22 24 22 22 - - - - - - 24 22 22 24 22 22 22 20 20 22 20 20 648 189 837 731 Pension: In payment at beginning of year Increase during the year In payment at end of year Transfer value: At beginning of year £ 67,892 2,611 70,503 £ 1,505,496 Contributions made by the director during the year – Increase during the year At end of year 21,293 1,526,789 * comprises benefits plus, in the case of Mr Oakley a bonus of £112,500, and payments in lieu of pension contributions of £59,000 (see “Director’s pension arrangements – Mr J C Oakley” below). The increase in the year in annual pension in excess of inflation was £746. ** retired 31 December 2012 Fees paid to Mr Blackett and Mr Killick in respect of 2012 included, in each case, additional remuneration of £2,500 Approved by the board on RICHARD M ROBINOW 25 April 2013 in respect of their membership of the audit committee. Chairman Fees payable in respect of Mr Green-Armytage, Mr Letts and Mr Lim were paid to companies in which such directors were interested. Director’s pension arrangements - Mr J C Oakley Mr Oakley (who was aged 64 at 31 December 2012) was until 31 July 2009 an ordinary member of the R.E.A. Pension Scheme. That Scheme is a defined benefit 78 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 (“IFRSs”) as adopted by the European Union and Article 4 of the IAS Regulation and have elected to prepare the parent company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law, the directors must not approve the accounts 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 for that period. 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 IFRSs 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 responsible for the maintenance and • make judgments and accounting estimates that are integrity of the corporate and financial information included on the company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 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; 79 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 25 April 2013 80 Auditor’s report (group) Independent auditor’s 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 2012 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 44. 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. In addition, we Financial Reporting Standards (IFRSs) as adopted by the read all the financial and non-financial information in the European Union. annual report to identify material inconsistencies with the audited financial statements and to identify any information This report is made solely to the company’s members, as that is apparently materially incorrect based on, or materially a body, in accordance with Chapter 3 of Part 16 of the inconsistent with, the knowledge acquired by us in the Companies Act 2006. Our audit work has been course of performing the audit. If we become aware of any undertaken so that we might state to the company’s apparent material misstatements or inconsistencies we members those matters we are required to state to them consider the implications for our report. in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or Opinion on financial statements assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, In our opinion the group financial statements: for this report, or for the opinions we have formed. Respective responsibilities of directors and auditor As explained more fully in the Directors’ Responsibilities Statement, 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 2012 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. 81 Auditor’s 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 2012 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 Auditor London, England 25 April 2013 82 Consolidated income statement for the year ended 31 December 2012 Revenue Net (loss) / 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 Impairment loss 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 2012 $’000 2011 $’000 2 4 13 2 5 16 2, 7 8 5 9 10 35 11 124,600 (5,677) (63,566) 55,357 5,979 12 (1,601) (18,899) (3,000) 37,848 411 (7,701) 30,558 (12,855) 147,758 4,011 (68,056) 83,713 7,375 339 (1,719) (16,959) – 72,749 2,889 (11,465) 64,173 (18,559) 17,703 45,614 11,342 6,713 (352) 17,703 40,453 5,006 155 45,614 33.9 cents 33.9 cents 121.0 cents 121.0 cents 83 Consolidated balance sheet as at 31 December 2012 Non-current assets Goodwill Biological assets Property, plant and equipment Prepaid operating lease rentals Indonesian coal and stone interests Investments Deferred tax assets Non-current receivables Total non-current assets Current assets Inventories Investments Trade and other receivables Cash and cash equivalents Total current assets Total assets Current liabilities Trade and other payables Current tax liabilities Bank loans US dollar notes Other loans and payables Total current liabilities Non-current liabilities Bank loans Sterling notes US dollar notes Preference shares issued by a subsidiary Derivative financial 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 25 April 2013 and signed on behalf of the board. RICHARD M ROBINOW Chairman 84 Note 12 13 14 15 16 19 28 18 19 20 21 30 23 25 29 23 24 25 26 27 28 29 31 32 33 34 35 2012 $’000 12,578 265,663 145,610 26,630 29,480 – 6,063 2,470 2011 $’000 12,578 244,433 102,185 23,497 28,580 1,430 4,689 1,835 488,494 419,227 20,712 1,256 32,155 26,393 80,516 25,559 963 34,162 30,601 91,285 569,010 510,512 (30,051) (4,348) (1,000) (691) (1,105) (37,195) (51,194) (54,279) (48,007) (54) (11,622) (44,372) (7,257) (19,895) (8,349) (2,000) (4,527) (1,353) (36,124) (27,018) (51,332) (29,414) (1,500) (16,216) (40,283) (5,680) (216,785) (171,443) (253,980) (207,567) 315,030 302,945 97,565 18,680 (4,854) 201,630 313,021 2,009 315,030 87,939 21,771 (11,762) 202,763 300,711 2,234 302,945 Consolidated statement of comprehensive income for the year ended 31 December 2012 Profit for the year Note 2012 $’000 17,703 2011 $’000 45,614 Other comprehensive income Changes in fair value of cash flow hedges: Gains / (losses) arising during the year Reclassification adjustments for losses included in the consolidated income statement Changes in fair value of hedged instrument Reclassification adjustments for gains included in the consolidated income statement Exchange differences on translation of foreign operations Tax relating to components of other comprehensive income 9 – – – – – (2,064) – (2,064) 1,700 894 2,594 (303) (611) 4,102 (329) 5,453 Total comprehensive income for the year 15,639 51,067 Attributable to: Ordinary shareholders Preference shareholders Non-controlling interests 9,151 6,713 (225) 15,639 45,867 5,006 194 51,067 Consolidated statement of changes in equity for the year ended 31 December 2012 Share capital (note 31) $’000 60,548 At 1 January 2011 – Prior year reclassification Total comprehensive (loss) / income – Issue of new preference shares (cash) 24,248 3,143 Issue of new preference shares (scrip) – Dividends to preference shareholders – Dividends to ordinary shareholders Share Translation reserve (note 33) $’000 Retained earnings (note 34) $’000 (18,197) 166,228 (1,021) 45,459 – – (5,006) (2,897) 1,021 5,414 – – – – premium (note 32) $’000 24,901 – – 13 (3,143) – – Non- controlling interests (note 35) $’000 2,040 – 194 – – – – Sub total $’000 233,480 – 50,873 24,261 – (5,006) (2,897) Total equity $’000 235,520 – 51,067 24,261 – (5,006) (2,897) At 31 December 2011 Correction of previous accounting error (note 33) Total comprehensive income Issue of new preference shares (cash) Issue of new preference shares (scrip) Dividends to preference shareholders Dividends to ordinary shareholders 87,939 21,771 (11,762) 202,763 300,711 2,234 302,945 – – 6,389 3,237 – – – – 146 (3,237) – – 9,099 (2,191) – – – – (9,099) 18,055 – – (6,713) (3,376) – 15,864 6,535 – (6,713) (3,376) – (225) – – – – – 15,639 6,535 – (6,713) (3,376) At 31 December 2012 97,565 18,680 (4,854) 201,630 313,021 2,009 315,030 85 Consolidated cash flow statement for the year ended 31 December 2012 Net cash from operating activities 36 32,470 33,776 Note 2012 $’000 2011 $’000 411 4 (50,264) (15,033) (2,241) (1,616) (3,900) 2,889 11 (19,487) (18,001) (6,729) – (9,717) (72,639) (51,034) (6,713) (3,376) (5,006) (2,897) (10,603) (13,469) 6,535 33,593 24,260 – (19,000) (10,000) – (259) 36,027 36,204 (3,949) – 22,649 11,588 37 (3,965) 30,601 (243) (5,670) 36,710 (439) 21 26,393 30,601 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 Acquisition of subsidiary company Investment in Indonesian coal interests Net cash used in investing activities Financing activities Preference dividends paid Ordinary dividends paid Repayment of borrowings Proceeds of issue of preference shares Issue of US dollar notes, net of expenses Redemption of US dollar notes Redemption of sterling notes Net sale and repurchase of US dollar notes New bank borrowings drawn Net cash from financing activities Cash and cash equivalents Net 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 86 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 82 to 117 are prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted 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. Details regarding the correction of a previous accounting error in respect of hedge accounting can be found under “Correction of previous accounting error” under “Derivative financial instruments” on page 93, and in notes 33 and 34. Presentational currency The consolidated financial statements of the group are presented in US dollars, which is also 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 7 (amended): “Financial instruments: disclosures” IFRS 9: “Financial instruments: classification and measurement” IFRS 10: “Consolidated financial statements” IFRS 11: “Joint arrangements” IFRS 12: “Disclosure on interests in other entities” IFRS 13: “Fair value measurement” Amendments to IAS 27 and IAS 28 reflecting the changes from the new IFRS 10 and IFRS 11 above IAS 19 (amended): “Employee benefits” IAS 32 (amended): “Financial instruments: presentation - offsetting financial assets and financial liabilities” IFRIC 20: “Stripping costs in the production phase of a surface mine” The effective date of IFRS 9 was deferred by the International Accounting Standards Board (IASB) and it now has mandatory application for accounting periods beginning on or after 1 January 2015. This standard represented the first phase of the IASB’s project to replace IAS 39 Financial instruments: recognition and measurement. It sets out the classification and measurement criteria for financial assets and financial liabilities. It is not considered that the effect of applying the standard in its current form would have a material impact on the group’s reported profit or equity. The impact on the group of further changes to IFRS 9 and the impact of the second and third phases of the IASB’s project, covering impairment and hedge accounting respectively, will be assessed when the IASB has finalised the proposed requirements. IFRS 9 has not been endorsed by the EU and will only become applicable once that endorsement has occurred. The adoption of IFRS 10 Consolidated financial statements, which is mandatory for accounting periods beginning on or after 1 January 2013, may alter the composition of those subsidiary companies which are included in the consolidated financial statements of the company. IFRS 13 Fair value measurement has been issued. This standard aims to provide a single source of fair value measurement and disclosure requirements for use across 87 Accounting policies (group) continued IFRS. The implementation of IFRS 13 does not change where fair value is or is not applied under IFRS and will not require a restatement of historical transactions. Mandatory application is from 1 January 2013. 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. An amendment to IAS 1 Presentation of financial statements has been issued and has mandatory application for accounting periods beginning on or after 1 July 2012. This amendment in other changes the disclosure of comprehensive income grouping them into items which recycle to profit and loss and items which do not. Apart from the change in disclosure, this amendment will have little impact on the group financial statements. items presented IAS 19 Employee benefits has been revised and has mandatory application from 1 January 2013. The new standard does not substantially change the values of retirement benefit liabilities on the balance sheet, but it has eliminated an option that allowed an entity to defer recognition of changes in the net benefit liability; this will have a non-material impact on the unrecognised actuarial loss in relation to the group’s Indonesian retirement benefit obligations. In addition, the revised standard has extended and amended some of the disclosure requirements for multi-employer plans, which the directors are currently evaluating. 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 the financial statements 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 liabilities recognised. The share of total assets and comprehensive income is attributed to the owners of the parent and to non-controlling interests even if this results in the non- controlling interests having a deficit balance. Results of subsidiaries acquired or disposed of are included in the consolidated income statement from the effective date of 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. All intra-group transactions, balances, income and expenses are eliminated on consolidation. Goodwill Goodwill is recognised as an asset on the basis described under “Basis of consolidation” above and once recognised is tested for impairment at least annually. Any impairment is debited immediately as a loss in the consolidated income statement and is not subsequently reversed. On disposal of a subsidiary, the attributable amount of any goodwill is included in the determination of the profit or loss on disposal. For the purpose of impairment testing, goodwill is allocated to each of the group's cash generating units expected to benefit from the synergies of the combination. Cash generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. Goodwill arising between 1 January 1998 and the date of transition to IFRS is retained at the previous UK Generally Accepted Accounting Practice amount subject to testing for impairment at that date. Goodwill written off to reserves prior to 1 January 1998, in accordance with the accounting standards then in force, has not been reinstated and is not 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 88 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 for the provision of services. Interest income is accrued on a time basis by reference to the principal outstanding and at the effective interest rate applicable (which is the rate that exactly discounts estimated future cash receipts, through the expected life of the financial asset, to that asset’s net carrying amount). Dividend income is recognised when the shareholders’ rights to receive payment have been established. Leasing Assets held under finance leases and other similar contracts are recognised as assets of the group at their fair values or, if lower, at the present values of minimum lease payments (for each asset, determined at the inception of the lease) and are depreciated over the shorter of the lease terms and their useful lives. The corresponding liabilities are included in the balance sheet as finance lease obligations. Lease payments are apportioned between finance charges and a reduction in the lease obligation to produce a constant rate of interest on the balance of the capital repayments outstanding. Hire purchase transactions are dealt with similarly, except that assets are depreciated over their useful lives. Finance and hire purchase charges are charged directly against income. Rental payments under operating leases are charged to income on a straight-line basis over the term of the relevant lease. Foreign currencies Transactions in foreign currencies are recorded at the rates of exchange ruling at the dates of the transactions. At each balance sheet date, assets and liabilities denominated in foreign currencies are retranslated at the rates of exchange prevailing at that date except that non-monetary items that are measured in terms of historical cost in a 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 such loans relate to investment in overseas operations or hedge the group’s investment in such operations, are recognised directly in equity. For consolidation purposes, the assets and liabilities of any group entity with a functional currency other than the US dollar are translated at the exchange rate at the balance sheet date. Income and expenses are translated at the average rate for the period unless exchange rates fluctuate significantly. Exchange differences arising are classified as equity and transferred to the group’s translation reserve. Such exchange differences are recognised as income or expenses in the period in which the entity is sold. Goodwill and fair value adjustments arising on the acquisition of an entity with a functional currency other than the US dollar are treated as assets and liabilities of that entity and are translated at the closing rate of exchange. Borrowing costs Borrowing costs incurred in financing construction or installation of qualifying property, plant or equipment are added to the cost of the qualifying asset, until such time as the construction or installation is substantially complete and the asset is ready for its intended use. Borrowing costs incurred in financing the planting of extensions to the developed agricultural area are treated as expenditure relating to biological assets until such extensions reach maturity. All other borrowing costs are recognised in the consolidated income statement of the period in which they are incurred. Operating profit Operating profit is stated after any gain or loss arising from changes in the fair value of biological assets (net of expenditure relating to those assets up to the point of maturity) but before investment income and finance costs. 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. 89 Accounting policies (group) continued 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 to the consolidated income statement in addition to the adjusted regular cost for the period. 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 not recognised at the balance sheet date are amortised to income over the expected average remaining lives of the participating employees. 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. Biological assets All biological assets are bearer biological assets as recognised by IAS 41, and are distinguished from consumable biological assets by virtue of being harvestable. 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 the 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 such 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 a standard pre-tax profit margin and then deriving the present value of the resultant profit stream. For this purpose, the standard pre-tax profit margin is taken to be the average of the historic pre-tax profit margins for the 20 years ending with the year of the valuation subject to buffering of year to year changes, such that the change in the standard pre-tax margin does not exceed 5 per cent and any change in the standard pre tax margin that runs contrary to the trend in current margins is ignored. The historic pre-tax profit margin for each year represents the transfer value of FFB less standard production costs (including an allowance for overheads and a recovery charge in respect of buildings and plant and machinery). FFB transfer value is derived from the average price of crude palm oil FOB Samarinda (itself based on 90 the CIF Rotterdam price less transport costs and export duty) over the relevant year, less processing costs. 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 use of agricultural buildings, plantation infrastructure and vehicles. The variation in the value of the biological assets in each accounting period, after allowing for additions to the biological assets in the period, is charged or credited to profit or loss as appropriate, with no depreciation being provided on such assets. Property, plant and equipment All property, plant and equipment (including, with effect from 1 January 2007, additions to plantation infrastructure) is carried at original cost less any accumulated depreciation and any accumulated impairment losses. Depreciation is computed using the straight line method so as to write off the cost of assets, other than property and plant under construction, over the estimated useful lives of the assets as follows: buildings - 20 years; plant and machinery - 5 to 16 years. Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the terms of the relevant leases. The gain or loss on the disposal or retirement of an asset is determined as the difference between the sales proceeds, less costs of disposal, and the carrying amount of the asset and is recognised in the consolidated income statement. Prepaid operating lease rentals Payments to acquire leasehold interests in land are treated as prepaid operating lease rentals and amortised over the periods of the leases. Impairment of tangible and excluding goodwill intangible assets At each balance sheet date, the group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that any asset has suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the group estimates the recoverable amount of the cash- generating unit to which the asset belongs. An intangible asset with an indefinite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired. The recoverable amount of an asset (or cash-generating unit) is the higher of fair value less costs to sell and value in use. In assessing value in use, estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and those risks specific to the asset (or cash- generating unit) for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash- generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where, with respect to assets other than goodwill, an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. 91 Accounting policies (group) continued Inventories Inventories of agricultural produce harvested from the biological assets are stated at fair value at the point of harvest of the FFB from which the produce derives plus costs incurred in the processing of such FFB (including direct labour costs and overheads that have been incurred in bringing such inventories to their present location and condition) or at net realisable value if lower. Inventories of engineering and other items are valued at the lower of cost, on the weighted average method, or net realisable value. For these purposes, net realisable value represents the estimated selling price (having regard to any outstanding contracts for forward sales of produce) less all estimated costs of processing and costs incurred in marketing, selling and distribution. Recognition and derecognition of financial instruments Financial assets and liabilities are recognised in the group’s financial statements when the group becomes a party to the contractual provisions of the relative constituent instruments. Financial assets are derecognised only when the contractual rights to the cash flows from the assets expire or if the group transfers substantially all the risks and rewards of ownership to another party. Financial liabilities are derecognised when the group’s obligations are discharged, cancelled or have expired. Non-derivative financial assets The group’s non-derivative financial assets comprise loans and receivables (including Indonesian coal interests), and cash and cash equivalents. The group does not hold any financial assets designated as held at ‘fair value through profit and loss’ (“FVTPL”) or ‘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 potentially irrecoverable amounts. Cash and cash equivalents Cash and cash equivalents comprise cash in hand, demand deposits and other short-term highly liquid investments that have a maturity of not more than three months from the date of acquisition and 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. Held-to-maturity investments Debentures and shares with fixed and determinable payments and fixed maturity dates that are intended to be held to maturity are classified as held-to-maturity investments, and are measured at amortised cost using the effective interest method, less any impairment, with revenue recognised on an effective yield basis. Non-derivative financial liabilities The group’s non-derivative financial liabilities comprise redeemable instruments, bank borrowings, finance leases and trade payables, which are held at amortised cost. Note issues, bank borrowings and finance leases issues and instruments (comprising note Redeemable 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 92 with the relative unamortised balance of costs treated as non- current receivables. Correction of previous accounting error In previous years, the group accounted for certain cross- currency interest rate swaps as cash flow hedges of the group’s liability in respect of 9.5 per cent guaranteed sterling notes 2015/17 issued by REA Finance B.V.. After discussion with the Financial Reporting Council’s Conduct Committee, the group has concluded that this accounting treatment was incorrect because the swaps represented a hedge of the group’s presentational currency and cash flow hedge accounting may not be applied in respect of such a hedge. The consequential corrections needed have been booked in the accompanying financial statements as set out in note 33. Because the overall impact of the accounting error on the 2011 financial statements is not considered material, comparative figures have not been adjusted but the differences in profit before tax, tax, profit for the period and the component of that profit attributable to non-controlling interests that would have been reported for each of the years 2009 to 2011 had the cross-currency interest rate swaps been correctly accounted for are detailed in note 33. Equity instruments Instruments are classified as equity instruments if the substance of the relative contractual arrangements evidences a residual interest in the assets of the group after deducting all of its liabilities. Equity instruments issued by the company are recorded at the proceeds received, net of direct issue costs not charged to income. The preference shares of the company are regarded as equity instruments. Trade payables All trade payables owed by the group are non interest bearing and are stated at their nominal value. Financial liabilities at FVTPL A financial liability may be designated as at FVTPL upon initial recognition if such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise, or if it forms part of a contract containing one or more embedded derivatives, and IAS 39 Financial Instruments: Recognition and Measurement permits the entire combined contract (asset or liability) to be designated as at FVTPL. The group designates its derivative financial instruments as described below as held at FVTPL. 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 22. 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, through finance costs (note 8) with the foreign exchange element recognised through administrative expenses (note 5), unless the derivative is designated and qualifies as a hedging instrument (either as a cash flow hedge or a fair value hedge), in which case the timing of the recognition in profit or loss depends on the nature of the hedge relationship. A derivative is presented as a non-current asset or non-current liability if the remaining maturity of the instrument is more than 12 months and the derivative is not expected to be realised or settled within 12 months. Other derivatives are presented as current assets or liabilities. Cash flow and fair value hedges The group does not hold any derivatives designated and qualifying as cash flow or fair value hedges. 93 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. Derivatives As described in note 22, 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. 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). 94 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 estimating 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 revenue Total revenue 2012 $’000 122,621 1,979 124,600 12 411 125,023 2011 $’000 147,523 235 147,758 339 2,889 150,986 In 2012, three customers accounted for respectively 42 per cent, 21 per cent and 12 per cent of the group’s sales of agricultural goods (2011: two customers, 51 per cent and 13 per cent). As stated in note 22 “Credit risk”, substantially all sales of goods are made on the basis of cash against documents or letters of credit and accordingly the directors do not consider that these sales result in a concentration of credit risk to the group. The crop of oil palm fresh fruit bunches for 2012 amounted to 597,722 tonnes (2011: 607,335 tonnes). The fair value of the crop of fresh fruit bunches was $78,468,000 (2011: $90,906,000), based on the price formulae determined by the Indonesian government for purchases of fresh fruit bunches from smallholders (see note 13). 3. Segment information In the table below, the group’s sales of goods are analysed by geographical destination and the carrying amount of net assets is analysed by geographical area of asset location. Sales by geographical destination: Indonesia Rest of Asia Carrying amount of net assets by geographical area of asset location: UK, Continental Europe and Singapore Indonesia 2012 $’m 73.4 51.2 124.6 51.5 263.5 315.0 2011 $’m 53.2 94.3 147.5 44.6 258.3 302.9 The group has three reportable segments under IFRS 8. These comprise two operating segments, cultivation of oil palms, coal and stone operations, and a head office segment comprising the activities of the parent company and its UK, European and Singaporean subsidiaries. The accounting policies of the reportable segments are the same as the group’s accounting policies set out on pages 87 to 93. Segment profit is the operating profit or loss earned by each segment before investment revenues, finance costs and taxation. This is the measure by which the group’s chief executive assesses segment performance. The resolution of competing rights over certain plantation areas referred to in note 42 concerns assets in the group’s segment ‘cultivation of oil palms’. 95 Notes to the consolidated financial statements continued 3. Segment information - continued Year to 31 December 2012 Revenue Gross profit / (loss) Net gain from changes in fair value of biological assets Other operating income Distribution costs Administrative expenses Impairment loss Operating profit / (loss) Investment revenues Finance costs Profit before taxation Taxation Profit for the year Plantations $’000 122,134 Coal and stone $’000 2,466 56,870 5,979 2 (1,601) (10,239) – 51,011 (1,513) – – – (2,268) (3,000) (6,781) Consolidated total assets Consolidated total liabilities Depreciation charged to consolidated income statement Additions to non-current assets 523,276 141,639 6,125 75,258 34,137 439 10 903 11,597 111,902 79 3 Year to 31 December 2011 Revenue Gross profit Net gain from changes in fair value of biological assets Other operating income Distribution costs Administrative expenses Operating profit / (loss) Investment revenues Finance costs Profit before taxation Taxation Profit for the year Plantations $’000 129,542 Coal and stone $’000 18,216 82,218 7,375 339 (1,719) (10,756) 77,457 1,495 – – – (1,158) 337 Consolidated total assets Consolidated total liabilities Depreciation charged to consolidated income statement Additions to non-current assets 453,384 113,379 5,385 51,686 36,403 2,341 7 9,721 20,725 91,847 52 1,630 96 Head office Total $’000 – – – 10 – (6,392) – (6,382) $’000 – – – – – (5,045) (5,045) $’000 124,600 55,357 5,979 12 (1,601) (18,899) (3,000) 37,848 411 (7,701) 30,558 (12,855) 17,703 569,010 253,980 6,214 76,164 $’000 147,758 83,713 7,375 339 (1,719) (16,959) 72,749 2,889 (11,465) 64,173 (18,559) 45,614 510,512 207,567 5,444 63,037 Head office Total 4. Agricultural produce inventory movement The net (loss) / gain arising from changes in fair value of agricultural produce inventory represents the movement in the fair value of that inventory less the amount of the movement in such inventory at historic cost (which is included in cost of sales). 5. Profit before tax 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) / losses Increase / (release) of provision for UK pension (see note 38) Loss on disposal of fixed assets Net loss on financial liabilities at FVTPL Indonesian operations Head office Administrative expenses before capitalisation Amounts payable to the company’s auditor 2012 $’000 2011 $’000 18,899 220 456 5,812 223 (845) 1,072 39 190 13,681 4,762 18,899 16,959 (5,943) 405 5,292 152 519 (253) 408 - 11,445 4,840 16,959 The amount payable to Deloitte LLP for the audit of the company’s financial statements was $136,000 (2011: $124,000). Amounts payable to Deloitte LLP for the audit of accounts of subsidiaries of the company pursuant to legislation were $18,000 (2011: $16,000). Amounts payable to Deloitte LLP for other services were $10,000 (2011: $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 auditor) and for group accountancy services. Amounts payable to affiliates of Deloitte LLP for the audit of subsidiaries’ financial statements were $26,000 (2011: amounts payable to affiliates of Deloitte LLP for the audit of subsidiaries were $24,000). Earnings before interest, tax, depreciation and amortisation and net biological gain Operating profit Depreciation and amortisation Net biological gain 2012 $’000 2011 $’000 37,848 6,214 (5,979) 38,083 72,749 5,444 (7,375) 70,818 97 Notes to the consolidated financial statements continued 6. Staff costs, including directors Average number of employees (including executive directors): Agricultural - permanent Agricultural - temporary Head office Their aggregate remuneration comprised: Wages and salaries Social security costs Pension costs 7. Investment revenues Interest on bank deposits Other interest income 8. Finance costs Interest on bank loans and overdrafts Interest on US dollar notes Interest on sterling notes Change in value of sterling notes arising from exchange fluctuations Change in fair value of derivative financial instruments Reclassification from translation reserve in equity Other finance charges Amount included as additions to biological assets 2012 Number 2011 Number 4,720 2,524 9 7,253 4,668 2,850 7 7,525 $’000 $’000 23,869 692 1,604 26,165 2012 $’000 164 247 411 2012 $’000 4,145 3,433 5,598 1,029 (2,108) – 372 12,469 (4,768) 7,701 23,651 893 423 24,967 2011 $’000 507 2,382 2,889 2011 $’000 2,510 3,671 5,679 – – 283 1,942 14,085 (2,620) 11,465 The reclassification from translation reserve in equity arose from the early repurchase for cancellation of £2.46 million of 9.5 per cent guaranteed sterling notes 2015/17 (see note 24) which was hedged by a cross currency interest swap (see note 27). Deferred tax previously provided in respect of this amount was also reclassified to income (see note 9). Amounts included as additions to biological assets and construction in progress arose on borrowings applicable to the Indonesian operations and reflected a capitalisation rate of 34.9 per cent (2011: 20.9 per cent); there is no directly related tax relief. 98 9. Tax Current tax: UK corporation tax Foreign tax Prior year Total current tax Deferred tax: Current year Prior year Total deferred tax Total tax 2012 $’000 534 9,638 557 10,729 2,068 58 2,126 2011 $’000 – 14,634 – 14,634 3,925 – 3,925 12,855 18,559 Taxation is provided at the rates prevailing for the relevant jurisdiction. For Indonesia, the current and deferred taxation provision is based on a tax rate of 25 per cent (2011: 25 per cent) and for the United Kingdom, the taxation provision reflects a corporation tax rate of 24.5 per cent (2011: 26.5 per cent) and a deferred tax rate of 23 per cent (2011: 26 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 24.5 per cent (2011: 26.5 per cent) Tax effect of the following items: Expenses not deductible in determining taxable profit Non taxable income Overseas tax rates above / (below) UK standard rate Overseas withholding taxes, net of relief Tax effect of change in rate on UK net deferred tax assets Tax credit on loss in overseas subsidiary not recognised Tax losses in overseas subsidiaries time expired Reduction in recoverable amounts relating to disputed Indonesian tax assessments Additional tax provisions 2012 $’000 30,558 2011 $’000 64,173 7,487 17,006 796 (85) 267 1,890 160 1,739 58 557 (14) 532 (135) (793) 1,947 41 – – – (39) Tax expense at effective tax rate for the year 12,855 18,559 In addition to the amount charged to the income statement, the following amounts relating to tax have been recognised directly in other comprehensive income: Tax relating to cash flow hedges: Current Deferred Reclassification to income statement (see note 8) – – – – – 286 (73) 213 116 329 99 Notes to the consolidated financial statements continued 10. Dividends Amounts recognised as distributions to equity holders: Preference dividends of 9p per share Ordinary dividends of 6.5p per share (2011: 5.5p per share) 2012 $’000 6,713 3,376 10,089 2011 $’000 5,006 2,897 7,903 An interim dividend of 3.5p per ordinary share in respect of the year ended 31 December 2012 was paid on 25 January 2013. In accordance with IAS10 “Events after the reporting period”, this dividend, amounting in aggregate to $1,852,000, has not been included in the 2012 financial statements. 11. Earnings per share Earnings for the purpose of basic and diluted earnings per share * * being net profit attributable to ordinary shareholders Weighted average number of ordinary shares for the purpose of basic earnings per share Effect of dilutive potential ordinary shares Weighted average number of ordinary shares for the purpose of diluted earnings per share 12. Goodwill and acquisition of subsidiary Beginning of year End of year 2012 $’000 11,342 ‘000 33,415 – 33,415 2012 $’000 12,578 12,578 2011 $’000 40,453 ‘000 33,415 – 33,415 2011 $’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 standard unit profit margin calculated by reference to a five year average of historic profit margins 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. Based upon the recent review, the directors have concluded that no impairment of goodwill is required. Acquisition of subsidiary Pursuant to contracts dated 13 March and 6 June 2012, the group acquired 95 per cent of the issued share capital of PT Persada Bangun Jaya (“PBJ2”) for a cash consideration of $1,616,000. At the date of acquisition, PBJ2 held land permits (izin lokasi) in respect of 5,192 hectares in East Kalimantan, Indonesia. The transaction has been accounted for by the purchase method of accounting. The book values of the net assets acquired were: Prepaid operating lease rentals Satisfied by: Cash payment by group Subscription by Indonesian investor 100 $’000 1,641 1,616 25 1,641 13. Biological assets Beginning of year Additions to planted area and costs to maturity including finance costs (see note 8) Transfers to property, plant and equipment (see note 14) Transfers from prepaid operating lease rentals (see note 15) Transfers to non-current receivables Transfers to current receivables Net biological gain End of year Net biological gain comprises: Fair value of crops harvested during the year (see note 2) Gain arising from movement in fair value attributable to other physical changes Gain arising from movement in fair value attributable to price changes 2012 $’000 244,433 15,369 – 45 (79) (84) 5,979 265,663 (78,468) 72,226 12,221 5,979 2011 $’000 221,883 15,502 (76) – (3) (248) 7,375 244,433 (90,906) 87,186 11,095 7,375 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 fair value determination assumed a discount rate of 15 per cent in the case of PT REA Kaltim Plantations (“REA Kaltim”), 15 per cent in the case of PT Sasana Yudha Bhakti (“SYB”) and 18 per cent in the case of all other group companies (2011: 16 per cent in the case of REA Kaltim, 17.5 per cent in the case of SYB and 19 per cent in the case of all other group companies) and a standard unit margin of $55.20 per tonne of oil palm fresh fruit bunches (“FFB”) (2011: standard unit margin of $52.50 per tonne of FFB). The fair valuation of the group’s biological assets as at 31 December 2012 determined on the basis of the methodology utilised as at 31 December 2011 would have amounted to $251 million. The valuation of the group’s biological assets would have been reduced by $14,250,000 (2011: $13,600,000) if the crops projected for the purposes of the valuation had been reduced by 5 per cent; by $13,570,000 (2011: $12,890,000) if the discount rates assumed had been increased by 1 per cent and by $25,810,000 (2011: $25,880,000) if the assumed unit profit margin per tonne of oil palm FFB 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 2012, the group had no outstanding forward sale contracts at fixed prices (2011: none). At 31 December 2012, the group had no outstanding forward sales for delivery in 2013, on terms that the sales price of each delivery be determined immediately ahead of delivery by reference to prevailing open market prices (31 December 2011: 6,000 tonnes per month for the eleven month period to 30 November 2012). At the balance sheet date, biological assets of $67,580,000 (2011: $64,349,000) had been charged as security for bank loans (see note 23) but there were otherwise no restrictions on titles to the biological assets (2011: none). Expenditure approved by the directors for the development of immature areas in 2013 amounts to $20,000,000 (2011: $47,000,000). 101 Notes to the consolidated financial statements continued 14. Property, plant and equipment Buildings and structures Plant, Construction in progress Total Cost: At 1 January 2011 Additions Exchange differences Disposals Transfers (see note 13) At 31 December 2011 Additions Exchange differences Disposals At 31 December 2012 Accumulated depreciation: At 1 January 2011 Charge for year Exchange differences Eliminated on disposals At 31 December 2011 Charge for year Exchange differences Eliminated on disposals At 31 December 2012 Carrying amount: End of year Beginning of year equipment and vehicles $’000 39,464 1,747 (17) (234) 7,193 48,153 18,847 31 (462) 66,569 14,831 3,379 (12) (159) 18,039 3,994 17 (422) 21,628 $’000 53,818 3,329 – (76) 2,035 59,106 16,533 – – 75,639 4,373 2,047 – (11) 6,409 2,573 – – 8,982 $‘000 $‘000 11,410 17,116 – – (9,152) 19,374 14,638 – – 34,012 – – – – – – – – – 104,692 22,192 (17) (310) 76 126,633 50,018 31 (462) 176,220 19,204 5,426 (12) (170) 24,448 6,567 17 (422) 30,610 66,657 52,697 44,941 30,114 34,012 19,374 145,610 102,185 The depreciation charge for the year includes $171,000 (2011: $135,000) 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 (2011: $nil). At the balance sheet date, the group had entered into contractual commitments for the acquisition of property, plant and equipment amounting to $5,212,000 (2011: $37,849,000). 102 15. Prepaid operating lease rentals Cost: Beginning of year Additions Transfers to biological assets (note 13) Transfers to non-current assets End of year Accumulated amortisation: Beginning of year Charge for year End of year Carrying amount: End of year Beginning of year 2012 $‘000 25,261 3,857 (45) (291) 28,782 1,764 388 2,152 2011 $‘000 18,532 6,729 – – 25,261 1,255 509 1,764 26,630 23,497 23,497 17,277 Additions in the year include $1,641,000 (2011: $nil) in respect of a subsidiary acquired during the year. The amortisation charge for the year includes $164,000 (2011: $357,000) which has been capitalised as part of the additions to biological assets. Balances classified as prepaid operating lease rentals represent amounts invested in land utilised for the purpose of the plantation operations in Indonesia. At 31 December 2012, certificates of hak guna usaha had been obtained in respect of areas covering 70,584 hectares (2011: 70,584 hectares). An hak guna usaha (literally a “right of agricultural use”) is effectively a government lease entitling the lessee to utilise the land leased for agricultural and related purposes. Retention of an hak guna usaha is subject to payment of annual land taxes in accordance with prevailing tax regulations. Hak guna usaha are granted for an initial term of 30 years and are renewable on expiry of such term. 16. Indonesian coal and stone interests The balance of $29,480,000 (2011: $28,580,000) comprises interest bearing loans made to two Indonesian companies that, directly and through a further Indonesian company, own rights in respect of certain coal and stone concessions in East Kalimantan Indonesia, together with related balances; such loans are repayable not later than 2020. Pursuant to the arrangements between the group and its local partners, KCC Resources Limited (“KCC”) has the right, subject to satisfaction of local regulatory requirements, to acquire the three concession holding companies at original cost on a basis that will give the group (through KCC) 95 per cent ownership with the balance of five per cent remaining owned by the local partners. In the meantime, the concession holding companies are being financed by loan funding from the group and no dividends or other distributions or payments may be paid or made by the concession holding companies to the local partners without the prior agreement of KCC. The directors have carried out an impairment review of the loans from PT KCC Resources Indonesia (“KCCI”) by which the group is funding the concession holding companies. Each concession holding company has been treated as a cash-generating unit and its recoverable amount has been estimated on the basis of value in use, applying a discount rate of 10 per cent. In view of the uncertainties arising from the potential difficulties on the extraction and marketing of coal from one of the concessions, the directors have concluded that an impairment charge of $3.0 million should be recognised in the 2012 consolidated income statement (2011: $nil). 103 Notes to the consolidated financial statements continued 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. 18. Inventories Agricultural produce Engineering and other operating inventory 19. Investments Shares (non-current assets) US dollar notes (current assets) 2012 $’000 11,220 9,492 20,712 2012 $’000 – 1,256 1,256 2011 $’000 16,169 9,390 25,559 2011 $’000 1,430 963 2,393 The investments are categorised as held-to-maturity and are carried at amortised cost. The shares comprise redeemable participating preference shares of $10 each issued by KCC Resources Limited as described in note 26, of which the company owned 146,050 (2011: 143,050). For the reasons given in note 26, at 31 December 2012 the investment has been netted off against the corresponding liability. The US dollar notes comprise $1,256,000 nominal of the 7.5 per cent dollar notes 2017 issued by the company, as described in note 25. The fair value of these investments is set out in note 22 under the heading 'Fair value of financial instruments'. 20. Trade and other receivables Due from sale of goods Prepayments and advance payments Advance payment of taxation Deposits and other receivables 2012 $’000 3,545 10,527 14,022 4,061 32,155 2011 $’000 2,507 11,380 13,226 7,049 34,162 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 4 days (2011: 4 days). The directors consider that the carrying amount of trade and other receivables approximates their fair value. 21. Cash and cash equivalents Cash and cash equivalents comprise cash held by the group and short-term bank deposits and UK government securities with maturities of less than three months. Cash balances amounting to $555,000 (2011: $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 24). The Moody’s prime rating of short term bank deposits amounting to $26.3 million is set out in note 22 under the heading ‘Credit risk’. 104 22. 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 23 to 26, 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. Net debt to equity ratio 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 2012 $’000 163,536 (26,393) 137,143 2011 $’000 126,588 (30,601) 95,987 315,030 43.5% 302,945 31.7% 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 2012 comprised loans, investments and receivables (including Indonesian coal and stone interests) and cash and cash equivalents amounting to $65,558,000 (2011: $67,127,000). Non-derivative financial liabilities as at 31 December 2012 comprised liabilities at amortised cost amounting to $170,850,000 (2011: $123,694,000). Derivative financial instruments at 31 December 2012 comprised instruments not in designated hedge accounting relationships at fair value representing a liability of $11,622,000. In 2011, as explained in “Accounting policies (group)”, the group incorrectly accounted for certain cross-currency interest rate swaps as cash flow hedges and, on that basis, reported liabilities at 31 December 2011 of $15,321,000 in respect of derivative financial instruments in designated hedge accounting relationships at fair value and $895,000 in respect of derivative financial instruments not in designated hedge accounting relationships at fair value. 105 Notes to the consolidated financial statements continued 22. Financial instruments - continued As explained in note 16, conditional arrangements exist for the group to acquire at historic cost the shares in the Indonesian companies owning rights over certain coal and stone 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. 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 an Indonesian rupiah term loan facility at 3.5 per cent (2011: 3.5 per cent) above the Jakarta Inter Bank Offer Rate. In addition, the interest rate formula includes an allowance for the bankers’ cost of funds. Interest is payable on drawings under US dollar short-term facilities at floating rates varying between 4.9 per cent and 9.9 per cent (2011: between 6.9 per cent and 8.0 per cent). A one per cent increase in interest applied to those financial instruments shown in the table below entitled “Fair value of financial instruments” as held at 31 December 2012 which carry interest at floating rates would have resulted over a period of one year in a pre- tax profit (and equity) decrease of approximately $258,000 (2011: pre-tax profit (and equity) increase of $16,000). 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 and, for the immediate future, 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 in its operations 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. 106 22. Financial instruments - continued 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 $974,000 on the net sterling denominated non-derivative monetary items (excluding the sterling notes which are hedged) (2011: gain of $421,000). A 5 per cent strengthening of the Indonesian rupiah against the US dollar would have resulted in a loss dealt with in the consolidated income statement and equity of $1,439,000 on the net Indonesian rupiah denominated, non- derivative monetary items (2011: loss of $1,151,000). 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 2012, 66 per cent of bank deposits were held with banks with a Moody’s prime rating of P1, 2 per cent with a Moody’s prime rating of P2, 26 per cent with a bank with a Moody’s prime rating of P3 and the balance with banks with no Moody’s prime rating. Substantially all sales of goods are made on the basis of cash against documents or letters of credit. At the balance sheet date, no trade receivables were past their due dates, nor were any impaired; accordingly no bad debt provisions were required. The maximum credit risk exposures in respect of the group’s financial assets at 31 December 2012 and 31 December 2011 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 23. 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. 2012 Bank loans US dollar notes Sterling notes KCC preference shares (see note 26) Trade and other payables, and customer deposits Weighted average interest rate % 9.0 8.5 10.4 Under 1 year $’000 5,703 4,739 5,324 – 13,373 29,139 Between 1 and 2 years $’000 18,951 18,676 5,318 – – Over 2 years $’000 38,517 40,388 67,045 54 – Total $’000 63,171 63,803 77,687 54 13,373 42,945 146,004 218,088 107 Notes to the consolidated financial statements continued 22. Financial instruments - continued 2011 Bank loans US dollar notes Sterling notes KCC preference shares (see note 26) Trade and other payables, and customer deposits Weighted average interest rate % 11.3 9.1 10.4 Under 1 year $’000 4,988 7,625 5,080 – 10,997 28,690 Between 1 and 2 years $’000 2,797 17,250 5,070 – – Over 2 years $’000 30,223 16,125 69,118 1,500 – Total $’000 38,008 41,000 79,268 1,500 10,997 25,117 116,966 170,773 At 31 December 2012, the group’s non-derivative financial assets (other than receivables) comprised cash and deposits of $26,400,000 (2011: $30,601,000) carrying a weighted average interest rate of 1.4 per cent (2011: 2.3 per cent) all having a maturity of under one year, and Indonesian coal interests of $29,480,000 (2011: $28,580,000) details of which are given in note 16. Derivative financial instruments The following table details the amounts due in respect of the group’s derivative financial instruments. These arise under the cross currency interest rate swaps (“CCIRS”) described in note 27. The cash flows are settled gross and, therefore, the table takes no account of sterling receipts under the CCIRS. At 31 December 2012 At 31 December 2011 Fair value of financial instruments Under 1 year $’000 7,197 7,296 Between 1 and 2 years $’000 7,138 7,197 Over 2 years $’000 75,798 82,936 Total $’000 90,133 97,429 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 2012 (2011: none). Cash and deposits + Bank debt - within one year + Bank debt - after more than one year + 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 Cross currency interest rate swaps - hedge against interest liabilities +bearing interest at floating rates o bearing interest at fixed rates 108 2012 Book value $’000 26,393 (1,000) (51,194) (54) (48,698) (54,279) (8,311) (137,143) (2,416) (894) 2012 Fair value $’000 26,393 (1,000) (51,194) – (48,813) (59,233) (8,311) (142,158) (2,416) (894) 2011 Book value $’000 30,601 (2,000) (27,018) (1,500) (33,941) (51,332) (10,797) (95,987) (4,524) (895) 2011 Fair value $’000 30,601 (2,000) (27,018) (1,500) (35,000) (56,094) (10,797) (101,808) (4,524) (895) (140,453) (145,468) (101,406) (107,227) 22. Financial instruments - continued 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. For 2012, the book value of the preference shares issued by a subsidiary is net of the investment held by the company (see note 19). 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. The fair value of the 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 2012 at fair value resulted in a loss of $11,622,000 (2011: loss of $16,216,000). The movement in 2012 has been dealt with through the consolidated income statement. In 2011, as explained in “Accounting policies (group)”, the group incorrectly accounted for the CCIRS as a cash flow hedge and the movement of $1,510,000, before related tax relief, was dealt with as follows: a loss of $190,000 was included in finance charges in the consolidated income statement and a gain of $1,700,000 was recognised in other comprehensive income. 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 $1,192,000 (2011: $1,607,000). 23. 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 2012 $‘000 52,194 1,000 17,714 33,480 52,194 1,000 51,194 52,194 2011 $‘000 29,018 2,000 – 27,018 29,018 2,000 27,018 29,018 All bank loans are denominated in either US dollars ($16.0 million - 2011: $2.0 million) or Indonesian rupiahs ($36.2 million - 2011: $27.0 million) and are at floating rates, thus exposing the group to interest rate risk. The weighted average interest rate in 2012 was 9.9 per cent (2011: 11.3 per cent). Bank loans of $37,194,000 (2011: $27,018,000) are secured on the land, plantations, property, plant and equipment owned by PT Sasana Yudha Bhakti (“SYB”), having an aggregate book value of $121 million (2011: $91 million), and are the subject of an unsecured guarantee by the company and REA Kaltim. 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 $9.0 million (2011: $10.0 million) and undrawn Indonesian rupiah denominated facilities of $nil (2011: $11.6 million). 109 Notes to the consolidated financial statements continued 24. Sterling notes The sterling notes comprise £34.54 million (2011: £34.54 million) nominal of 9.5 per cent guaranteed sterling notes 2015/17 issued by the company’s subsidiary, REA Finance B.V. (“REAF”). The sterling notes are guaranteed by the company and another wholly owned subsidiary of the company, R.E.A. Services Limited (“REAS”), and are secured principally on unsecured loans made by REAS to Indonesian plantation operating subsidiaries of the company. 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 £34.54 million ($56.1 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. The gain or loss on the ineffective portion of these contracts is reflected in finance costs in the consolidated income statement. 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. The sterling notes are issued by REA Finance B.V., a wholly owned subsidiary of the company, are guaranteed by the company and another wholly owned subsidiary of the company, R.E.A. Services Limited (“REAS”), are secured principally on unsecured loans made by REAS to Indonesian plantation operating subsidiaries of the company and, save to the extent previously redeemed or cancelled, are repayable by three equal annual instalments commencing 31 December 2015. 25. US dollar notes The US dollar notes comprise US$16 million (2011: $35 million) nominal of 7.5 per cent dollar notes 2012/14 (“2012/14 dollar notes”) and US$34.0 million (2011: nil) nominal of 7.5 per cent dollar notes 2017 (“2017 dollar notes”) of the company, and are stated net of the unamortised balance of the note issuance costs. $34 million nominal of 2017 dollar notes were issued in November 2012, as to some $19 million nominal by way of an exchange offer to holders of existing 2012/14 dollar notes and as to the balance by way of a placing at par. Pursuant to the placing R.E.A. Services Limited (“REAS”), a subsidiary of the company, agreed to subscribe for $2.0 million nominal of 2017 dollar notes, pending investment decisions by certain external prospective placees. At 31 December 2012 REAS had resold, at the placing price, $0.7 million nominal of the notes so subscribed by it, leaving a balance as at that date of $1.26 million nominal (see note 19). REAS has, subsequent to the year- end, sold its remaining holding. The 2012/14 and 2017 dollar notes are unsecured obligations of the company. The 2012/14 dollar notes are repayable by three instalments commencing 31 December 2012 but repayment obligations are reduced to the extent that notes have been previously redeemed or purchased and cancelled. A substantial nominal amount of the original issue of 2012/14 dollar notes has now been purchased and cancelled (including the $19.0 million nominal of the notes acquired under the exchange offer referred to above). As a result, and subject to any further purchases and cancellations, slightly under $1 million of the outstanding 2012/14 dollar notes will fall due for repayment at the end of 2013 and the balance at the end of 2014. The 2017 dollar notes are repayable on 30 June 2017. 110 26. 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 and stone 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 pursuant to a placing agreement dated 28 January 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 and stone 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. 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 and stone 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 pursuant to a placing agreement dated 28 January 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 and stone 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. At 31 December 2012 the company had acquired 146,050 KCC preference shares (2011: 143,050). Following conclusion by the directors that it is unlikely that the required level of earnings will be achieved, the KCC preference shares at 31 December 2012 have been carried net of the company’s holding. 27. Derivative financial instruments At both 31 December 2012 and 31 December 2011, the group had outstanding three contracts providing in aggregate 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 had or has the option to terminate the CCIRS as to £22 million on 14 February 2012 (not exercised), as to £8 million on 30 September 2013 and as to £7 million on any of 24 October 2013, 2014 and 2015 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. As described in Accounting policies (group), the group has concluded that these instruments do not qualify to be accounted for as cash flow hedges and has transferred the balance in hedging reserve at 1 January 2012 to retained earnings (note 33). 111 Notes to the consolidated financial statements continued 28. 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) Property, plant and equipment Biological assets Income/ expenses* At 1 January 2011 (Charge) / credit to income for the year Effect of change in tax rate Charge to equity for the year Exchange differences ** At 31 December 2011 (Charge) / credit to income for the year Effect of change in tax rate Charge to equity for the year Exchange differences ** $’000 (22,670) (1,816) (1) – 4,060 (20,427) (1,706) – – 83 $’000 (17,278) (2,260) – – – (19,538) (1,818) – – – At 31 December 2012 (22,050) (21,356) Deferred tax assets Deferred tax liabilities At 31 December 2012 Deferred tax assets Deferred tax liabilities 17 (22,067) – (21,356) (22,050) (21,356) 247 (20,674) – (19,538) Agricultural produce inventory $’000 (983) (1,003) – – – (1,986) 1,420 – – – (566) – (566) (566) – (1,986) (1,986) Tax losses $’000 898 760 (21) – (31) 1,606 1,371 – – (98) 2,879 2,879 – 2,879 1,606 – 1,606 Total $’000 (35,267) (3,903) (22) (271) 3,869 (35,594) (2,445) – (338) 68 (38,309) 6,063 (44,372) (38,309) 6,675 (42,269) (35,594) $’000 4,766 416 – (271) (160) 4,751 (1,712) – (338) 83 2,784 3,167 (383) 2,784 4,822 (71) 4,751 At 31 December 2011 * ** forming part of the exchange differences on translation of foreign operations. (20,427) (19,538) includes income, gains or expenses recognised for reporting purposes, but not yet charged to or allowed for tax. At the balance sheet date, the group had unused tax losses of $11.8 million (2011: $6.4 million) available to be applied against future profits. A deferred tax asset of $2,879,000 (2011: $1,606,000) has been recognised in respect of these losses. A tax loss of $5.6 million incurred by the group’s coal subsidiary in 2012 has not been so recognised. 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 $11,125,000 (2011: $11,869,000). 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. 112 29. Other loans and payables Retirement benefit obligations (see note 38): UK Indonesia 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 2012 $’000 3,429 4,659 274 8,362 2011 $’000 2,230 4,260 543 7,033 1,105 1,353 1,473 2,509 3,275 7,257 1,316 2,524 1,840 5,680 8,362 7,033 3,523 180 4,659 8,362 2,469 304 4,260 7,033 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 37 days (2011: 38 days). The directors estimate that the fair value of trade payables approximates their carrying value. 31. Share capital Authorised (in pounds sterling): 50,000,000 - 9 per cent cumulative preference shares of £1 each (2011: 45,000,000) 41,000,000 - ordinary shares of 25p each (2011: 41,000,000) 2012 $’000 11,414 585 4,464 12,088 1,500 30,051 2012 £’000 50,000 10,250 60,250 2011 $’000 7,013 3,695 2,982 5,694 511 19,895 2011 £’000 45,000 10,250 55,250 113 Notes to the consolidated financial statements continued 31. Share capital - continued Issued and fully paid (in US dollars): 50,000,000 - 9 per cent cumulative preference shares of £1 each (2011: 44,068,553) 33,414,545 - ordinary shares of 25p each (2011: 33,414,545) 2012 2011 $’000 83,007 14,558 97,565 $’000 73,381 14,558 87,939 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 17 September 2012, 3,926,575 9 per cent cumulative preference shares were issued, fully paid, by way of a placing at 105p per share (total consideration £4,123,000 - $6,708,000) on 28 September 2012, 2,004,872 9 per cent cumulative preference shares were issued, credited as fully paid, to ordinary shareholders by way of capitalisation of share premium account. 32. Share premium account At 1 January 2011 Issue of new preference shares (cash and scrip) At 31 December 2011 Issue of new preference shares (cash and scrip) At 31 December 2012 33. Translation reserve At 1 January 2011 Prior year reclassification (note 34) Change in fair value of cash flow hedge Exchange differences on translation of foreign operations Other movements in the year Taxation for the year Attributable to non-controlling interests At 31 December 2011 Correction of previous accounting error Change in fair value of cash flow hedge Exchange differences on translation of foreign operations Other movements in the year Taxation for the year Attributable to non-controlling interests At 31 December 2012 114 $’000 24,901 (3,130) 21,771 (3,091) 18,680 Total $’000 (18,197) 1,021 1,700 3,799 283 (329) (39) (11,762) 9,099 – (2,064) – – (127) (4,854) Hedging reserve $’000 (10,451) – 1,700 (303) 283 (329) 1 (9,099) 9,099 – – – – – – Other reserve $’000 (7,746) 1,021 – 4,102 – – (40) (2,663) – – (2,064) – – (127) (4,854) 33. Translation reserve - continued As described in Accounting policies (group), the group has concluded that its hedging instruments do not qualify to be accounted for as cash flow hedges and has transferred the balance in hedging reserve at 1 January 2012 to retained earnings. Had the correct accounting been applied in the years 2009 to 2011 the effect on reported profit before tax, tax, profit for the period and the component of that profit attributable to non-controlling interests would have been as follows: 2009: Profit before tax Tax Profit after tax Attributable to non controlling interests 2010: Profit before tax Tax Profit after tax Attributable to non controlling interests 2011: Profit before tax Tax Profit after tax Attributable to non controlling interests As reported $’000 Correction As corrected $’000 $’000 41,717 (11,861) 29,856 6,674 (1,791) 4,883 48,391 (13,652) 34,739 518 (39) 479 50,447 (15,474) 34,973 (2,292) (4,944) (7,236) 48,155 (20,418) 27,737 288 16 304 64,173 (18,559) 45,614 1,680 (329) 1,351 65,853 (18,888) 46,965 155 1 156 The cumulative amount recognised in equity in respect of the erroneous hedge accounting was $9,099,000, which has been reclassified at the beginning of the current year from translation reserve to retained earnings. 34. Retained earnings Beginning of year Correction of previous accounting error (note 33) Prior year reclassification Profit for the year Ordinary dividend paid End of year 2012 $’000 202,763 (9,099) – 11,342 (3,376) 2011 $’000 166,228 – (1,021) 40,453 (2,897) 201,630 202,763 115 Notes to the consolidated financial statements continued 35. Non-controlling interests Beginning of year Share of profit for the year Share of items taken directly to equity Exchange translation differences Subscription to share capital of new subsidiary End of year 36. Reconciliation of operating profit to operating cash flows Operating profit Depreciation of property, plant and equipment Decrease / (increase) in fair value of agricultural produce inventory Amortisation of prepaid operating lease rentals Amortisation of sterling and US dollar note issue expenses Biological gain Impairment loss Loss on disposal of property, plant and equipment Operating cash flows before movements in working capital Increase in inventories (excluding fair value movements) Decrease / (increase) in receivables Increase in payables Exchange translation differences Cash generated by operations Taxes paid Tax refund received Interest paid Net cash from operating activities 2012 $’000 2,234 (352) – 127 – 2,009 2012 $’000 37,848 6,162 5,678 388 645 (5,979) 3,000 39 47,781 (831) 2,070 6,891 (801) 55,110 (16,200) 1,261 (7,701) 2011 $’000 2,040 155 (1) 40 – 2,234 2011 $’000 72,749 5,292 (4,011) 152 1,012 (7,375) – 419 68,238 (7,661) (9,028) 8,490 (185) 59,854 (15,176) – (10,902) 32,470 33,776 No additions to property, plant and equipment during the year were financed by new finance leases (2011: $nil). 37. Movement in net borrowings Change in net borrowings resulting from cash flows: Decrease in cash and cash equivalents Net increase in borrowings Issue of US dollar notes, net of amortisation of issue expenses Redemption of US dollar notes, net of amortisation of issue expenses Redemption of sterling notes, net of amortisation of issue expenses Investments netted off against preference shares liability Net sale and repurchase of US dollar notes Currency translation differences Net borrowings at beginning of year Net borrowings at end of year 116 2012 $’000 2011 $’000 (3,965) (25,424) (29,389) (33,593) 18,355 – (1,430) 259 (45,798) 2,156 (85,190) (5,670) (9,180) (14,850) – 9,328 3,609 – – (1,913) 501 (83,778) (128,832) (85,190) 38. Retirement benefit obligations United Kingdom The company is the principal employer of the R.E.A. Pension Scheme (the “Scheme”) and a subsidiary company is a participating employer. The Scheme is a multi-employer contributory defined benefit scheme with assets held in a trustee-administered fund, which has participating employers outside the group. The Scheme is closed to new members. As the Scheme is a multi-employer scheme, in which the employers are unable to identify their respective shares of the underlying assets and liabilities (because there is no segregation of the assets), and does not prepare valuations on an IAS 19 basis, the group accounts for the Scheme as if it were a defined contribution scheme. A non-IAS 19 valuation of the Scheme was last prepared, using the attained age method, as at 31 December 2011. This method was adopted in the previous valuation as at 31 December 2008, as it was considered the appropriate method of calculating future service benefits as the Scheme is closed to new members. At 31 December 2011 the Scheme had an overall shortfall in assets (deficit), when measured against the Scheme’s technical provisions, of £5,197,000. The technical provisions were calculated using assumptions of an investment return of 4.70 per cent pre-retirement and 3.20 per cent post-retirement and annual increases in pensionable salaries of 3.0 per cent. The basis for the inflationary revaluation of deferred pensions and increases to pensions in payment was changed from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI) with effect from 1 January 2011 in line with the statutory change, except that the change does not apply to pension accrual from 1 January 2006, where the RPI still applies. The rates of increase in the RPI and the CPI were assumed to be 3.0 per cent and 2.25 per cent respectively. It was further assumed that both non-retired and retired members’ mortality would reflect S1PXA tables at 85 per cent and that non-retired members would take on retirement the maximum cash sums permitted from 1 January 2012. Had the Scheme been valued at 31 December 2011 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 provides for recovery of the deficit shown by the 31 December 2011 valuation through the payment of quarterly additional contributions over the period from 1 January 2013 to 30 September 2018 after taking account of the additional contributions paid in 2012 under the 31 December 2008 valuation. The normal contributions paid by the group in 2012 were £17,000 - $27,000 (2011: £16,000 - $26,000) and represented 23.4 per cent (2011: 23.4 per cent) of pensionable salaries. The additional contribution applicable to the group for 2012 was £231,000 - $367,000 (2011: £225,000 - $362,000). Under the valuation as at 31 December 2011 the normal contributions will increase to the rate of 36.4 per cent of pensionable salaries and the additional contribution will rise to £396,000 - $643,000 for 2013, £407,000 - $661,000 for 2014 and thereafter by 2.75 per cent per annum. A provision of £2,109,000 - $3,429,000 (2011: £1,435,000 - $2,230,000) 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, net of related tax relief. To the extent that the group makes additional contribution to the scheme, a relevant portion of such provision will credited to income. The net charge/ (credit) to administrative expenses was as follows: Release of provision relating to additional contributions paid in the year Additional provision arising from the 2011 actuarial valuation Net charge/ (credit) to administrative expenses (note 5) The next actuarial valuation will be made as at 31 December 2014. 2012 $’000 (367) 1,439 1,072 2011 $’000 (253) – (253) 117 Notes to the consolidated financial statements continued 38. Retirement benefit obligations - continued The company has a contingent liability of $3.8 million (2011: $2.5 million) 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: 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: 2012 6.3% 6% TM11-2009 55 10 2011 7.1% 7% TM 1-11 55 10 2012 $’000 4,260 846 327 (2) (52) (20) (285) (415) 4,659 2012 $’000 846 327 (2) (52) 1,119 (100) 1,019 2011 $’000 2,779 849 285 725 – – (71) (307) 4,260 2011 $’000 849 285 725 – 1,859 (337) 1,522 Balance at 1 January Current service cost Interest expense Actuarial (gain) / loss Effect of curtailments Effect of settlements Exchange Paid during the year Balance at 31 December (see note 29) The amounts recognised in adminstrative expenses in the consolidated income statement were as follows: Current service cost Interest expense Actuarial (gain) / loss Effect of curtailments Amount included as additions to biological assets 118 38. Retirement benefit obligations - continued Unrecognised actuarial losses at 31 December 2012 amounted to $512,000 (2011: $448,000). 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 Effect of curtailments Effect of settlements Exchange Paid during the year Balance at 31 December 2012 $’000 4,708 846 327 100 (52) (20) (323) (415) 5,171 2011 $’000 3,096 849 285 856 – – (71) (307) 4,708 Estimated benefit payments in 2013 are $261,000 (2012: $885,000). 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 2012 $’000 1,484 – – – – 1,484 2011 $’000 1,315 – – – – 1,315 2012 Closing 2012 Average 2011 Closing 2011 Average 9,670 1.6255 9,392 1.59 9,046 1.554 8,790 1.61 119 Notes to the consolidated financial statements continued 41. Events after the reporting period An interim dividend of 3½p per ordinary share in respect of the year ended 31 December 2012 was paid on 25 January 2013. In accordance with IAS 10 “Events after the reporting period” this dividend, amounting in aggregate to $1,852,000, has not been reflected in these financial statements. 42. Resolution of competing rights over certain plantation areas The fully titled land areas held by PT Sasana Yudha Bhakti (“SYB”), a plantation subsidiary of the company, include 3,557 hectares that are the subject of third party claims in respect of the rights to coal underneath such land. On 30 December 2011, SYB entered into a conditional settlement arrangement to resolve such claims. Under this agreement, SYB has agreed to swap the 3,557 hectares the subject of the claims for 9,097 hectares of fully titled land held by another company, PT Prasetia Utama (“PU”), the whole of the issued share capital of which is to be transferred to SYB. As a term of the settlement, SYB has also agreed to relinquish the 2,212 hectares in respect of which it holds a land allocation still subject to completion of titling (being land that is also subject to overlapping mineral rights). The book value of the assets to be relinquished by SYB amounted as at 31 December 2012 to $8.8 million (2011: $13.9 million), comprising prepaid operating lease rentals of $2.8 million (2011:$2.9 million) and biological assets of $6.0 million (2011:$11.0 million). The reduction in value of $5.1 million results mainly from the group’s decision to exclude the SYB hectarage to be swapped from the group’s core plantation land areas, to reduce upkeep expenditure thereon to a minimum and to reflect this decision in the valuation of biological assets as at 31 December 2012. The arrangements are conditional, inter alia, upon the consent of the holders of the 9.5 per cent guaranteed sterling notes 2015/17 (see note 24) which was obtained on 14 March 2012. During 2012, progress was made in regard to satisfying other conditions. However, completion has been delayed by a need to obtain comfort as to the continuing validity of the land titles held by PU. 43. 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 and 2010 PT REA Kaltim Plantations (“REA Kaltim”) and PT Sasana Yudha Bhakti (“SYB) , both wholly owned subsidiaries of the company, entered into agreements with three cooperatives to develop and manage land owned by the cooperatives as oil palm plantations. To assist with the funding of such development, the cooperatives have concluded various long term loan agreements with Bank Pembangunan Daerah Kalimantan Timur (“Bank BPD”), a regional development bank, under which the cooperatives may borrow in aggregate up to Indonesian rupiah 157 billion ($16.3 million) with amounts borrowed repayable over 15 years and secured on the lands under development (“the bank facilities”). REA Kaltim has guaranteed the obligations of two cooperatives as to payments of principal and interest under the respective bank facilities and, in addition, has committed to lend to the cooperatives any further funds required to complete the agreed development. REA Kaltim is entitled to a charge over the developments when the bank facilities have been repaid in full. SYB has guaranteed the obligations of the third cooperative on a similar basis. On maturity of the developments, the cooperatives are required to sell all crops from the developments to REA Kaltim and SYB respectively and to permit repayment of indebtedness to Bank BPD, REA Kaltim and SYB respectively out of the sales proceeds. As at 31 December 2012 the aggregate outstanding balances owing by the three cooperatives to Bank BPD amounted to Indonesian rupiah 101 billion ($10,513,000) (2011: Indonesian rupiah 54 billion - $5,963,000). 120 44. 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 50 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 2012 $’000 356 570 – 926 2011 $’000 93 508 – 601 121 Auditor’s report (company) Independent auditor’s 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 2012 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 (xiii). 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). and to identify any information that is apparently materially incorrect based on, or materially inconsistent This report is made solely to the company’s members, as with, the knowledge acquired by us in the course of a body, in accordance with Chapter 3 of Part 16 of the performing the audit. In addition, we read all the financial Companies Act 2006. Our audit work has been and non-financial information in the annual report to undertaken so that we might state to the company’s identify material inconsistencies with the audited financial members those matters we are required to state to them statements. If we become aware of any apparent material in an auditor’s report and for no other purpose. To the misstatements or inconsistencies we consider the fullest extent permitted by law, we do not accept or implications for our report. assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, Opinion on financial statements for this report, or for the opinions we have formed. Respective responsibilities of directors and auditor As explained more fully in the statement of Directors’ responsibilities, the directors are responsible for the preparation of the parent company 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 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 Practices Board’s Ethical Standards for Auditors. In our opinion the parent company financial statements: • • • give a true and fair view of the state of the parent company’s affairs as at 31 December 2012; 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. 122 Opinion on other matters prescribed by Companies Act 2006 the Other matter In our opinion: • • the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006; and We have reported separately on the group financial statements of R.E.A. Holdings plc for the year ended 31 December 2012. the information given in the Directors’ report for the financial year for which the financial statements are prepared is consistent with the parent company Mark McIlquham ACA (Senior Statutory Auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor financial statements. London, England 25 April 2013 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. 123 Company balance sheet as at 31 December 2012 Fixed and non-current assets Investments Deferred tax asset Current assets Debtors Cash Total current assets Creditors: amounts falling due within one year Net current liabilities Note 2012 £’000 2011 £’000 (i) (ii) (iii) (iv) 145,166 432 130,678 223 145,598 130,901 3,258 2,716 5,974 (8,248) (2,274) 5,957 6,122 12,079 (14,465) (2,386) Total assets less current liabilities 143,324 128,515 Creditors: amounts falling due after more than one year Borrowings Net assets (v) (67,044) (56,532) 76,280 71,983 Capital and reserves Share capital Share premium account Profit and loss account Total shareholders’ funds (vi) (vii) (vii) 58,353 9,233 8,694 76,280 52,422 11,148 8,413 71,983 Approved by the board on and signed on behalf of the board. 25 April 2013 RICHARD M ROBINOW Chairman 124 Movement in total shareholders’ funds for the year ended 31 December 2012 Total recognised gains for the year Dividends to preference shareholders Dividends to ordinary shareholders Issue of new preference shares by way of placing Issue costs of ordinary shares, preference shares and debt securities Shareholders' funds at beginning of year Shareholders' funds at end of year There are no gains or losses other than those recognised in the profit or loss account. 2012 £’000 2011 £’000 6,686 (4,233) (2,172) 4,123 (107) 4,297 71,983 76,280 8,734 (3,201) (1,838) 15,450 (443) 18,702 53,281 71,983 125 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 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. 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 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. 126 Notes to the company financial statements (i) Investments Shares in subsidiaries Loans to subsidiaries The movements were as follows: Beginning of year Additions to shares in and loans to subsidiaries Exchange translation difference arising on foreign currency hedge End of year 2012 £’000 57,760 87,406 2011 £’000 58,004 72,674 145,166 130,678 Shares £’000 58,004 10 (254) 57,760 Loans £’000 72,674 15,665 (933) 87,406 Shares in subsidiaries include an investment in KCC Resources Limited’s redeemable participating preference shares of $10 each. 3,000 of these shares were purchased from the original placees during June and July 2012 at a cost of $15,600 (£9,990) representing a price of $5.20 per share (2011: 143,050 of these shares were purchased at a price of $11.07 per share). 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 Resources Indonesia (Indonesia) PT Kutai Mitra Sejahtera (Indonesia) PT Persada Bangun Jaya (Indonesia) PT Putra Bongan Jaya (Indonesia) PT REA Kaltim Plantations (Indonesia) PT Sasana Yudha Bhakti (Indonesia) KCC Resources Limited KCC Resources Limited REA Finance B.V. (Netherlands) R.E.A. Services Limited (England and Wales) REA Services Private Limited (Singapore) Sub holding company Plantation agriculture Plantation agriculture Coal operations Plantation agriculture Plantation agriculture Plantation agriculture Plantation agriculture Plantation agriculture Group finance Group finance Group finance Group finance and services Group services Class of shares Percentage owned Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Preference Ordinary Ordinary Ordinary 100 95 95 95 95 95 95 100 95 100 97 100 100 100 The entire shareholdings in Makassar Investments Limited, R.E.A. Services Limited, REA Finance B.V. and REA Services Private Limited are held directly by the company. All other shareholdings are held by subsidiaries. The following dormant UK subsidiaries, together with their company registration number have taken advantage of the exemption pursuant to Companies Act 2006 s394A from preparing individual accounts: Subsidiary Cairnhill Investments Limited Jentan Plantations Limited Kutai Plantations Limited Sandan Investments Limited Company registrarion number 6424228 6662767 4740407 6419813 127 Notes to the company financial statements continued (ii) Deferred tax asset Deferred tax: Beginning of year Net amount credited to profit and loss account End of year Included in non-current assets Net deferred tax asset at end of year The deferred tax asset is made up as follows: Timing differences Tax losses available Undiscounted deferred tax 2012 £’000 2011 £’000 223 209 432 432 432 – 432 432 – 223 223 223 223 – 223 223 At the balance sheet date, the company had unused tax losses available to be applied against future profits amounting to £1,880,000 (2011: £860,000). A deferred tax asset of £432,000 (2011: £223,000) has been recognised in respect of these losses as the company considers, based on financial projections, that the losses will be utilised. (iii) Debtors Trade debtors Amount owing by group undertakings Other debtors Prepayments and accrued income (iv) Creditors: amounts falling due within one year US dollar notes 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 128 2012 £’000 464 2,458 336 – 3,258 2012 £’000 425 7,633 20 170 8,248 2012 £’000 29,569 37,475 67,044 67,044 – 67,044 2011 £’000 – 5,921 4 32 5,957 2011 £’000 2,913 11,431 22 99 14,465 2011 £’000 19,057 37,475 56,532 44,040 12,492 56,532 (v) Creditors: amounts falling due after more than one year - continued The US dollar notes comprise US$16 million (2011: $35 million) nominal of 7.5 per cent dollar notes 2012/14 (“2012/14 dollar notes”) and US$34.0 million (2011: nil) nominal of 7.5 per cent dollar notes 2017 (“2017 dollar notes”) of the company, and are stated net of the unamortised balance of the note issuance costs. US$34 million nominal of 2017 dollar notes were issued in November 2012, as to some $19 million nominal by way of an exchange offer to holders of existing 2012/14 dollar notes and as to the balance by way of a placing at par. Pursuant to the placing R.E.A. Services Limited (“REAS”), a subsidiary of the company, agreed to subscribe for $2.0 million nominal of 2017 dollar notes, pending investment decisions by certain external prospective placees. At 31 December 2012 REAS had resold, at the placing price, $0.7 million nominal of the notes so subscribed by it, leaving a balance as at that date of $1.26 million nominal (see note 19 to the consolidated financial statements). REAS has, subsequent to the year-end, sold its remaining holding. The 2012/14 and 2017 dollar notes are unsecured obligations of the company. The 2012/14 dollar notes are repayable by three instalments commencing 31 December 2012 but repayment obligations are reduced to the extent that notes have been previously redeemed or purchased and cancelled. A substantial nominal amount of the original issue of 2012/14 dollar notes has now been purchased and cancelled (including the $19.0 million nominal of the notes acquired under the exchange offer referred to above). As a result, and subject to any further purchases and cancellations, slightly under $1 million nominal of the outstanding 2012/14 dollar notes will fall due for repayment at the end of 2013 and the balance at the end of 2014. The 2017 dollar notes are repayable on 30 June 2017. As disclosed in note (viii), 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. (vi) Share capital Authorised: 50,000,000 - 9 per cent cumulative preference shares of £1 each (2011: 45,000,000) 41,000,000 - ordinary shares of 25p each (2011: 41,000,000) Called-up and fully paid: 50,000,000 - 9 per cent cumulative preference shares of £1 each (2011: 44,068,553) 33,414,545 - ordinary shares of 25p each (2011: 33,414,545) 2012 £’000 50,000 10,250 60,250 50,000 8,353 58,353 2011 £’000 45,000 10,250 55,250 44,069 8,353 52,422 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 17 September 2012, 3,926,575 9 per cent cumulative preference shares were issued, fully paid, by way of a placing at 105p per share (total consideration £4,123,000). on 28 September 2012, 2,004,872 9 per cent cumulative preference shares were issued, credited as fully paid, to ordinary shareholders by way of capitalisation of share premium account. 129 Notes to the company financial statements continued (vii) Movement in reserves Beginning of year Recognised gains for the year Dividends to preference shareholders Dividends to ordinary shareholders Issue of preference shares (scrip) Issue of preference shares (cash) Costs of issues End of year Share premium account £’000 11,148 – – – (2,004) 196 (107) Profit and loss account £’000 8,413 6,686 (4,233) (2,172) – – – 9,233 8,694 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 £6,686,000 (2011: profit £8,734,000) - see statement of total recognised gains and losses. (viii) 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 2012 Book value £’000 2,716 (29,994) 2012 Fair value £’000 2,716 (30,030) 2011 Book value £’000 6,122 (21,970) 2011 Fair value £’000 6,122 (21,970) (27,278) (27,314) (15,848) (15,848) The fair value of the US dollar notes reflects the last price at which transactions in those notes were effected prior to 31 December 2012 (2011: 31 December 2011). The interest expense in the year relating to the US dollar notes was £1.8 million (2011: 2.0 million). 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 2012, the company had outstanding US$16 million nominal (2011: $35 million) of 7.5 per cent dollar notes 2012/14 and US$34 million nominal (2011: $nil) of 7.5 per cent dollar notes 2017. 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. 130 (viii) Financial instruments and risks - continued A limited degree of interest rate risk is accepted. A substantial proportion of the company’s financial instruments at 31 December 2012 carried interest at fixed rates rather than floating rates. On the basis of the company’s analysis, it is estimated that a rise of one percentage point in interest rates applied to those financial instruments which carry interest at floating rates would have resulted in an increase of £nil (2011: £nil) in the company’s interest revenues in its profit and loss account. (ix) Pensions The company is the principal employer of the R.E.A. Pension Scheme (the “Scheme”) and a subsidiary company is a participating employer. The Scheme is a multi-employer contributory defined benefit scheme with assets held in a trustee-administered fund, which has participating employers outside the group. The Scheme is closed to new members. As the Scheme is a multi-employer scheme, in which the employers are unable to identify their respective shares 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. A non-FRS 17 valuation of the Scheme was last prepared, using the attained age method, as at 31 December 2011. This method was adopted in the previous valuation as at 31 December 2008, as it was considered the appropriate method of calculating future service benefits as the Scheme is closed to new members. At 31 December 2011 the Scheme had an overall shortfall in assets (deficit), when measured against the Scheme’s technical provisions, of £5,197,000. The technical provisions were calculated using assumptions of an investment return of 4.70 per cent pre-retirement and 3.20 per cent post-retirement and annual increases in pensionable salaries of 3.0 per cent. The basis for the inflationary revaluation of deferred pensions and increases to pensions in payment was changed from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI) with effect from 1 January 2011 in line with the statutory change, except that the change does not apply to pension accrual from 1 January 2006, where the RPI still applies. The rates of increase in the RPI and the CPI were assumed to be 3.0 per cent and 2.25 per cent respectively. It was further assumed that both non-retired and retired members’ mortality would reflect S1PXA tables at 85 per cent and that non-retired members would take on retirement the maximum cash sums permitted from 1 January 2012. Had the Scheme been valued at 31 December 2011 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 provides for recovery of the deficit shown by the 31 December 2011 valuation through the payment of quarterly additional contributions over the period from 1 January 2013 to 30 September 2018 after taking account of the additional contributions paid in 2012 under the 31 December 2008 valuation. The normal contributions paid by the group in 2012 were £17,000 (2011: £16,000) and represented 23.4 per cent (2011: 23.4 per cent) of pensionable salaries. The additional contribution applicable to the group for 2012 was £231,000 (2011: £225,000). Under the valuation as at 31 December 2011 the normal contributions will increase to the rate of 36.4 per cent of pensionable salaries and the additional contribution will rise to £396,000 for 2013, £407,000 for 2014 and thereafter by 2.75 per cent per annum. A provision of £2,109,000 (2011: £1,435,000) for these additional contributions adjusted for the time value of money has been recognised under retirement benefit obligations with an equal charge to income, net of related tax relief. To the extent that the group makes additional contribution to the scheme, a relevant portion of such provision will credited to income. The next actuarial valuation will be made as at 31 December 2014. 131 Notes to the company financial statements continued (ix) Pensions - continued 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. (x) Related party transactions Aggregate directors’ remuneration: Salaries and fees Benefits Annual bonus 2012 £’000 2011 £’000 650 77 112 839 613 48 70 731 During 2012 and 2011, 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. (xi) Rates of exchange See note 40 to the consolidated financial statements. (xii) Contingent liabilities and commitments Sterling notes The company has guaranteed the obligations for both principal and interest relating to the outstanding £35 million nominal (2011: £35 million) 9.5 per cent guaranteed sterling notes 2015/17 issued by REA Finance B.V.. The directors consider the risk of loss to the company from this guarantee to be remote. Bank borrowings The company has given, in the ordinary course of business, guarantees in support of the subsidiary company borrowings from, and other contracts with, banks (including cross currency interest rate swaps) amounting in aggregate to £32 million (2011: £29 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 (ix) above. Operating leases The company has an annual commitment under a non-cancellable operating lease of £111,000 (2011: £105,000). The commitment expires after 4 years. The lease does not contain any contingent rentals or an option to purchase the property. 132 (xiii) Post balance sheet event A first interim dividend of 3½p per ordinary share in respect of the year ended 31 December 2012 was paid on 25 January 2013. In accordance with IAS10 “Events after the reporting period” this dividend, amounting in aggregate to £1,002,000, has not been reflected in these financial statements. 133 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-third 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 11 June 2013 at 10.00 am to consider and, if thought fit, to pass the following resolutions. Resolution 13 and 14 will be proposed as special resolutions; all other resolutions will be proposed as ordinary resolutions. 1 To receive the company's annual accounts for the financial year ended 31 December 2012, together with the directors' report, the directors' remuneration report and the auditor’s report. 2 To approve the directors' remuneration report for the financial year ended 31 December 2012. 3 To declare a final dividend in respect of the year ended 31 December 2012 of 3½p per ordinary share to be paid on 26 July 2013 to ordinary shareholders on the register of members at the close of business on 28 June 2013. 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 M A Parry, who was appointed as a director since the last annual general meeting and submits himself for re-election. 6 To re-elect as a director Ms I Chia, who was appointed as a director since the last annual general meeting and submits herself for re-election. 7 To re-elect as a director Mr D H R Killick, who, having been a director at each of the two preceding annual general meetings and who was not re-appointed by the company in general meeting at or since either of such meetings, retires in accordance with the articles of association and submits himself for re-election. 8 To re-appoint Deloitte LLP, chartered accountants, as auditor 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 auditor. 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 £60,250,000 the creation of 15,000,000 9 per cent cumulative preference shares of £1 each ranking pari passu in all respects with the existing 9 per cent cumulative preference shares of £1 each in the capital of the company. to £75,250,000 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 2014), 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 134 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), subject to the passing of resolution 10 set out in the notice of the 2013 annual general meeting of the company of £15,000,000; such authorisation to expire at the conclusion of the next annual general meeting of the company (or, if earlier, on 30 June 2014), save that the company may before such expiry make any offer or agreement which would or might require preference shares to be allotted or rights to be granted, after such expiry and the directors may allot preference shares, or grant rights to subscribe for or to convert any security into preference shares, in pursuance of any such offer or agreement as if the authorisations conferred hereby had not expired. 13 That, subject to the passing of resolution 11 set out in the notice of the 2013 annual general meeting of the company (the “2013 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 2013 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 for cash 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 2014), save that the company may before such expiry make any offer or agreement which would or might require equity securities to be allotted, or treasury shares to be sold, after such expiry and the directors may allot equity securities or sell treasury shares, in pursuance of any such offer or agreement as if the power conferred hereby had not expired. 14 That a general meeting of the company other than an annual general meeting may be called on not less than 14 clear days' notice. By order of the board R.E.A. SERVICES LIMITED Secretary 25 April 2013 Registered office: First Floor 32 – 36 Great Portland Street London W1W 8QX Registered in England and Wales no: 00671099 135 Notice of annual general meeting continued Notes The sections of the accompanying Directors' report entitled “Results and dividends”, “Directors”, “Increase in share capital”, “Authorities to allot share capital”, “Authority to disapply pre-emption rights”, “General meeting notice period” and “Recommendation” contain information regarding, and recommendations by the board of the company as to voting on, resolutions 3 to 7 and 10 to 14 set out above in this notice of the 2013 annual general meeting of the company (the “2013 Notice”). their share certificate). Completion of a form of proxy, or other written instrument appointing a proxy, or any appointment of a proxy submitted electronically, will not preclude a holder of ordinary shares from attending and voting in person at the annual general meeting if such holder wishes to do so. CREST members may register the appointment of a proxy or proxies for the annual general meeting and any adjournment(s) thereof through the CREST electronic proxy appointment service by using the procedures described in the CREST Manual (available via www.euroclear.com/CREST) subject to the company’s articles of association. CREST personal members or other CREST sponsored members, and those CREST members who have The company specifies that in order to have the right to attend and appointed (a) voting service provider(s), should refer to their vote at the annual general meeting (and also for the purpose of CREST sponsor or voting service provider(s), who will be able to determining how many votes a person entitled to attend and vote take the appropriate action on their behalf. may cast), a person must be entered on the register of members of the company at 6.00 pm on 9 June 2013 or, in the event of any In order for a proxy appointment or instruction regarding a proxy adjournment, at 6.00 pm on the date which is two days before the appointment made or given using the CREST service to be valid, day of the adjourned meeting. Changes to entries on the register the appropriate CREST message (a “CREST proxy instruction”) of members after this time shall be disregarded in determining the must be properly authenticated in accordance with the rights of any person to attend or vote at the meeting. specifications of Euroclear UK and Ireland Limited (“Euroclear”) and must contain the required information as described in the Only holders of ordinary shares are entitled to attend and vote at CREST Manual (available via www.euroclear.com/CREST). The the annual general meeting. A holder of ordinary shares may CREST proxy instruction, regardless of whether it constitutes a appoint another person as that holder’s proxy to exercise all or any proxy appointment or an instruction to amend a previous proxy of the holder’s rights to attend, speak and vote at the annual appointment, must, in order to be valid be transmitted so as to be general meeting. A holder of ordinary shares may appoint more received by the company’s registrars (ID: RA10) by 10.00 am on 9 than one proxy in relation to the meeting provided that each proxy June 2013. For this purpose, the time of receipt will be taken to be is appointed to exercise the rights attached to (a) different share(s) the time (as determined by the time stamp applied to the message held by the holder. A proxy need not be a member of the company. by the CREST applications host) from which the company’s A form of proxy for the meeting is enclosed. To be valid, forms of registrars are able to retrieve the message by enquiry to CREST in proxy and other written instruments appointing a proxy must be the manner prescribed by CREST. The company may treat as received by post or by hand (during normal business hours only) by invalid a CREST proxy instruction in the circumstances set out in the company’s registrars, Capita Registrars, PXS, 34 Beckenham Regulation 35(5)(a) of the Uncertificated Securities Regulations Road, Beckenham BR3 4TU by no later than 10.00 am on 9 June 2001. 2013. CREST members and, where applicable, their CREST sponsors or Alternatively, appointment of a proxy may be submitted voting service provider(s) should note that Euroclear does not make electronically by using either Capita Registrars' share portal service available special procedures in CREST for particular messages. at www.capitashareportal.com or the CREST electronic proxy Normal system timings and limitations will therefore apply in appointment service as described below (and so that the relation to the input of CREST proxy instructions. It is the appointment is received by the service by no later than 10.00 am responsibility of the CREST member concerned to take (or, if the on 9 June 2013). Shareholders who have not already registered CREST member is a CREST personal member or sponsored for Capita Registrars' share portal service may do so by registering member or has appointed (a) voting service provider(s), to procure as a new user at www.capitashareportal.com and giving the that such member’s CREST sponsor or voting service provider(s) investor code shown on the enclosed proxy form (as also shown on take(s)) such action as shall be necessary to ensure that a 136 message is transmitted by means of the CREST system by any meeting (including the auditor’s report and the conduct of the particular time. In this connection, CREST members and, where audit); or (ii) any circumstance connected with an auditor of the applicable, their CREST sponsors or voting service provider(s) are company having ceased to hold office since the last annual general referred, in particular, to those sections of the CREST Manual meeting of the company. The company may not require the concerning practical limitations of the CREST system and timings. members requesting any such website publication to pay its expenses in complying with section 527 or section 528 of the The rights of members in relation to the appointment of proxies Companies Act 2006. Where the company is required to place a described above do not apply to persons nominated under section statement on a website under section 527 of the Companies Act 146 of the Companies Act 2006 to enjoy information rights 2006, it must forward the statement to the company's auditor by (“nominated persons”) but a nominated person may have a right, not later than the time when it makes the statement available on under an agreement with the member by whom such person was the website. The business which may be dealt with at the annual nominated, to be appointed (or to have someone else appointed) as general meeting includes any statement that the company has a proxy for the annual general meeting. If a nominated person has been required under section 527 of the Companies Act 2006 to no such right or does not wish to exercise it, such person may have publish on a website. a right, under such an agreement, to give instructions to the member as to the exercise of voting rights. As at the date of this 2013 Notice, the issued share capital of the company comprises 33,414,545 ordinary shares and 50,000,000 Any member attending the annual general meeting has the right to 9 per cent cumulative preference shares. Only holders of ordinary ask questions. The company must cause to be answered any such shares (and their proxies) are entitled to attend and vote at the question relating to the business being dealt with at the meeting annual general meeting. Accordingly, the voting rights attaching to but no such answer need be given if (a) to do so would interfere shares of the company exercisable in respect of each of the unduly with the preparation for the meeting or involve the resolutions to be proposed at the annual general meeting total disclosure of confidential information, (b) the answer has already 33,414,545 as at the date of this 2013 Notice. been given on a website in the form of an answer to a question, or (c) it is undesirable in the interests of the company or the good Shareholders may not use any electronic address (within the order of the meeting that the question be answered. meaning of sub-section 4 of section 333 of the Companies Act 2006) provided in this 2013 Notice (or any other related document Copies of the executive director’s service agreement and letters including the form of proxy) to communicate with the company for setting out the terms and conditions of appointment of non- any purposes other than those expressly stated. executive directors are available for inspection at the company's registered office during normal business hours from the date of this Under section 338 and section 338A of the Companies Act 2006, 2013 Notice until the close of the annual general meeting members meeting the threshold requirements in those sections (Saturdays, Sundays and public holidays excepted) and will be have the right to require the company (i) to give, to members of the available for inspection at the place of the annual general meeting company entitled to receive notice of the annual general meeting, for at least 15 minutes prior to and during the meeting. notice of a resolution which may properly be moved and is intended A copy of this 2013 Notice, and other information required by be dealt with at the meeting any matter (other than a proposed section 311A of the Companies Act 2006, may be found on the resolution) which may be properly included in the business. A to be moved at the meeting and/or (ii) to include in the business to company's website www.rea.co.uk. resolution may properly be moved or a matter may properly be included in the business unless (a) (in the case of a resolution only) Under section 527 of the Companies Act 2006, members meeting it would, if passed, be ineffective (whether by reason of the threshold requirements set out in that section have the right to inconsistency with any enactment or the company’s constitution or require the company to publish on a website (in accordance with otherwise), (b) it is defamatory of any person, or (c) it is frivolous or section 528 of the Companies Act 2006) a statement setting out vexatious. Such a request may be in hard copy form or electronic any matter that the members propose to raise at the relevant form, must identify the resolution of which notice is to be given or annual general meeting relating to (i) the audit of the company's the matter to be included in the business, must be authorised by annual accounts that are to be laid before the annual general the person or persons making it, must be received by the company 137 Notice of annual general meeting continued not later than the date 6 clear weeks before the meeting, and (in the case of a matter to be included in the business only) must be accompanied by a statement setting out the grounds for the request. 138 CBP00036511904134458 This report has been printed in the UK by Wyndeham Grange using vegetable based inks on Regency Silk paper. 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