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Wellstream Holdings PLC Annual Report & Accounts 2007 48723 MG Annual Report - Front 17/4/08 11:39 Page 2
Contents
Financial Highlights 1
Chairman’s Statement 2
Chief Executive’s Review 4
Financial Review 30
Board of Directors 34
Directors’ Report 36
Corporate Governance Report 44
Audit Committee Report 49
Directors’ Remuneration Report 51
Statement of Directors’ Responsibilities 57
Independent auditors’ report to the members of Wellstream Holdings PLC 58
Group Income Statement 60
Statements of Recognised Income and Expense 60
Balance Sheets 61
Cash Flow Statements 62
Notes to the Accounts 63
Historical Results 90
Shareholder Information 91
Glossary 92
Notice of Annual General Meeting 93 48723 MG Annual Report - Front 17/4/08 11:39 Page 1
Wellstream Holdings PLC Annual Report & Accounts 2007 | 1
Financial Highlights
Revenue £m 266.8
147.2 Revenue up 81.2%
2006 2007
Profit before Tax £m 41.7
25.4 Profit before Tax up 64.1%
2006 2007
Backlog £m 335.9
226.8 Backlog up 48.1%
2006 2007
Revenue Backlog is the aggregate of revenue that has not yet been recognised in the accounts from contracts that have been entered into and from contracts that the directors are confident will be entered into. 48723 MG Annual Report - Front 17/4/08 11:39 Page 2
2 | Chairman’s Statement
Chairman’s Statement
Wellstream has achieved a record financial performance during 2007. 48723 MG Annual Report - Front 17/4/08 11:39 Page 3
Wellstream Holdings PLC Annual Report & Accounts 2007 | 3
Chairman’s Statement Establishment of Seastream JV I am pleased to announce that Wellstream In July 2007, we successfully established has achieved a record financial a Joint Venture called Seastream. It has performance during 2007. secured a major contract from BHP Billiton, In addition, we successfully completed in which we offered our products on the Initial Public Offering (IPO) and an installed basis for the first time. listed our shares on the London Stock This project is progressing to plan Exchange on 1 May 2007. and we look forward with confidence to securing additional contracts for Financial performance installation of our flexible pipe products. In the 12 months to 31 December 2007, Revenue increased by 81% to £266.8m Board additions (2006: £147.2m), Adjusted EBITDA I welcome the addition to the board of increased by 136% to £56.9m (2006: three industry specialists, Neil Gaskell, £24.1m), and adjusted earnings per the former Treasurer of Royal Dutch Shell, share reached 34.7p against 11.4p for Francisco Gros, former CEO of Petrobras 2006. We maintain a strong backlog and Pat Murray the former CEO of which has increased by £109.1m during Dresser Inc. I also welcome Chris Gill as 2007, ending the year at £335.9m. Finance Director, who joined us on 7 January 2008. Marek Gumienny, of Improved utilisation in Newcastle Candover Partners, resigned as a non- High utilisation rates have been achieved executive director at the IPO and Andrew throughout the year in Newcastle and we Turk, Finance Director, left the Company achieved a record throughput of 237 nkm. on 31 December 2007. I thank them both This contributed substantially to our for their contribution during a period of buoyant performance this year. Following rapid growth and considerable change a programme of process improvements, in the Company. we also revised our capacity in Newcastle to 260 nkm and plan to further expand Outlook that capacity. With our new investment in capacity, we have set the foundations to take Successful start-up of our new advantage of the anticipated demand for production plant in Brazil flexible pipe. The market fundamentals We officially opened the Niterói plant in remain strong and we have confidence July 2007 having started production in that we are well positioned to capture a May and I am pleased to report that the significant share of this growing market. plant is already making a contribution in excess of our expectations. In total we Finally, I pay tribute to the professionalism achieved a throughput of 52 nkm, which of our staff, whose hard work and was ahead of our ramp-up plan. On dedication have helped bring about these 29 November 2007 we announced plans record breaking results. to further expand capacity at Niterói, recognising the Board’s confidence in future demand for our products.
John Kennedy Chairman 48723 MG Annual Report - Front 17/4/08 11:39 Page 4
4 | Chief Executive’s Review
Chief Executive’s Review
I am delighted to deliver my first Chief Executive’s Review for Wellstream as a newly listed Public Company.
Financial Highlights 2007 2006 Change Revenue £266.8m £147.2m +81.2% Adjusted EBITDA (b) £56.9m £24.1m +136% Backlog (a) £335.9m £226.8m +48.1%
2007 was a remarkable year for In 2007 Wellstream had approximately “In 2007 Wellstream Wellstream. Several records were broken 30% of the global offshore flexible pipe had approximately and strong foundations were set for market and was the world’s second 30% of the global future growth. largest supplier. Our portfolio includes offshore flexible pipe dynamic risers, static flowlines, subsea market and was the Significant highlights included the strong and topside jumpers, fluid transfer lines world’s second performance from the Newcastle and well service lines for use in the operation, on-time start up of the new offshore oil and gas market. Onshore largest supplier.” Niterói plant in Brazil, further growth of we produce FlexSteel™ a flexible the onshore FlexSteelTM business and pipeline product. Our success is based the launch of an installation capability on strong technology supported by through the Seastream JV. Towards the continuous research and development, end of the year the Company decided to excellent customer relationships and a further expand its future offshore focus on working collaboratively with flexible capacity by some 40% through customers and partners. an investment programme in the Niterói and Newcastle offshore production Wellstream’s core business addresses facilities. the needs of the floating production and subsea sectors of the offshore oil Scope of the business and gas industry. This is a fast growing With over 20 years’ experience, segment, where deepwater applications Wellstream is a leading designer and are becoming more common and for supplier of high quality unbonded which flexible pipe is often a critical flexible pipeline products and systems. element of the development solution. 48723 MG Annual Report - Front 17/4/08 11:39 Page 5
Wellstream Holdings PLC Annual Report & Accounts 2007 | 5
Year End Annualised Offshore Capacity Offshore Flexible Pipeline Throughput In normalised km of 8 inch ID pipe. In normalised km of 8 inch ID pipe. A mechanism for determining the equivalent length of A mechanism for determining the equivalent length of any pipe to a ‘standard’ product. any pipe to a ‘standard’ product. +14% 410 +39% +64% 360 289.1
+23% +10% 220 208.0 200 169.5
2005 2006 2007 2008(F) 2005 2006 2007
Revenue & Backlog Growth Adjusted EBITDA (in £ millions) (in £ millions) +136% +81% 56.9 335.9
266.8 226.8 +63% +165%
24.1 147.2
90.1 78.6 Revenue 9.1
Revenue Backlog 2005 2006 2007 2005 2006 2007 (a) Blue arrows represent year-on-year revenue growth. (b) Adjusted EBITDA represents operating profit before Revenue Backlog is the aggregate of revenue that has depreciation and excludes the share option expense as not yet been recognised in the accounts from contracts defined on page 30 of the Financial Review. Adjusted that have been entered into and from contracts that the EBITDA is not a measure of profit or operating performance directors are confident will be entered into. Revenue recognised under IFRS. Backlog is not a measure of profit or operating performance recognised under IFRS. 48723 MG Annual Report - Front 17/4/08 11:39 Page 6
6 | Chief Executive’s Review
Offshore Market Overview World Marketed Energy Use by Fuel Type, Nuclear 1980-2030(1) Renewables Oil and gas are expected to continue as Natural Gas the world’s dominant energy sources for Coal Liquids the foreseeable future. As many of the 250 more easily accessible offshore hydrocarbon deposits have now been 200 discovered and produced, the industry has to explore in progressively more 150 remote locations, often in deeper water depths. This has increased the capital 100 intensity of the newer developments and Quadrillion BTU sparked an evolution in development 50 concepts from fixed platforms to floating 0 production facilities such as FPSO 1980 1995 2004 2015 2030 (Floating Production, Storage and Offloading) vessels.
Industry analysts, Infield Systems Ltd, have estimated that capital expenditure on deepwater developments has increased from approximately $9bn in 2004 to $19bn in 2007. Over the next five years, they expect this expenditure to increase further to in excess of $25bn per annum.
As oil companies move in to more remote areas, and deeper water depths, the use of floating production facilities has become more prevalent. Flexible pipelines are a critical element of the majority of FPSO developments; connecting the wellheads to the surface via flexible risers. Thus, the increased use of FPSOs worldwide has been one of the drivers for rapid growth in Wellstream’s business.
(1) Source: Energy Information Administration (EIA) 2007. 48723 MG Annual Report - Front 17/4/08 11:39 Page 7
Wellstream Holdings PLC Annual Report & Accounts 2007 | 7
Capital expenditure on deepwater developments has increased from approximately $9bn in 2004 to $19bn in 2007. Over the next 5 years expenditure is expected to increase further to in excess of $25bn per annum.
(Courtesy: Subsea 7 and Chevron) 48723 MG Annual Report - Front 17/4/08 11:39 Page 8
8 | Chief Executive’s Review
There are now approximately 200 floating 30 Year Development of the Worldwide FPSO Inventory(1) production systems in service worldwide, (no. units as of end year) of which some 60% are FPSOs. 150 International Maritime Associates Inc. project that this inventory of FPSOs will double over the next five years. 100 The most important regions globally for this type of development are Latin America and West Africa which together account for over 40% of the global installed base for FPSOs. The market in 50 Latin America dominates the worldwide flexible market, underpinned by Brazil, and if the potential of the major discoveries made in the country during 0 2007 is realised, this trend is expected 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 to continue. A significant market is also developing in Asia. In addition to FPSOs, subsea developments are also an important driver for Wellstream’s business. Whilst much of the subsea market has evolved in support of floating production vessels and deepwater developments, subsea tiebacks in shallow water remain significant, particularly in mature production basins like the North Sea and Gulf of Mexico. In these regions, the current high oil and gas prices have made the development of marginal fields economic. Many of these developments have been facilitated by the use of flexible flowlines, which can be quickly Total U.S. Wells Completed(2) manufactured and rapidly installed using readily available and cost effective offshore installation vessels. 70,000
60,000 Onshore Market Overview The onshore market in North America, 50,000
and in particular the USA, has 40,000 remained robust during 2007 as oil companies have sought to increase 30,000
production and exploit unconventional 20,000 gas plays. A growing market for refurbishment of existing flowline 10,000 infrastructure is also emerging. 0 95 96 97 98 99 00 01 02 03 04 05 06 07
Source: (1) International Maritime Associates Inc (2008). (2) Energy Information Administration, (EIA). 48723 MG Annual Report - Front 17/4/08 11:39 Page 9
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The increased use of FPSOs worldwide has been one of the drivers for rapid growth in Wellstream’s business. 48723 MG Annual Report - Front 17/4/08 11:39 Page 10
10 | Chief Executive’s Review
Wellstream’s ability to deliver against its goals rests firmly with its employees and Wellstream therefore seeks to create an environment of enthusiasm, engagement and opportunity for all of its staff. 48723 MG Annual Report - Front 17/4/08 11:39 Page 11
Wellstream Holdings PLC Annual Report & Accounts 2007 | 11
Strategy for Growth Wellstream aims to build a leadership position as a supplier of bespoke engineered flexible pipeline products for oil companies around the world. This leadership position will be built upon superior customer relationships, innovation, technology, manufacturing and project delivery excellence. Wellstream’s ability to deliver against these goals rests firmly with its employees and Wellstream therefore seeks to create an environment of enthusiasm, engagement and opportunity for all of its staff. The business will deliver growth organically and through alliances and acquisitions that add capacity and capability. Currently, the Company is:
• Increasing production throughput in Brazil and the UK • Adding capacity in Newcastle, UK to reach 300 nkm/pa in 2009 • Increasing capacity in Niterói, Brazil to reach 270 nkm/pa in 2009 • Continuing to grow production of onshore flowline products • Developing the Seastream JV focused on installation of flexible pipelines and risers to support Wellstream’s strategic intent to keep the installed cost of flexible pipe visible to end customers. 48723 MG Annual Report - Front 17/4/08 11:39 Page 12
12 | Chief Executive’s Review
Newcastle Brazil The centrepiece of 2007’s strong Undoubtedly a major 2007 milestone was performance was the Newcastle the successful commissioning of the new manufacturing operation which plant in Niterói, Brazil in May 2007. The successfully met many challenges Niterói plant was formally inaugurated including complexity in design, on 11 July 2007 with Government manufacturing, testing, packaging and representatives, Petrobras, and other shipping of flexible pipe. The capacity major customers and suppliers in at Newcastle, measured in normalised attendance. The ramp-up of production kilometres (nkm), was upgraded at the at the plant progressed ahead of plan start of the year to 240 nkm/pa and for the remainder of the year and a further upgraded mid year to 260 nkm/pa total of 52 nkm throughput was Total throughput of 237 nkm represented achieved. The plant has also received a new annual record for the plant, being full accreditation from Petrobras. The 14% ahead of 2006. The outcome ramp-up of the Niterói plant exceeded validated the ongoing focus on expectations and we have brought continuous improvement in all facets of forward the commitment to a 4 shift the operation. system to allow 24/7 operations.
With the establishment of two manufacturing facilities for our offshore business, the operational teams in Niterói and Newcastle are actively working on production optimisation and taking advantage of the plants’ combined and complementary capabilities.
Throughput in the Newcastle plant 2004-2007 237 nkm
2004 2005 2006 2007 48723 MG Annual Report - Front 17/4/08 11:40 Page 13
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Major Projects Of particular note was the In total 26 projects were at an execution stage during 2007. Of particular note was Frade project for Chevron in the Frade project for Chevron in Brazil. This is a contract valued in the order of Brazil. This is a contract £100m requiring the design and production of 138km of pipes varying in size from valued in the order of £100m. 2 inch to 8 inch. The Frade project accounted for some two thirds of the annual production in Newcastle and at year end the programme was on schedule and over 70% complete. The year also featured eight major projects for Petrobras. These projects involved both the Newcastle and Niterói operations. Of particular note was the technically complex P52 16 inch loading line contract which was successfully completed in July and has now been installed offshore by the customer. Other major contracts included UNBC phase 1 which is the first project to be entirely executed and manufactured in Brazil. The UNBC projects are continuing into 2008 where several pipe designs are being delivered from the Niterói plant. Niterói Plant, Brazil
Frade Field Layout
Partners: Chevron, Petrobras and INPEX 48723 MG Annual Report - Front 17/4/08 11:40 Page 14
14 | Chief Executive’s Review
Supply Chain Management Capacity Expansion The supply chain is critical to In November we announced capacity Wellstream’s operations with carbon expansions in both Niterói (from 150 steels, alloy steels, high grade polymers, nkm/pa to 270 nkm/pa) and Newcastle end fittings and ancillaries being sourced (from 260 nkm/pa to 300 nkm/pa); a £35 globally for our three major operations. million investment has been approved Overall, there have been no major for this. This is further supported by a interruptions to the supply chain global continuous improvement initiative. throughout 2007 and we are continuing to extend material solutions and the The capacity expansion project has vendor base. We are intensively successfully transitioned from the developing further Brazilian sources of definition to execution phase. Critical supply to support the Niterói plant. activities are on track to support the Q1 2009 operational handover. Long lead A notable success has been the equipment items have been ordered introduction of the new PA12 nylon grade, and pre-construction activities for Niterói which was developed collaboratively and Newcastle are progressing well. with Degussa. This new pipeline barrier and shield material has achieved rapid In support of capacity expansion, an and widespread acceptance by our accelerated reel build programme has customers and is a welcome alternative been progressing in both Brazil and the to the previously existing nylon solution. UK and will run through 2008.
We have seen recent encouraging signs in stabilisation and in some cases reduction in raw material prices. This is most prominent in the high value alloy steels. 48723 MG Annual Report - Front 17/4/08 11:40 Page 15
Wellstream Holdings PLC Annual Report & Accounts 2007 | 15
Year End Annualised Capacity - Wellstream Newcastle & Niterói
+39%
570 nkm
+14% 410 nkm +64% 360 nkm
+10% 300 nkm 260 nkm 260 nkm 220 nkm 200 nkm 200 nkm
Niterói
Newcastle 2004 2005 2006 2007 2008 2009 FCST FCST
A £35 million investment has been approved for capacity expansion. 48723 MG Annual Report - Front 17/4/08 11:40 Page 16
16 | Chief Executive’s Review
Health, Safety and Environment Wellstream places great emphasis on Health, Safety and Environmental (HSE) performance. In terms of key measurables, 2007’s performance was almost twice as effective as 2006.
Safety Wellstream places great emphasis on • Continuous Improvement - Health, Safety and Environmental (HSE) Implementing lean manufacturing performance. In terms of key principles throughout the business measurables, 2007’s performance was • Supply Chain Management - Engaging almost twice as effective as 2006. with our key suppliers to assess HSE Two Lost Time Incidents (LTIs) were competencies and share learning recorded (eight in 2006) and the OSHA • Percentage Safe Auditing - A daily work recordable rate was 1.68 (3.33 in 2006). routine involving a team of In order to continue this improvement Management, Operators and HSE and further enhance the entire personnel organisation’s focus on safety, new • Behavioural Safety Training - To initiatives have been launched that support the “Journey to Zero” concentrate on leading HSE indicators • OHSAS 18001/ISO 14001 and the behavioural aspects of safety. certification - Expanding the scope to In 2007 the Company embarked upon include the Niterói plant in Brazil. a programme of change - “Journey to Zero”. The driver for this change has been the Company’s belief that all 2007 OSHA Recordable Incident Frequency Rates accidents and incidents are preventable (last 12 months rolling) and the programme ensures that this principle is embedded within the 3.50 Company’s organisational culture. 3.00 Building on the successes of 2007, we 2.50 aim to further develop our policies and practices. We have identified the 2.00 following objectives as being fundamental to this goal in 2008; 1.50
1.00
0.50
0.00 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
OSHA Recordable Incident 1 Day Lost Time Incident 48723 MG Annual Report - Front 17/4/08 11:40 Page 17
Wellstream Holdings PLC Annual Report & Accounts 2007 | 17
Environment Wellstream is committed to seeking ways to minimise avoidable harm to the environment. In Newcastle, Wellstream has implemented an Environmental Management system, certified to ISO 14001. Resource conservation and pollution prevention principles are integrated into our business processes, facilities, operations and products. In Brazil and Panama City, USA, 2008 will see a focus on improving monitoring and setting of targets.
The Company is in the early stages of implementing an Energy and Waste Management Programme. This encompasses auditing, further definition of waste production and the carbon footprint. The intention is to further refine reduction targets and recycling initiatives. 48723 MG Annual Report - Front 17/4/08 11:40 Page 18
18 | Chief Executive’s Review
Customers and Awards Our 20 year relationship with Petrobras has been further enhanced by the opening of the plant in Niterói, Brazil.
This has already begun to benefit the manufacturing programme will business by facilitating greater commence in Newcastle in mid 2008 and co-operation in terms of collaborative the project team is overseeing an capacity planning, product qualification extensive engineering, procurement and and technology development. Key manufacturing preparedness programme. commitments have been received from At year end we also received a Petrobras for 2008. commitment from Devon Energy for The Niterói plant has also supported remedial installation work on the Polvo other Wellstream customers such as field in Brazil. The offshore work was Devon Energy, Chevron, Anadarko and completed in February 2008. StatoilHydro, all of whom have projects that were executed in 2007 or will be manufactured in 2008.
In total this customer support translated into a backlog at 31 December 2007 of £335.9m.
Seastream and the Pyrenees project On 3 July 2007, BHP Billiton awarded Wellstream and its Seastream Joint Venture, contracts for its Pyrenees project offshore Western Australia. The contracts involve the supply and installation of flexible flowlines and risers and installation of the subsea infrastructure and the Floating Production Storage and Offloading vessel (FPSO). The value of these contracts is in excess of £100m and represents a significant milestone for both Wellstream and the Joint Venture. At the end of the year preparations were well underway from a new operating centre in Perth, Australia for the offshore programme which is due to commence in early 2009. The pipe 48723 MG Annual Report - Front 17/4/08 11:40 Page 19
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The Seastream initiative underpins Wellstream’s strategic intent to keep the installed cost of flexible pipes visible to end customers. 48723 MG Annual Report - Front 17/4/08 11:40 Page 20
20 | Chief Executive’s Review
The onshore FlexSteelTM business has performed well with encouraging new sales being achieved in Latin America. 48723 MG Annual Report - Front 17/4/08 11:40 Page 21
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Onshore The onshore FlexSteelTM business has performed well with encouraging new sales being achieved in Latin America. Production in the Panama City plant has accelerated with the introduction of new equipment during the first quarter of 2007. In total 618 nkm(1) of pipeline was produced during 2007. The period also saw the successful introduction of 5.5 inch and 6 inch diameter products. The first 6 inch pipe delivery is destined for Pemex in Mexico. South America continues to show promise with Petrobras placing initial orders and negotiations continuing in Venezuela. The American and Canadian markets continue to underpin the business and despite the drop-off in the Canadian gas market, the high pressure market for the FlexSteelTM product has remained positive.
Note (1): Normalised kilometre (nkm) for Wellstream’s onshore pipe is based on a standard 4 inch Internal Diameter pipe. A relative scale factor is applied to other pipes to convert actual production lengths and composition into nkm. 48723 MG Annual Report - Front 17/4/08 11:40 Page 22
22 | Chief Executive’s Review
Organisation With the upturn in activity, global staff numbers have grown from 715 at 31 December 2006 to 945 at 31 December 2007.
Organisation Technology R&D The principal growth has been in We have an extensive R&D pressure and tensile armour materials Brazil with the start-up of the new programme designed to meet under differing environmental plant and associated operations. The customer and market needs and to conditions enhancing the customer’s smooth start-up in Niterói has been create and commercialise new confidence in the predictive lifetime of facilitated by an intensive induction designs and solutions. Full-scale test a riser in very challenging conditions. and training programme which and qualification work for customer- included the placement of Brazil funded programmes are now being As increasing numbers of offshore employees in the UK in the first half scheduled out to 2011. fields are turning to “sour service”, of the year and the deployment of where the oil is strongly composed of During 2007 our strategic programme several UK and US based specialists contaminants like hydrogen sulphide, has included completion of a high in Niterói to assist with knowledge a major materials test programme pressure deepwater riser qualification. transfer in the second half of the year. has been undertaken to validate the As a result of the qualification permeable characteristics of all our Following flotation, an SAYE scheme requirements there are a number of polymers used as an internal fluid was made available to UK employees full-scale tests such as burst, tension barrier for this application. with 79% of the eligible UK workforce and dynamic cycling of complete participating. This has had a positive riser structures to demonstrate the effect and has raised the sense of long performance against industry term involvement in the Company’s standards. Each flexible riser is a future. To further emphasise this, at complex non-bonded structure year end a 3 year pay agreement has comprising polymers, metals, structural been concluded with the Newcastle tapes and end terminations. These workforce. layers all interact with one another and The success of the Company was the testing ensures that during service recognised locally and nationally in no unacceptable wear, cracks or the UK. Wellstream became North breaks occur within the structure. East of England Company of the Year Completion of the 540 bar design adds at the North East Business Awards. In to the qualification envelope and also November, Wellstream received the provides invaluable performance UK Company of the Year award from data as even more challenging the British Chamber of Commerce. service requirements are considered.
ERP system It is important to continue to enhance 2007 also saw the start-up of a the knowledge base of materials company wide Enterprise Resource technology even for existing materials. Planning (ERP) project. The intention Industry requirements for service in the is to replace stand-alone systems, order of 25 years mean that fatigue spreadsheets and databases that have testing to demonstrate performance served their purpose to date, with a in excess of 250 years is required. new integrated system. Significant investment continues to be made in the fatigue testing of 48723 MG Annual Report - Front 17/4/08 11:40 Page 23
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Key Performance Indicators (KPIs) Wellstream implements a throughout the year. These KPIs are performance management system cascaded throughout the business throughout the business. At the and more detailed KPIs are also start of every year the critical created that align with geographical success factors are reviewed and centres and business functions. key performance indicators are set These KPIs drive the appropriate for the Group. The Board approves focus in the Group and the top 6 these KPI targets and monitors and KPIs for 2007 were as follows; assesses performance against these
Business Area KPI Measure
Financial Delivery EBITDA (Group)(1) 136% increase on 2006
Project Offshore Gross Margin(2) 93% increase on 2006 Management
Supply Chain Material Receipts(3) 99% on-time delivery
Manufacturing Throughput(4) 39% increase on 2006
Technology Patents lodged(5) 7 certificates of invention filed
Business Acquisition Offshore orders(6) 27% increase on 2006
(1) EBITDA is defined on page 30 in the (4) Throughput is measured in normalised Financial Review. kilometres. It is a measure of capacity utilisation. (2) Offshore Gross Margin measures the profitability of project production in the (5) The lodging of patents is important year. It is calculated by deducting because it allows for protection of material and transportation costs from intellectual property. The filing of an revenue on a contract by contract basis. application by our patent agent with the UK Patent Office (or patent offices in (3) On-time material receipts are important other jurisdictions) is an important step in ensuring minimal interruption to and is therefore treated as a KPI. production. We measure any delay to the planned production that results directly (6) Offshore orders are the value of future from delayed material receipts and this is revenue added to backlog on receipt of a calculated as a proportion of production customer order. It is a measure of the hours available. rate at which we win new business. 48723 MG Annual Report - Front 17/4/08 11:40 Page 24
24 | Chief Executive’s Review
Risks and Uncertainties Since Wellstream is a technologically complex business operating in a challenging industry, risk management is a key facet of day-to-day management. 48723 MG Annual Report - Front 17/4/08 11:40 Page 25
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At an operational level there are strict Senior Management and key processes in place to review risks and personnel uncertainties during the bidding process Experienced and qualified personnel and during engineering, procurement, are in high demand in the oil and gas manufacturing, testing and post-delivery industry. It is important for Wellstream to project phases. Risk assessments are maintain a close focus on both retention performed on a project-by-project and effective recruitment of key basis and the operations are reviewed personnel at a time of growth. Actions to monthly through formal processes. support this include detailed succession planning, regular remuneration reviews, At the corporate level, the Executive Team industry benchmarking, improved in Wellstream regularly performs a risk employee welfare arrangements and mapping exercise which is reviewed careful career development. with the Board and the Audit Committee. This includes an assessment of Single source vendors in the operational, financial, strategic, supply chain compliance and environmental risks. Wellstream’s supply chain is critical to This risk mapping exercise is extensive the operation and for certain material as is the tracking of mitigating actions. types there are sole source vendors. In Key risks highlighted include: addition, for the materials that are imported into Brazil, the supply chain is Petrobras is a key customer long and time consuming. These of Wellstream challenges are mitigated by having a Petrobras commands a significant clear supply chain strategy in place, proportion of Wellstream’s business. The careful maintenance of stocking demand for flexible pipe is progressively programmes, constant vigilance of defined as part of a continuous dialogue vendor performance, the development between the two companies. Regular of commercial risk and reward and open review meetings establish arrangements and, where appropriate, capacity availability and Petrobras’ the establishment of effective long term offshore field development priorities. vendor frame agreements. Wellstream continues to diversify the customer base both in Brazil (where international oil companies are increasingly active) and internationally. 48723 MG Annual Report - Front 17/4/08 11:40 Page 26
26 | Chief Executive’s Review
Customer concentration Volatility of the oil and gas industry Wellstream’s business is founded on The price of oil and gas and levels of a relatively small number of high value business confidence across oil and gas customers including Petrobras. If markets are key drivers for Wellstream’s requested project lead times from business. The trends towards the use these customers change significantly, of deepwater, floating production and revenue and margin performance subsea technologies are also important. could be put at risk. In order to A sustained and significant reduction in mitigate this, Wellstream continues to oil and gas prices and/or a reduction broaden its customer base, develop in business confidence could have an new relationships in selected regions adverse impact on the level of customer and apply the principle of focused spending. To mitigate this exposure account management to its Wellstream strives to maintain in-depth strategically targeted customer base. market intelligence, to gather and use client feedback and to plan capacity, Product mix throughput and its cost base so that any During the sales and business downturn can be weathered effectively. development process, Wellstream strives to influence product mix to Seastream initiative manufacturing friendly solutions but it The risk profile of offshore installation is not always possible to achieve an of flexible pipe is significantly different optimal outcome. Poor product mix to that of design and manufacturing can affect throughput and hence activity. Recognising that this is a revenue and margin performance. newly developing business stream for To mitigate this exposure Wellstream Wellstream, great care has been taken constantly manages the “funnel” of to negotiate acceptable risk profiles incoming work and encourages on projects as they are secured. standardisation of its pipe structures during project planning phases. In addition it is always the aim to gain sufficient margins on projects that have more challenging product scopes. 48723 MG Annual Report - Front 17/4/08 11:40 Page 27
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28 | Chief Executive’s Review
Corporate Social Responsibility Local involvement is at the very heart of Wellstream’s social responsibility programme. 48723 MG Annual Report - Front 17/4/08 11:40 Page 29
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Corporate Social Responsibility Wellstream is focussed on working in governs the actions of all employees in partnership with all elements of our the conduct of Wellstream’s business communities - education, charities, local and in respect of the Company’s organisations, support groups, business dealings with customers, suppliers, and the public sector. clients, contractors and intermediaries. The Company’s business conduct policy On a routine basis Wellstream actively covers gifts and hospitality, international works with clients on project specific business relationships, conflicts of HSE Performance Recognition Schemes interest, confidential information and where HSE ‘best practice’ is rewarded the reporting of misconduct. with a charitable donation. In 2007, PetroSA’s Southern Gas Field project, The Company is committed to following in which Wellstream was involved, a stringent fraud and anti-corruption generated a donation to two South policy to ensure all business is African schools. conducted in a legal, fair and honest manner. This policy governs the actions Local involvement is at the very heart of of all employees and is accessible to all; Wellstream’s social responsibility the Company will not tolerate fraud, programme; such involvement can be corrupt, dishonest or illegal activity seen in Wellstream’s support of the local amongst employees, customers, Walker Central Junior Football Club in suppliers or intermediaries. Newcastle upon Tyne, UK to which in 2007 Wellstream donated £10,000. Wellstream also operates under the guidance of a whistle blowing policy. The Company has a specific budget for The whistle blowing policy states the community involvement activities. course of action an employee should Of the budget set aside for charitable take if they have concerns. All policies giving, a proportion is given to charities are available to view on the website. with which the Company has formed www.wellstream.com partnerships, such as St Oswald’s Hospice (UK), Santa Clara Project (Brazil) Outlook and United Way (USA). Looking ahead, we will continue to apply Many of our employees give generously ourselves to maintain our strong of their money, time and energy and throughput and ensure we deliver against in support of their efforts; Wellstream our targets for investment in capacity operates a charitable giving policy expansion. This investment will boost whereby the Company matches total capacity by some 40% in 2009. the monies raised up to a set limit by The long term industry fundamentals any employee. remain strong and we continue to see growth opportunities across all aspects Ethical Trading Policies of our business. Wellstream has a robust business conduct policy that ensures the Company trades legally, fairly, openly, Gordon Chapman honestly and with transparency in all Chief Executive Officer dealings. The policy is highly visible and 1 April 2008 48723 MG Annual Report - Front 17/4/08 11:40 Page 30
30 | Financial Review
Financial Review
Overview Revenue for the year ended 31 December The Company successfully completed 2007 increased by 81.2% to £266.8m its IPO on the London Stock Exchange (2006: £147.2m). Resulting Operating during the year and its shares were profit increased by 139.7% to £47.6m admitted to trading on 1 May 2007. (2006: £19.8m) which generated profit This and the consequent repayment of before taxation of £41.7m (2006: £25.4m) pre IPO debt resulted in a number of and diluted earnings per share of 31.6p transactions of a substantially one-off or (2006: 34.6p). non-recurring nature, a summary of which is included below.
Operating Profit before Diluted Diluted EBITDA (1) profit Taxation EPS(p) EPS(p) £000 £000 £000 2007 2006
Unadjusted measure 52,836 47,561 41,740 31.6 34.6
Non Exec options see (2) below 4,089 4,089 4,089 3.1 -
Exchange gains on financing see (3) below - - (2,755) (2.1) (23.2)
Repayment of DDBs see (4) below - - 2,716 2.1 -
Adjusted measure 56,925 51,650 45,790 34.7 11.4
(1) EBITDA represents Operating profit before depreciation is charged. (2) Prior to IPO, share options were issued to a non-executive director and these were exercised and converted into shares at IPO. A charge of £4.1m, inclusive of employer’s taxes, was made in this regard. (3) Foreign exchange gains on financing of £2.8m (2006: £17.0m) arose substantially on long term US Dollar denominated debt that was converted to Sterling on 1 May 2007 as part of the IPO. (4) Upon the bank refinancing and repayment of the Deep Discount Bonds, the associated fees, previously capitalised, of £2.7m were written off. 48723 MG Annual Report - Front 17/4/08 11:40 Page 31
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Revenue Profit before Taxation Revenue for the year ended 31 December Profit before Taxation of £41.7m 2007 totalled £266.8m (2006: £147.2m). (2006: £25.4m) includes items of a substantially one-off or non-recurring The Group’s Offshore business nature totalling £4.1m (see table opposite). contributed the bulk of this growth ending the year with revenue of £255.6m Taxation (2006: £139.4m). This result is The Group effective rate of taxation in underpinned by the opening and the year was 30.5%. Corporate tax rates subsequent revenues from the facility in in the UK and Brazil of 30% and 34% Brazil and strong underlying growth respectively and a favourable tax regime originating from existing UK operations. in the UK for research and development The Onshore business also saw strong underlie this rate. The full year rate is growth albeit from a lower base, recording higher than that anticipated in the Group’s revenue of £11.2m (2006: £7.8m). Interim Report of 29.2% due to the successful start-up in Brazil and EBITDA consequent increase in second half Adjusted EBITDA for the year ended profits taxed at 34%. Cash tax payments 31 December 2007 totalled £56.9m commenced in the UK during 2007 as (2006: £24.1m). The corresponding prior year losses have been exhausted. EBITDA margin in the period was 21.3% (2006: 16.4%), an incremental margin EPS earned in the period of 27.2%. This Adjusted diluted earnings per share for the incremental margin reflects increased year ended 31 December 2007 was 34.7p use of installed capacity, offset (2006: 11.4p). Basic earnings per share somewhat by start-up inefficiencies in for the year ended 31 December 2007 the newly installed Brazilian capacity. was 31.8p (2006: 34.6p). Diluted earnings per share was 31.6p (2006: 34.6p). Financing Costs Financing costs comprise net interest Dividend expense of £8.6m (2006: £11.4m) and The Company, in line with its Prospectus, foreign exchange gains on financing of has not proposed a dividend for 2007. £2.8m (2006: £17.0m). The exchange The Prospectus also identifies that, gain on foreign currency denominated assuming the Company has accumulated balances was primarily incurred in the sufficient distributable reserves, its period prior to IPO and relates directors anticipate paying both an interim substantially to US Dollar denominated and final dividend for 2008. debt which was repaid on IPO. 48723 MG Annual Report - Front 17/4/08 11:40 Page 32
32 | Financial Review
Operating Cash Flow Financing Activities Cash flow from operations was The IPO generated net proceeds from the £32.7m (2006: £0.2m). Working capital sale of new share capital of £66.8m which, in the period increased by £24.6m along with draw-down on the Group’s (2006: £23.7m). This increase reflects the £85m revolving facility, enabled the longer supply chain currently associated repayment of long-term debt and deep with our Brazilian operations and phasing discounted bonds that existed pre-IPO. of customer payments over the year end. The net cash raised from financing Net interest paid of £3.1m (2006: £4.8m) activities of £12.9m (2006: £2.8m), was and taxation paid of £4.5m (2006: £0.1m) applied to short-term debt leaving net resulted in a net cash increase from cash at the period end of £0.8m (2006: operating activities of £25.1m £20.9m deficit). (2006: decrease £4.7m), which more than covered the significant investment in Net Debt capital equipment made in the period. Net debt at 31 December 2007 was £46.7m (2006: £119.2m) which is currently Capital Expenditure denominated substantially in Sterling. Capital expenditure in the year ended Total debt available to the Group is 31 December 2007 was £16.7m £89.4m which, after allowing for (2006: £14.0m). The most significant performance bonds, guarantees and investment was in Brazil where the Group cash balances held overseas, leaves has created new capacity in a leasehold the Group with in excess of £30m of facility. The total investment in Brazil in available headroom. the past two years has been £17.9m of which in excess of 90% was incurred in respect of new plant and equipment. In November 2007 the Group announced a further £35m investment in new capacity, which is expected to occur during 2008 and early 2009. 48723 MG Annual Report - Front 17/4/08 11:40 Page 33
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Treasury Accounting Policies The Group’s day-to-day cash requirements The Group has updated its accounting and its capital investment programme are policies in order to provide the most financed through an £85m revolving relevant and tailored information to credit facility. Short-term fixed interest stakeholders. Details are included on rate loans, normally over a period of 1-3 page 63. months, form the significant part of the drawn-down facility with the balance Going Concern being carried at variable interest rates. Based on normal business planning The overall credit facility is planned to and control procedures, the directors reduce periodically from November 2008 have a reasonable expectation that the until its expiry in May 2013. Company and the Group have adequate resources to continue in operational Although a substantial part of the Group’s existence for the foreseeable future. revenue and profit is earned outside the For this reason, the directors continue UK, subsidiaries generally trade in either to adopt the going concern basis in local currency or Sterling. The Group is preparing the accounts. therefore not normally exposed to significant foreign exchange transactional risk. Occasionally the Group does generate revenue in a third party currency and, where this occurs, the potential risk is assessed against any natural hedges Chris Gill that exist within the Group before any Finance Director financial hedges are considered. The 1 April 2008 Group also has an exposure to foreign currency that arises upon the translation of overseas results into Sterling.
The Group does not currently hold any financial instruments to hedge either currency or interest rates. 48723 MG Annual Report - Front 17/4/08 11:40 Page 34
34| Board of Directors
Wellstream Holdings PLC Board of Directors
1. John W Kennedy 2. Gordon Chapman 1234 3. Christopher Braithwaite 4. Chris Gill 5. Sir Graham Hearne 6. Neil Gaskell 7. Francisco Gros 8. Nils Stoesser 9. Patrick M Murray
John W Kennedy Christopher Braithwaite Chairman Chief Operating Officer Mr Kennedy, aged 58, joined Wellstream Mr Braithwaite, aged 51, joined in 2003 as Chairman. Mr Kennedy has Wellstream in August 2004 as Chief over 30 years of experience, holding Operating Officer. He has over 25 years executive positions in Halliburton, of experience in project management, Brown & Root and Dresser Enterprises. engineering and manufacturing In 1993, Mr Kennedy received the Sloan businesses in companies including Fellowship, London Business School Halliburton/Brown & Root and ABB. and also holds a M.Sc., B.E. and C.Eng. He has a B.Sc. (Hons) degree in Civil from University College Dublin. Engineering from the University of Mr. Kennedy is currently a director of the Surrey and a M.Sc. degree in Business United Kingdom Atomic Energy Authority, Administration & Project Management Integra Group, Maxwell Drummond from Cranfield School of Management. International Ltd, Hydrasun Holdings Ltd, He is chairman of Subsea NE and Bifold Fluid Power Ltd, and also acts as director of NOF Energy, both industry an advisor and a consultant to several bodies. oil field service companies. Chris Gill Gordon Chapman Finance Director Chief Executive Officer Mr Gill, aged 45, joined the Company as Mr Chapman, aged 57, originally joined Finance Director on 7 January 2008. Wellstream in 1991 and is now the He qualified as a Chartered Accountant Company’s Chief Executive Officer having in 1988 with Ernst and Whinney and led the management Buy-out in 2003. has a B.Sc. in Mining Engineering from He has over 30 years of experience in Newcastle University. the oil field services sector, including He has over 20 years of financial 15 years with Wellstream. Prior to joining experience across a diverse range of Wellstream, Mr Chapman worked on businesses, most recently as Finance pipeline projects in South America, India, Director at the Noble Organisation and the Caribbean, Nigeria and the North domnick hunter group plc and prior to Sea. He is a chartered civil engineer that in Black and Decker Corp. He is a with a degree in Civil Engineering from non-executive director of Stadium Salford University. Group plc and a board member of the North of England Industrial Development Board. 48723 MG Annual Report - Front 17/4/08 11:40 Page 35
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56789
Sir Graham Hearne Francisco Gros Nils Stoesser Senior Independent Independent Non-Executive Non-Executive Director Non-Executive Director Director Mr Stoesser, aged 33, joined Sir Graham, aged 70, joined Wellstream Francisco R. Gros, age 65, has been Wellstream in 2003 as a non- executive in 2003 as an independent non- a director of the Company since 2007. director. He is a director of Candover executive director. Sir Graham practiced Mr Gros is non-executive Vice Partners Limited, which he joined in law before taking a number of senior Chairman of OGX Petroleo e Gas 1999 from Arthur Andersen, where he executive positions, including Chief Participacoes S.A., a company involved qualified as a chartered accountant. Executive of Enterprise Oil. Sir Graham in the exploration of oil and gas Mr Stoesser also holds non-executive is currently non-executive Chairman reserves in Brazil. Previously Mr Gros directorships with Qioptiq and Linos of Braemer Shipping Services Group was President and Chief Executive AG groups. Mr Stoesser has a PLC, Catlin Group Limited and Stratic Officer of Fosfertil from 2003 to 2007. M.Eng (Hons) degree in Mechanical Energy Corporation. He is a In addition, Mr Gros was President and Engineering from Newcastle upon non-executive director of N.M. Chief Executive Officer of Petróleo Tyne University. Rothschild & Sons Ltd and Rowan Brasileiro S.A. from January 2002 to Companies, Inc. December 2002, and President and Patrick M Murray Chief Executive Officer of the Brazilian Independent Non-Executive Neil Gaskell Development Bank from 2000 to Director Independent Non-Executive December 2001. Previously, Mr Gros Patrick Murray, aged 65, joined Director was also a Managing Director of Wellstream in July 2007 as an Mr Gaskell, aged 59, joined Wellstream Morgan Stanley from 1993 to 2000, independent non-executive director. in 2007 as an independent non- and was Governor of the Central Mr Murray has 25 years of experience executive director. Mr. Gaskell has 25 Bank on two occasions, in 1987 and in senior management positions, most years of experience in senior from 1991 to 1992. Mr Gros is also recently as Chairman of the Board management roles at various Shell the Chairman of the Board for Wilson and CEO of Dresser, Inc. Mr Murray companies including from 2000 to Sons Ltd. and serves on the Boards of holds a B.S. degree in Accounting and 2003 as Group Treasurer, responsible Globex Utilidades S.A., EDP-Energias a Master of Business Administration for all financing policies, funding and do Brasil S.A., Lojas Renner, Fosfertil, from Seton Hall University. Mr Murray risk management. Mr Gaskell is and Agco Corp. Mr Gros has a B.A. is on the Board of Directors of Harvest currently a non-executive director of (cum laude) from the Woodrow Wilson Natural Resources, Inc., Precision several companies including Integra School of Public and International Drilling Corporation, Rancher Energy Group and Aberdeen All Asia Affairs at Princeton University. Corp., the Maguire Energy Institute, Investment Trust PLC and others in the World Affairs Council of the oil and gas industry. Mr Gaskell Dallas/Fort Worth, and the Board of is a fellow of the Association of Regents of Seton Hall University. Chartered Certified Accountants and has a B.A. in Philosophy and Economics from the London School of Economics. 48723 MG Annual Report - Mid 17/4/08 11:42 Page 36
36 | Directors’ Report
Directors’ Report The directors present their annual report on the affairs of the Group, together with the financial statements and independent auditors’ report, for the year ended 31 December 2007. 48723 MG Annual Report - Mid 17/4/08 11:42 Page 37
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Principal activities The principal activities of the Group continue to be the design and manufacture of bespoke flexible pipeline products and systems for the oil and gas industry.
The subsidiary and associated undertakings principally affecting the profits or net assets of the Group in the year are listed in note 13 to the financial statements.
The Company has operations in Newcastle UK, Panama City Florida USA, Niterói Brazil, Perth Australia, and offices in Rio de Janeiro Brazil, Houston USA and Calgary Canada, including a branch in Panama City USA.
Business review The Chief Executive’s Review which contains key performance indicators, principal risks and uncertainties, business performance and strategy is set out on pages 4 - 29 and is included in the Directors’ Report by reference.
Results and Dividends The results for the year and amounts transferred to reserves are detailed on pages 60 - 62. In accordance with the dividend policy set out in the Company’s Prospectus, the directors are not recommending the payment of a dividend for the financial year ended 31 December 2007.
Articles of Association The Company’s Articles may only be amended by special resolution at a general meeting of the shareholders. At the Annual General Meeting to be held on 19 May 2008, a resolution will be put to shareholders proposing the adoption of new Articles of Association. An explanation of the principal proposed changes can be found in the Appendix to the Notice of Meeting.
Capital Structure The Company’s authorised share capital as at 31 December 2007 was £1,500,000 divided into 150,000,000 ordinary shares of £0.01 each. The Company’s issued share capital as at that date and at 1 April 2008 was 99,579,750 ordinary shares of £0.01 each, each credited as fully paid.
The changes that took place to the share capital of the Company throughout the reporting period are set out below, divided between the periods before and after the Company’s shares were admitted to listing on the Official List of the UK Listing Authority and to trading on the London Stock Exchange on 1 May 2007 (Admission).
Before Admission The authorised share capital of the Company as at 1 January 2007 was £28,043 divided into 78,000 preferred ordinary shares of £0.01 each and 27,263 “A” ordinary shares of £1.00 each. 78,000 preferred ordinary shares of £0.01 each were issued to various Candover shareholders and 20,000 “A” ordinary shares of £1.00 each were issued to members of the management team of Wellstream.
On 27 March 2007 the authorised share capital of the Company was increased from £28,043 to £58,043 by the creation of 30,000 redeemable non-voting shares of £1.00 each. Such shares were issued fully paid on the same date to Candover Partners Limited. 48723 MG Annual Report - Mid 17/4/08 11:42 Page 38
38 | Directors’ Report continued
From and after Admission At a meeting of the Board held on 25 April 2007 it was resolved that, with effect from and conditional upon Admission, the Company would:
• issue 2,000 “A” ordinary shares of £1.00 each to Uberior Trading Limited, an indirect wholly owned subsidiary of HBOS, pursuant to the exercise in full of warrants issued by the Company to Uberior Trading Limited in connection with the Company’s financing arrangements;
• issue 1,523 “A” ordinary shares of £1.00 each to Sir Graham Hearne (a non-executive director), pursuant to the exercise in full of options issued by the Company to Sir Graham Hearne and;
• redeem the 30,000 redeemable non-voting shares of £1.00 each issued to Candover Partners Limited on 27 March 2007.
Pursuant to a resolution passed by the shareholders of the Company at an extraordinary general meeting of the Company held on 25 April 2007, with effect from and conditional upon Admission:
• each issued and unissued “A” ordinary share of £1.00 each was subdivided into 100 “A” ordinary shares of £0.01 each, resulting in a total of 2,352,300 “A” ordinary shares of £0.01 each in issue;
• the authorised share capital of the Company was increased from £58,043 (divided into 2,726,300 “A” ordinary shares of £0.01 each, 78,000 preferred ordinary shares of £0.01 each and 30,000 redeemable non-voting shares of £1.00 each) to £135,263 by the creation of 7,722,000 preferred ordinary shares of £0.01 each;
• 99 bonus preferred ordinary shares of £0.01 each were issued to the holders of the preferred ordinary shares of £0.01 each for each preferred ordinary share of £0.01 each held by members on the day immediately prior to Admission, such bonus issue funded by the capitalisation of amounts standing to the credit of the Company’s share premium account, resulting in a total of 7,800,000 preferred ordinary shares of £0.01 each in issue;
• the issued and unissued “A” ordinary shares of £0.01 each and the issued and unissued preferred ordinary shares of £0.01 each were re-designated as ordinary shares of £0.01 each, resulting in a total of 10,152,300 ordinary shares of £0.01 each in issue;
• the authorised share capital of the Company was increased from £135,263 (divided into 10,526,300 ordinary shares of £0.01 each and 30,000 redeemable non-voting shares of £1.00 each) to £1,530,000 by the creation of 139,473,700 ordinary shares of £0.01 each;
• 6.5 bonus ordinary shares of £0.01 each were issued to the holders of the ordinary shares of £0.01 each for each ordinary share of £0.01 each held at such time, such bonus issue funded by the capitalisation of amounts standing to the credit of the Company’s share premium account; and
• all the authorised redeemable non-voting shares of £1.00 each were cancelled.
Upon Admission, on 1 May 2007, the Company’s ordinary shares were admitted to the Official List of the UK Listing Authority and to trading on the London Stock Exchange. The global offer comprised 67,037,500 ordinary shares of £0.01 each, of which 23,437,500 new ordinary shares of £0.01 each were issued by the Company and 43,600,000 were sold by existing shareholders.
The changes to the authorised and issued share capital of the Company up to 31 December 2007 are also set out in note 23 to the financial statements.
Resolutions relating to the Company’s share capital being proposed at the Annual General Meeting are set out in the Notice of Meeting. Further details are given in the accompanying letter from the Chairman.
The rights and obligations attaching to the Company’s ordinary shares are set out in the Company’s Articles, copies of which can be obtained from Companies House in the UK or by writing to the Company Secretary. 48723 MG Annual Report - Mid 17/4/08 11:42 Page 39
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There are no restrictions on transfer or voting of securities in the Company and there are no agreements known to the Company which might result in such restrictions. There are no shareholders carrying special rights with regard to control of the Company.
At an extraordinary general meeting of the Company on 25 April 2007, the Company was authorised, with effect from and conditional upon Admission, to purchase up to 9,957,975 of its own shares at a price between the nominal value and 105 per cent of the market price. The resolutions being proposed at the Annual General Meeting include a resolution to renew this authority.
Significant Agreements - Change of Control The following significant commercial agreements contain certain termination and other rights for our counterparties upon a change of control of the Company.
All Petrobras contracts follow their standard terms and conditions which provide for rights on a change of control. The following are the current significant contracts;
• Flowlines and risers for Marlim Sul Module 2 in excess of £40m
• Water injection and gas lift flowlines for Marlim Leste in excess of £40m
• Flexible risers and flowlines for the Campos Basin in excess of £50m
All the Company’s share schemes have change of control provisions.
The Company’s banking arrangements, including the £85m revolving facility and the debenture, have change of control provisions.
There are no agreements between the Company or directors or employees which provide for compensation for loss of office or employment that occurs because of a takeover bid. 48723 MG Annual Report - Mid 17/4/08 11:42 Page 40
40 | Directors’ Report continued
Directors The directors, who served throughout the year and since except as noted, were as follows:
John Kennedy appointed 8 March 2003 Francisco Gros appointed 19 March 2007 Executive Chairman and member of the Independent non-executive director, Chairman of the Nomination Committee Remuneration Committee and member of the Gordon Chapman appointed 13 January 2003 Nomination Committee Chief Executive Officer (CEO) Neil Gaskell appointed 19 March 2007 Chris Braithwaite appointed 27 August 2004 Independent non-executive director and Chairman of Chief Operating Officer (COO) the Audit Committee Andrew Turk appointed 19 March 2003 Pat Murray appointed 10 July 2007 Finance Director (who left the Company on Independent non-executive director, member of the 31 December 2007) Remuneration and Audit Committees Sir Graham Hearne appointed 18 July 2003 Senior Independent non-executive Director, Nils Stoesser appointed 13 January 2003 Chairman of the Nomination Committee and Non-executive director and member of the member of the Audit and Remuneration Committees Audit Committee Chris Gill appointed 7 January 2008 Marek Gumienny appointed 18 March 2003 Finance Director (FD) Non-executive director (resigned on 19 March 2007)
Election and re-election of directors In accordance with the Company’s Articles of Association, all of the Board will retire and offer themselves for election or re-election.
Three non-executive directors were appointed this year. Pat Murray appointed July 2007, Francisco Gros appointed March 2007 and Neil Gaskell appointed March 2007, all retire at the next Annual General Meeting and, being eligible, offer themselves for election. Sir Graham Hearne, Senior Independent non-executive Director and Nils Stoesser non- executive director who have both held office for more than three years retire in accordance with the requirements of the Company’s Articles of Association and being eligible, offer themselves for re-election. The Board believes that all of the non-executive directors offering themselves for election or re-election should be elected to their non-executive roles because of the contribution they have made to the success of the Company and because their experience is valuable for the future growth of the Company.
Chris Gill, who joined the Company on 7 January 2008 as Finance Director also retires and offers himself for election.
John Kennedy Chairman, Gordon Chapman CEO and Chris Braithwaite COO who have held office for more than three years, all retire in accordance with the Articles and being eligible offer themselves for re-election.
All directors who are due for election or re-election continue to perform effectively in terms of contribution, time commitment and commitment to the relevant Committees of the Board.
The rules regarding the appointment and replacement of directors are set out in the Articles of the Company. Directors are appointed by the Company by ordinary resolution at a general meeting of holders of ordinary shares or by the Board on the recommendation of the Nomination Committee. The Corporate Governance Report sets out further details on page 44.
Powers of the Directors The directors are responsible for managing the business of the Company and may exercise all the powers of the Company subject to the provisions of relevant statutes, any directions given by special resolution and the Company’s Memorandum and Articles. The Articles, for example, contain specific provisions and restrictions concerning the Company’s power to borrow money. Powers relating to the issuing of shares and power to purchase the Company’s own shares are also included in the Articles (subject to relevant statutory provisions) and the resolutions being proposed at the Annual General Meeting, as set out in the Notice of Meeting, include resolutions to renew such authorities. The Corporate Governance Report sets out details of matters reserved to the Board on page 45.
For fuller biographies of all the directors please see pages 34 - 35 48723 MG Annual Report - Mid 17/4/08 11:42 Page 41
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Directors’ interests The directors who held office at 31 December 2007 had the following interests in the shares and debentures of Wellstream Holdings PLC:
Description 31 December 2007 1st January 2007(1) Description of shares or or subsequent of shares debentures date of appointment
Name of Director Beneficial Non-Beneficial Beneficial Non-Beneficial John Kennedy* Ord 1p shares 4,078,125 - 5,000 Ord £1.00 shares - Gordon Chapman Ord 1p shares 2,500,000 - 5,000 Ord £1.00 shares - Chris Braithwaite Ord 1p shares 2,000,000 - 4,000 Ord £1.00 shares - Andrew Turk Ord 1p shares 1,250,000 - 2,500 Ord £1.00 shares - Sir Graham Hearne Ord 1p shares 692,250 - - - - Neil Gaskell Ord 1p shares 28,125 - - - -
*Held by Amko Energy SA.
No changes in the interests of directors took place between 31 December 2007 and the date of this report.
Note (1): The share capital of the Company since 31 December 2006 has been reorganised and the figures are not comparable with their current holdings.
Directors’ share options None of the directors currently hold share options in the Company except under the Performance Share Plan. Details of share option grants are included in the Directors’ Remuneration Report on page 56.
Directors’ indemnities The directors have the benefit of qualifying third party indemnity provisions.
Supplier payment policy The Company’s policy, which is also applied by the Group, is to settle terms of payment with suppliers when agreeing the terms of each transaction, ensure that suppliers are made aware of the terms of payment and abide by the terms of payment. Trade creditors of the Group at 31 December 2007 were equivalent to 45 (2006: 50) days’ purchases, based on the average daily amount invoiced by suppliers during the year.
Charitable and political contributions During the year the Group made charitable donations of £35,000 (2006: £5,000) principally to local charities serving the communities in which the Group operates.
No political donations were made or EU political expenditure incurred during the year. 48723 MG Annual Report - Mid 17/4/08 11:42 Page 42
42 | Directors’ Report continued
Substantial shareholdings On 26 March 2008 the Company had been notified, in accordance with the Disclosure and Transparency Rules, of the following interests in the ordinary share capital of the Company.
Name of Holder Number of Shares Percentage Nature of Holding Candover Shareholders 13,771,250 13.8% Direct Legal and General Group PLC 7,735,046 7.7% Direct 3,552,970 Indirect 4,182,076 Janus Capital Management LLC 6,736,698 6.8% Direct John Kennedy 4,078,125 4.1% Indirect Aegon UK Group of Companies 3,879,951 3.9% Direct Schroders PLC 3,847,025 3.9% Direct
Disabled employees Applications for employment by disabled persons are always fully considered, bearing in mind the aptitudes of the applicant concerned. In the event of members of staff becoming disabled every effort is made to ensure that their employment with the Group continues and that appropriate training is arranged. It is the policy of the Group that the training, career development and promotion of disabled persons should, as far as possible, be identical to that of other employees.
Employee consultation The Group places considerable value on the involvement of its employees and has continued to keep them informed on matters affecting them as employees and on the various factors affecting the performance of the Group. This is achieved through formal and informal meetings. Employee representatives are consulted regularly on a wide range of matters affecting their current and future interests.
Environment and social responsibility The Company recognises that it is part of the wider community and strives to act responsibly to promote the interests of the community. Further details of the Company’s approach to these issues is given on pages 17 and 29 of the Chief Executive’s Review.
Employee share plans The Company is keen to promote employee involvement in the success and growth of the Company. A Sharesave plan was implemented soon after IPO and was well received with over 75% of staff in the UK participating. It is open to all UK employees who can elect to save up to £250pm for 3 or 5 years and may then use the accumulated capital and interest to buy shares at the discounted price fixed at the beginning of the savings period.
Performance Share Plan During the year a Performance Share Plan was set up as part of performance related pay. Executive directors and senior employees were granted nominal cost share options which vest over a three year period when certain performance conditions set by the Remuneration Committee are met. Further details are given in the Directors’ Remuneration Report.
Neither scheme has issued any shares.
Research and development Further details are provided in the Chief Executive’s Review on page 22.
Financial Instruments Information about the use by the Company and its subsidiaries of financial instruments is given in note 22. 48723 MG Annual Report - Mid 17/4/08 11:42 Page 43
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Special business A resolution will be placed before the Annual General Meeting to amend the Articles of the Company to take account of the Companies Act 2006 requirements relating to conflicts of interests of the directors. An explanation of the resolutions is attached to the Notice of Meeting on page 94.
Auditors Each of the persons who is a director at the date of this annual report confirms that:
• so far as the director is aware, there is no relevant audit information of which the Company’s auditors are unaware; and
• the director has taken all the steps that he/she ought to have taken as a director in order to make himself/herself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information.
This confirmation is given and should be interpreted in accordance with the provisions of s234ZA of the Companies Act 1985.
Deloitte & Touche LLP have expressed their willingness to continue in office as auditors and a resolution to reappoint them will be proposed at the forthcoming Annual General Meeting.
Wellstream Holdings PLC By order of the Board,
Rob Lamb Company Secretary 1 April 2008 48723 MG Annual Report - Mid 17/4/08 11:42 Page 44
44 | Corporate Governance Report
Corporate Governance Report The Company is committed to the principles of corporate governance contained in the Combined Code on Corporate Governance issued by the Financial Reporting Council in June 2006 (the Code), for which the Board is accountable to shareholders.
Statement of compliance with the Combined Code The Company’s shares were admitted to listing on the Official List of the UK Listing Authority and to trading on the London Stock Exchange on 1 May 2007 (Admission). The Financial Services Authority requires listed companies to disclose how they have applied, and complied with, the provisions set out in section 1 of the Code. From Admission until September 2007, when the Company entered the FTSE 250, the Company was “a smaller listed Company” for the purposes of the Combined Code and so certain provisions of the Combined Code did not apply. Subject to this since Admission the Company has complied fully with the provisions set out in section 1 of the Code, except that one non-independent non-executive director remains a member of the Audit Committee contrary to C.3.1 of the Combined Code in order to provide continuity for the Committee after Admission. This corporate governance statement sets out details of how the Company has applied the provisions of section 1 of the Code since Admission. The Board will carry out an evaluation of the effectiveness of the Board and of the effectiveness of the system of internal controls on an annual basis but as the Company has only recently listed neither was completed during 2007 contrary to A.6 and C.2.1 of the Combined Code.
The Board Board composition and independence At the date of this report, the Board of Wellstream Holdings PLC consists of the executive Chairman, three executive directors and five non-executive directors. The roles of Chairman and Chief Executive Officer are separate and each has clearly defined responsibilities.
The Chairman’s main role is to lead the Board, ensuring its effectiveness in all aspects of its role and setting its agenda. The Chairman is also responsible for ensuring that the directors receive accurate, timely and clear information; a process that will be reviewed annually. The Chairman also ensures that the Company maintains clear communication with shareholders, facilitates the effective contribution of non-executive directors in particular and ensures constructive relations between executive and non-executive directors. The Chairman devotes two days a week to the business of the Company in an executive role, assisting in framing and developing strategy. Following its review, the Nomination Committee is satisfied that the Chairman is able to dedicate significant time to the business and that there has been no change in the level of his commitments since Admission. The Chief Executive Officer is responsible for implementing Group strategy and for managing the Group.
The Board aims to embody an appropriate balance of skills and experience to support the Company’s strategy and performance and has consequently appointed experienced non-executive directors who bring to the Company a wealth of skills and knowledge of the oil and gas industry. The non-executive directors represent the majority of the board. Of the five non-executive directors, Neil Gaskell, Francisco Gros, Sir Graham Hearne and Pat Murray are considered to be independent non-executive directors. 48723 MG Annual Report - Mid 17/4/08 11:42 Page 45
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The Board is satisfied that there are no relationships or circumstances which are likely to affect, or could appear to affect, the judgement of these directors. Nils Stoesser, also a non-executive director, is not considered by the Board to be independent as he represents Candover Investments plc, a significant shareholder of the Company. Sir Graham Hearne is recognised as the Senior Independent non-executive Director and is available to shareholders should they have concerns that cannot be resolved through normal channels with the Chairman, Chief Executive Officer or Finance Director. The independent non- executive directors will meet annually without the Chairman present to review the performance of the Chairman.
The non-executive directors are entitled to a fee for their services. They are not entitled to participate in any of the Company’s share schemes and are not eligible to join the Company’s pension scheme. Other than their fees, no non-executive director received remuneration from the Company during the year other than Sir Graham Hearne who made a gain of £3,624,616 at Admission upon exercise of options over shares in the Company granted by the Company before Admission in recognition of his contribution to the Company. The terms and conditions of appointment of the non-executive directors are available for inspection at the Annual General Meeting or by any person during normal business hours at the Company’s registered office.
The role of the Board The Board approved at its meeting in April 2007 a schedule of matters specifically reserved for the Board’s attention. The types of decisions taken by the Board include the approval of the Company’s strategy and annual budget and financial statements, acquisitions or disposals, documents sent to the Company’s shareholders, changes in capital structure, dividends and matters relating to its committees. Operational decisions are delegated to the Company’s management.
The Board holds ultimate responsibility for the management and success of the Company, developing strategy, scrutinising performance and maintaining internal controls and corporate governance. Responsibility for the day-to-day management of the Group is delegated to the Chief Executive Officer. Further, the Chief Operating Officer is responsible for managing the operating functions of the Group.
All directors are to be appointed via the recommendation of the Nomination Committee chaired by the Senior Independent non-executive Director, Sir Graham Hearne. Directors must retire and offer themselves for re-election by shareholders every three years in accordance with the Articles of the Company.
All directors joining the Company benefit from a tailored induction process familiarising them with the Company and updating their existing skills based on reports to the Board, factory visits and briefings from advisers. The Board intends to conduct annual performance appraisals of the effectiveness of the Board. No evaluation was carried out in the period from Admission to 31 December 2007.
The Board holds meetings on a regular basis, at least five per year and additionally for specific purposes as and when required. There were eight Board meetings in the period from Admission to 31 December 2007. Five meetings are scheduled in 2008. The number of meetings of the Board and of its committees held during the year is given below, together with the attendance details of each director or Committee member:
Number of meetings during the Board Audit Committee Remuneration Committee Nomination Committee year ended 31 December 2007 14 5 5 3
John Kennedy 13 1 1 3 Gordon Chapman 13 1 Chris Braithwaite 12 Andrew Turk 11 1 Sir Graham Hearne 13 4 4 3 Francisco Gros 10 4 3 Neil Gaskell 10 4 Nils Stoesser 13 5 1 Pat Murray 6 2 4 Marek Gumienny 2 1 48723 MG Annual Report - Mid 17/4/08 11:42 Page 46
46 | Corporate Governance Report continued
Committees of the Board The Board formally delegates certain of its responsibilities to committees by way of written terms of reference. The terms of reference for the Board’s committees were posted to the Company’s website on 10 December 2007. Details of each committee, its membership and its terms of reference are summarised below.
Audit Committee Prior to 19 March 2007, the Committee comprised John Kennedy, Andrew Turk, Marek Gumienny and Nils Stoesser. On 19 March 2007 the Board approved new terms of reference for the Committee and appointed Neil Gaskell as chairman together with Sir Graham Hearne in replacement for John Kennedy and Andrew Turk. Marek Gumienny also resigned on 19 March 2007. On 10 July 2007, Pat Murray was appointed as an additional member. The current members of the Committee therefore are Neil Gaskell (chairman of the Committee), Sir Graham Hearne, Pat Murray and Nils Stoesser. All members of the Committee are financially literate non-executive directors and a majority are considered independent. Neil Gaskell is considered to have “recent and relevant financial experience”.
The Committee met five times in the year, principally to review and approve the financial statements, approve its terms of reference, review the appointment of the auditors and review matters relating to risk control. Further details about the Committee are included in the Audit Committee Report on page 49.
Remuneration Committee From Admission to 10 July 2007, the Committee comprised Francisco Gros (chairman of the Committee) and Sir Graham Hearne, both independent non-executive directors who were appointed on 19 March 2007. Pat Murray, an independent non-executive director, was appointed to the Committee on 10 July 2007. Pre IPO, the Committee members were John Kennedy, Marek Gumienny, Nils Stoesser and Gordon Chapman. They ceased to be members of the Committee 19 March 2007.
The Committee met five times during the year. Its principal activity is to review and make recommendations on the remuneration of the executive directors. During the year the Committee approved its terms of reference and approved the setting up of the Company’s share plans and bonus arrangements based on performance targets agreed by the Committee. Further details about the Committee and details of the remuneration of directors are included in the Directors’ Remuneration Report on page 51.
Nomination Committee The Nomination Committee is responsible for appointments to the Board and reviewing the Board’s evaluation processes. This includes the re-appointment of non-executive directors at the conclusion of their specified terms of office and the re-election by shareholders of any director under the retirement by rotation provisions of the Company’s Articles of Association. The Committee also considers plans that are in place for succession planning, appointments of senior management and reviews the balance of skills and experience within the Company.
The Committee was appointed by the Board on 19 March 2007 and comprises Sir Graham Hearne (chairman of the Committee), John Kennedy and Francisco Gros. A majority of the Committee are independent non-executive directors.
The Committee met three times during the period from Admission to 31 December 2007. It reviewed and approved the appointment of Pat Murray and Chris Gill as well as a senior staff appointment. 48723 MG Annual Report - Mid 17/4/08 11:42 Page 47
Wellstream Holdings PLC Annual Report & Accounts 2007 | 47
Accountability and Audit Internal control The Board is responsible for the Group’s system of internal control and for reviewing its effectiveness. Such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss.
To be in compliance with provision C.2.1 of the Combined Code the Board should perform a specific review of the effectiveness of internal controls for the purpose of the Annual Report. It has not formally completed this review but will do so in future years. In so doing, the Board will receive a report from the Audit Committee which addresses the results of its review of the risk assessment process to the Board. The Board will then evaluate the effectiveness of the system of internal control.
The key procedures, which the directors have established with a view to providing effective internal control, are as follows:
Indication of business risks Prior to the Company’s shares being admitted to listing on the Official List of the UK Listings Authority and to trading on the London Stock Exchange, a comprehensive risk review was undertaken. During the period since the Admission, the Company has supplemented the processes used to identify and manage key risks to the business by establishing an internal audit function and instituting a formal process of recording key business risks. These activities enhance those that are already an integral part of the business’ internal control environment such as Strategic Planning, the appointment of Senior Managers, the regular reporting of performance and control over capital expenditure and evaluation of acquisitions.
The process by which key business risks are recorded and reported against was formalised in the fourth quarter of 2007, it will be monitored and maintained by an executive director who is responsible at Board level for these matters. Regular reviews and periodic updates with senior executives and management are carried out. This process considers the significant risks facing the Group including those risks arising from social, environmental and ethical issues and undertakes risk audits. In identifying significant risks to which the Group is exposed, it reviews the results of any relevant internal audit work and agrees mitigating actions, when possible.
Quality and integrity of personnel The integrity and competence of personnel is ensured through high recruitment standards and subsequent training courses. High quality personnel are seen as an essential part of the control environment.
Management Structure The Board has overall responsibility for the Group. Each executive director has been given responsibility for specific aspects of the Group’s affairs. A clearly defined organisation structure exists within which individual responsibilities are identified and can be monitored. The management of the Group as a whole is delegated to the Chief Executive Officer and the executive directors. The conduct of individual businesses is delegated to the local executive management teams. These teams are accountable for the conduct and performance of their businesses within the agreed business strategy. They have full authority to act subject to the reserved powers and sanctioning limits laid down by the Board and to Group policies and guidelines. 48723 MG Annual Report - Mid 17/4/08 11:42 Page 48
48 | Corporate Governance Report continued
Internal Audit The Group established an internal audit function in September 2007. It has an agreed programme of activities to review compliance with procedures and assess the integrity of the control environment. Internal audit acts as a service to the business by assisting with the continuous improvement of controls and procedures. Actions are agreed in response to its recommendations and these are followed up by the Audit Committee to ensure that satisfactory control is maintained.
Budgetary Process A comprehensive budgeting system is in place, with annual budgets for all operating subsidiaries. The combined budget is subject to consideration and approval by the Board. Management information systems provide the directors with relevant and timely information required to monitor financial performance.
Investment appraisal Budgetary approval and defined authorisation levels regulate capital expenditure. As part of the budgetary process the Board considers proposals for research and development programmes.
Whistle Blowing Policy The Company has in place a whistle blowing policy by which concerns may be reported and investigated confidentially.
Through these processes the Board believes it had an appropriate system of internal controls in place throughout the period and that the enhanced control environment established during 2007 will allow compliance with provision C.2.1 of the Combined Code in 2008.
Relations with shareholders Dialogue with institutional shareholders Most shareholder contact is with the Chief Executive Officer and Finance Director, however the Chairman and the Senior Independent non-executive Director and other directors as appropriate maintain contact with major shareholders to understand their issues and concerns and are available for discussion with shareholders.
Constructive use of the AGM The Annual General Meeting is to be held on 19 May 2008, and shareholders are encouraged to attend and to raise areas of interest or concern to directors.
Regular reports are made to the Board concerning shareholder’s views and market expectations. Investor road shows have been carried out to brief analysts and shareholders on the Company’s activities and information is regularly posted to the website. 48723 MG Annual Report - Mid 17/4/08 11:42 Page 49
Wellstream Holdings PLC Annual Report & Accounts 2007 | 49
Audit Committee Report Summary of the role of the Audit Committee
Overview The Audit Committee arrangements that were in place prior to the IPO were revised in March 2007 to reflect those appropriate for a publicly quoted company. New Terms of Reference were approved and the executive directors who had been members were replaced by two independent non-executive directors among whom Neil Gaskell was appointed as Chairman. During the remainder of 2007, the Audit Committee ensured that steps were taken to establish the appropriate arrangements including all those required to meet the requirements of the Combined Code on Corporate Governance except that the composition of the Committee included Nils Stoesser who is a non-independent non-executive director because the Committee wished to benefit from his extensive prior experience on the Company’s Audit Committee. This report describes how the Audit Committee has carried out its work and discharged its responsibilities.
As reported in the Corporate Governance Report in this Annual Report, the Company joined the main List of the London Stock Exchange on 1 May 2007 when the Audit Committee comprised two independent non-executive directors and one non-independent non-executive director. A further independent non-executive director joined the Committee in July 2007. The names and qualifications of the members of Committee are given in the Corporate Governance Report on page 46 and in the directors’ biographies on pages 34 - 35. The Committee met five times during the year of which three meetings were after Admission and attendance is indicated in the table on page 45. The Audit Committee invites the Group Finance Director, the Internal Auditor, and senior representatives of the external auditors to attend all of its meetings. Other senior management are invited to attend as required for the Committee to discharge its duties.
Summary of the role of the Audit Committee The Audit Committee’s role is to assist the Board’s oversight of:
• the integrity of the Company’s financial statements
• the Company’s compliance with applicable legal and regulatory requirements
• the external auditor’s qualifications and independence
• the performance of the Company’s internal audit function, and of the external auditors
• the adequacy of the Company’s financial disclosure, and
• the effectiveness of the Company’s risk management and internal control systems.
During the year the principal activities of the Committee have been to:
• approve new Terms of Reference which are publicly available on the investor relations section of the Company’s website www.wellstream.com which will be reviewed annually in future
• approve the terms of the external auditor’s appointment, audit plan and remuneration for 2007
• authorise and oversee the establishment of an Internal Audit department which started operation in September 2007 with a programme of work approved by the Committee
• considered the output from the group-wide process used to identify, evaluate and mitigate risks and agreed with management an enhanced group risk management process
• review the unaudited interim report for the first half of 2007, issued in September 2007 and monitored compliance with IFRS reporting standards. 48723 MG Annual Report - Mid 17/4/08 11:42 Page 50
50 | Audit Committee Report continued
The Audit Committee evaluates and makes recommendations to the Board about the appropriateness of the accounting policies and practices, areas of judgement, compliance with Accounting Standards, stock exchange and legal requirements and the results of the external audit. It reviews the unaudited half yearly and the annual financial statements and makes recommendations on specific actions or decisions (including formal adoption of the financial statements and reports) that the Board should consider in order to maintain the integrity of the financial statements. From time to time the Committee may also review other statements released to the stock exchange, shareholders and the financial community.
The Audit Committee manages the relationship with external auditors on behalf of the Board. It proposes to the Board the appointment, compensation and retention of the external auditors and oversees their work, reviews and monitors their independence, objectivity and performance.
The Audit Committee has also established and monitors the implementation of policies related to all non-audit services that the external auditors provide. The Committee noted that non-audit fees excluding Admission-related fees were £328,000 compared with £172,000 audit and other fees pursuant to legislation. While this total exceeds that which the Committee would prefer to target, £170,000 of the non-audit fees related to remuneration consultancy advice generated prior to and as a result of the IPO. In addition, IPO- related fees amounted to £1,050,000. The Committee concluded that the independence of the external auditors continues to be maintained.
The Audit Committee reviews and assesses the remit of the internal audit function. It monitors and discusses whether the risk management and internal control system is effective, including any significant matters arising from the audits which are discussed with, as appropriate, the Internal Auditor, management or the external auditors, Deloitte & Touche LLP. It monitors the qualifications, expertise, resources and independence of the Internal Auditor and will assess each year the Internal Auditor’s performance and effectiveness.
The Audit Committee reports its findings to the Board, identifying any matters in respect of which it considers that action or improvement is needed, and makes recommendations as to the steps to be taken.
The Committee is responsible for monitoring the implementation of the Group’s Whistleblowing Policy enabling employees to submit concerns confidentially or anonymously, and to ensure independent investigation with follow-up action where suitable. A copy of this policy may be viewed on the Company’s website www.wellstream.com.
The Committee is satisfied with the results of its activities regarding the external audit and recommend to the Board that the external auditors are re-appointed. The Committee has concluded it has acted in accordance with its Terms of Reference and ensured the independence and objectivity of the external auditors. The Chairman of the Audit Committee will be available at the Annual General Meeting to answer any questions about the work of the Committee.
Neil Gaskell Chairman of the Audit Committee 1 April 2008 48723 MG Annual Report - Mid 17/4/08 11:42 Page 51
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Directors’ Remuneration Report Introduction
This report has been prepared in accordance with Schedule 7A to the Companies Act 1985 (“the Act”). The report also meets the relevant requirements of the Listing Rules of the Financial Services Authority and describes how the Board has applied the principles relating to directors’ remuneration. As required by the Act, a resolution to approve the report will be proposed at the Annual General Meeting of the Company at which the financial statements will be approved.
The Act requires the auditors to report to the Company’s members on certain parts of the Directors’ Remuneration Report and to state whether in their opinion those parts of the report have been properly prepared in accordance with the Companies Act 1985. The report has therefore been divided into separate sections for audited and unaudited information.
Unaudited information Remuneration Committee The Company has established a Remuneration Committee which is constituted in accordance with the recommendations of the Combined Code. The members of the Committee since Admission were Chairman Francisco Gros and Sir Graham Hearne; and Pat Murray who was appointed on 10 July 2007. They are all independent non-executive directors. Pre IPO, the Committee members were John Kennedy, Marek Gumienny, Nils Stoesser and Gordon Chapman. They ceased to be members of the Committee on 19 March 2007.
None of the Committee has any personal financial interest (other than as shareholders), conflicts of interests arising from cross-directorships or day-to-day involvement in running the business. The Committee makes recommendations to the Board. No director plays a part in any discussion about his or her own remuneration. Sir Graham Hearne was awarded share options pre IPO, details of which are given on page 55.
The Committee appointed Deloitte & Touche LLP executive remuneration consulting team to provide advice on market practice and current trends in directors’ remuneration and benchmarking data. Deloitte & Touche LLP are the Company’s auditors. The Audit Committee has considered the independence of the auditors in relation to the provision of non-audit services to the Company and has concluded that there is no conflict with its policy set out further in the Audit Committee Report.
The Board approved the Committee’s Terms of Reference on 19 March 2007 and a revision approved on 14 September 2007. The Terms of Reference are available to view on the Company’s website www.wellstream.com
Remuneration policy for the executive directors Executive remuneration packages are designed to attract, motivate and retain directors of the high calibre needed to maintain the Group’s position as a market leader and to reward them for achieving appropriate levels of performance and for enhancing value to shareholders. The performance measurement of the executive directors and key members of senior management and the determination of their annual remuneration package are undertaken by the Committee.
There are five main elements of the remuneration package for executive directors and senior management:
• basic annual salary
• benefits-in-kind
• annual bonus payments which cannot exceed 100% of basic salary
• Performance Share Plan awards, and
• pension arrangements.
Executive directors are entitled to accept appointments outside the Company providing that the Chairman’s permission is sought. 48723 MG Annual Report - Mid 17/4/08 11:42 Page 52
52 | Directors’ Remuneration Report continued
Basic salary An executive director’s basic salary is reviewed by the Committee prior to the beginning of each year and when an individual changes position or responsibility. In deciding appropriate levels, the Committee considers the Group as a whole and relies on objective research which gives up-to-date information. Benchmarking data was reviewed which included an all sector analysis of the FTSE 250, other published survey data and comparator groups within the Company’s sector. Executive directors’ contracts of service which include details of remuneration will be available for inspection at the Annual General Meeting.
Benefits-in-kind The executive directors receive certain benefits-in-kind, principally a car and private medical insurance.
Annual bonus payments The Committee establishes the objectives that must be met for each financial year if a cash bonus is to be paid. In setting appropriate bonus parameters the Committee refers to market practice. Bonus targets for 2007 were based on a combination of EBIT and Backlog targets. The maximum performance-related bonus that can be paid is 100% of basic annual salary for the CEO and 80% of basic salary for the COO and FD. Maximum bonus payments for the year ended 31 December 2007 were paid as all targets were exceeded.
Performance Share Plan Following approval at the Extraordinary General Meeting on 11 April 2007, the Company established a new Performance Share Plan (PSP). This plan was designed to align the interests of shareholders and directors by means of performance targets. The Committee has responsibility for supervising the scheme and the grant of awards subject to performance conditions under its terms.
The performance criterion that must be met requires the Company’s earnings per share exceed certain targets set by the Remuneration Committee over a three year period. Thereafter the option may be exercised for the remaining part of its five year life without further test.
The Performance Share Plan rules permit a maximum of 200% of salary to be available for an award in exceptional circumstances at the discretion of the Committee.
Save As You Earn Share Scheme (SAYE) The Company also operates an SAYE scheme where options may be granted at up to a 20% discount to market value at date of grant. The executive directors are not eligible to participate in this scheme.
Pension arrangements A sum is paid to money purchase (defined contribution) arrangements for the executive directors and life cover is also provided. 48723 MG Annual Report - Mid 17/4/08 11:42 Page 53
Wellstream Holdings PLC Annual Report & Accounts 2007 | 53
Performance graph The following graph shows the Company’s performance, measured by total shareholder return, compared with the performance of the FTSE Mid 250 (excluding investment trusts) Index also measured by total shareholder return. The graph is based on average monthly data from the first month post IPO from 1 June 2007 to 31 December 2007.
300
250
200
150
100
50
0 1/6/07 1/7/07 1/8/07 1/9/07 1/10/07 1/11/07 1/12/07 31/12/07 Wellstream FTSE Mid 250 EXC Investment Trusts
Wellstream is in the FTSE 250 Index. Directors’ Contracts It is the Company’s policy that executive directors should have contracts with an indefinite term providing for a maximum of one year’s notice by either party. Pat Murray, Francisco Gros and Neil Gaskell being all non-executive directors appointed this year are proposed for election at the Annual General Meeting. Sir Graham Hearne and Nils Stoesser, non-executive directors retire in accordance with the Articles of Association and being eligible, offer themselves for re-election. No non-executive director has a service contract. Chris Gill Finance Director, who joined the Company on 7 January 2008 is proposed for election at the Annual General Meeting in May. He has a service contract which contains one year’s notice period. John Kennedy Chairman has a fixed term three year contract. In view of the IPO and the requirements of the Articles all directors will resign and submit themselves for election or re-election at the Annual General Meeting. All of the contracts are available for inspection before and during the Annual General Meeting. The details of the executive directors’ contracts are summarised in the table below:
Name of director Date of contract Notice period
John Kennedy 11 April 2007 12 months
Gordon Chapman 11 April 2007 12 months
Chris Braithwaite 11 April 2007 12 months
Andrew Turk 11 April 2007 12 months
Chris Gill 7 January 2008 12 months 48723 MG Annual Report - Mid 17/4/08 11:42 Page 54
54 | Directors’ Remuneration Report continued
Non-executive directors All non-executive directors have specific terms of engagement and their remuneration is determined by the Board within the limits set by the Articles of Association and based on independent surveys of fees paid to non-executive directors of similar companies. The basic fee paid to Sir Graham Hearne is £60,000 pa as the Senior Independent non-executive Director. Each of the other non-executive directors is paid a fee of £50,000 pa. Marek Gumienny who resigned in March 2007 was paid fees pro-rata at the rate of $30,000 pa.
The non-executive directors receive further fees for additional work performed for the Company in respect of chairing of the Remuneration Committee, Nomination Committee and Audit Committee. The additional fees paid during the year were at a rate of £5,000 pa for chairing of a committee. Non-executive directors cannot participate in any of the Company’s share schemes and are not eligible to join the Company’s pension scheme.
Audited information Aggregate directors’ remuneration
The total amounts for directors’ remuneration were as follows:
2007 2006 ££
Emoluments 1,810,236 1,184,854 Compensation for loss of office 230,000 - Gains on exercise of share options 3,624,616 - Money purchase pension contributions 90,173 52,517
5,755,025 1,237,371 48723 MG Annual Report - Mid 17/4/08 11:42 Page 55
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Directors’ emoluments and compensation
Fees/Basic Benefits Annual Compensation 2007 2006 salary in kind bonuses for loss total total of office Name of director £ £ £ £ £ £
Executive
John Kennedy 181,221 - - - 181,221 143,664 Gordon Chapman 295,667 6,308 330,000 - 631,975 434,755 Chris Braithwaite 229,667 2,741 184,000 - 416,408 327,759 Andrew Turk(1) 201,515 6,864 160,000 230,000 598,379 229,654
Non Executive
Sir Graham Hearne 50,065 - - - 50,065 16,341 Pat Murray 25,000 - - - 25,000 - Neil Gaskell 55,000 - - - 55,000 - Nils Stoesser 38,319 - - - 38,319 16,341 Francisco Gros 38,769 - - - 38,769 - Marek Gumienny 5,100 - - - 5,100 16,341
Aggregate emoluments 1,120,323 15,913 674,000 230,000 2,040,236 1,184,854
Fees to third parties ------
Note (1) Andrew Turk was paid compensation for loss of office, being one year’s salary and one third of his Performance Share Plan award.
Chairman’s award John Kennedy (Chairman) is paid a fee of £200,000 per annum and is eligible to receive an annual discretionary allocation of shares over a three year period from the date of Admission. At the discretion of the Remuneration Committee, he may be awarded each year a number of Wellstream shares calculated by dividing up to £250,000 by the share price on Admission (£3.20). For each annual award, 80% is issued to him on or within 30 days of the anniversary of the date of Admission (1 May) of the relevant year. The remaining 20% of the first and second awards, and all of the third award, are to be issued to him on or within 30 days of the third anniversary of the date of Admission (1 May 2010) provided he remains in employment with the Company at that date. If his employment terminates prior to that date, the Remuneration Committee may determine the amount of deferred allocation to be issued to him, if any. John Kennedy is not a member of any Wellstream pension scheme.
Name of Value as at No of shares Vesting on Balance of Vesting date Vesting Director date of 80% of award Anniversary award for balance criterion Admission of Admission of award
John £3.20 per 62,500 1 May 2008 15,625 1 May 2010 Remaining in Kennedy share service at relevant vesting date
Sir Graham Hearne received share options pre-Admission over 1,523 A ordinary shares of £1.00 each with an exercise price of £1.00 each. These options were exercised on Admission and a gain made of £3,624,616. 48723 MG Annual Report - Mid 17/4/08 11:42 Page 56
56 | Directors’ Remuneration Report continued
Directors’ Performance Share Plan
No of shares Value at date Performance Vesting Lapsed Exercise 30 August 2007 period criteria price Gordon Chapman 79,327 £5.20 1 Jan 2007 - Exceed - 1p per share per share 31 Dec 2009 EPS targets Chris Braithwaite 44,230 £5.20 1 Jan 2007 - Exceed - 1p per share per share 31 Dec 2009 EPS targets Andrew Turk 38,461 £5.20 1 Jan 2007 - Exceed 25,641 1p per share per share 31 Dec 2009 EPS targets
Directors’ pension entitlements The Company paid a contribution to the pension arrangements of the executive directors, Gordon Chapman, Chris Braithwaite and Andrew Turk as follows:
2007 2006 Gordon Chapman 50,667 20,267 Chris Braithwaite 21,666 19,000 Andrew Turk 17,840 13,250 Total 90,173 52,517
Approval This report was approved by the Board of Directors on 1 April 2008 and signed on its behalf by:
Francisco Gros Chairman of the Remuneration Committee 1 April 2008 48723 MG Annual Report - Mid 17/4/08 11:42 Page 57
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Statement of Directors’ Responsibilities The directors are responsible for preparing the Annual Report and the financial statements.
Statement of Directors’ Responsibilities The directors are responsible for preparing the Annual Report and the financial statements. The directors are required to prepare financial statements for the Group in accordance with International Financial Reporting Standards (IFRS) and have also elected to prepare financial statements for the Company in accordance with IFRS. Company law requires the directors to prepare such financial statements in accordance with IFRS, the Companies Act 1985 and Article 4 of the IAS Regulation.
International Accounting Standard 1 requires that financial statements present fairly for each financial year the Company’s financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board’s “Framework for the preparation and Presentation of Financial Statements”. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable International Financial Reporting Standards. Directors are also required to:
• properly select and apply accounting policies;
• present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; and
• provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance.
The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company, for safeguarding the assets, for taking reasonable steps for the prevention and detection of fraud and other irregularities and for the preparation of a Directors’ Report and Directors’ Remuneration Report which comply with the requirements of the Companies Act 1985.
The directors are responsible for the maintenance and integrity of the company website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements differs from legislation in other jurisdictions. 48723 MG Annual Report - Mid 17/4/08 11:42 Page 58
58 | Independent auditors’ report to the members of Wellstream Holdings PLC
Independent auditors’ report to the members of Wellstream Holdings PLC We have audited the group and parent company financial statements (the “financial statements”) of Wellstream Holdings PLC for the year ended 31 December 2007 which comprise the Group Income Statement, the Group and Parent Company Statements of Recognised Income and Expense, the Group and Parent Company Balance Sheets, the Group and Parent Company Cash Flow Statements, and the related notes 1 to 30. These financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors’ Remuneration Report that is described as having been audited.
This report is made solely to the company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditors The directors’ responsibilities for preparing the Annual Report, the Directors’ Remuneration Report and the financial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the Statement of Directors’ Responsibilities.
Our responsibility is to audit the financial statements and the part of the Directors’ Remuneration Report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).
We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the group financial statements, Article 4 of the IAS Regulation. We also report to you whether in our opinion the information given in the Directors’ Report is consistent with the financial statements. The information given in the Directors’ Report includes that specific information presented in the Chief Executive’s Review that is cross referred from the Business Review section of the Directors’ Report.
In addition we report to you if, in our opinion, the company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors’ remuneration and other transactions is not disclosed.
We review whether the Corporate Governance Statement reflects the company’s compliance with the nine provisions of the 2006 Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the group’s corporate governance procedures or its risk and control procedures.
We read the other information contained in the Annual Report as described in the contents section and consider whether it is consistent with the audited financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any further information outside the Annual Report. 48723 MG Annual Report - Mid 17/4/08 11:42 Page 59
Wellstream Holdings PLC Annual Report & Accounts 2007 | 59
Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the Directors’ Remuneration Report to be audited. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the group’s and company’s circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements and the part of the Directors’ Remuneration Report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements and the part of the Directors’ Remuneration Report to be audited.
Opinion In our opinion: • the group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the group’s affairs as at 31 December 2007 and of its profit for the year then ended;
• the parent company financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union as applied in accordance with the provisions of the Companies Act 1985, of the state of the parent company’s affairs as at 31 December 2007;
• the financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the group financial statements, Article 4 of the IAS Regulation; and
• the information given in the Directors’ Report is consistent with the financial statements.
Deloitte & Touche LLP Chartered Accountants and Registered Auditors Newcastle upon Tyne 1 April 2008 48723 MG Annual Report - End 17/4/08 11:37 Page 60
60 | Group Income Statement
Group Income Statement
For the year ended 31 December 2007
Notes 2007 2006 £000 £000
Revenue 4,5 266,810 147,221 Cost of sales (187,382) (105,850)
Gross profit 79,428 41,371
Administrative expenses (32,963) (22,763) Other operating income 1,096 1,237
Operating profit 6,7 47,561 19,845
Foreign exchange gains on financing 8 2,755 17,002 Finance income 9 1,115 402 Finance expenses 10 (9,691) (11,817)
Profit before tax 41,740 25,432
Income tax expense 11 (12,727) (23)
Profit for the year (all attributable to equity holders of the parent) 29,013 25,409
Basic earnings per ordinary share 12 31.8 34.6
Diluted earnings per ordinary share 12 31.6 34.6
All results are derived from continuing operations.
Statements of Recognised Income and Expense For the year ended 31 December 2007
Group Company 2007 2006 2007 2006 £000 £000 £000 £000
Exchange differences on translation of foreign operations 7,578 (1,887) - -
Net income/(expense) recognised directly in equity 7,578 (1,887) - -
Profit/(loss) for the year 29,013 25,409 (4,133) (21)
Total recognised income/(expense) (all attributable to equity holders of the parent) 36,591 23,522 (4,133) (21)
As permitted by Section 230 of the Companies Act 1985, the income statement of the parent Company is not presented as part of these accounts. The parent Company’s result for the year was a £4,133,000 loss (2006 - £21,000 loss).
Wellstream Holdings PLC Annual Report & Accounts 2007 48723 MG Annual Report - End 17/4/08 11:37 Page 61
Balance Sheets | 61
Balance Sheets
As at 31 December 2007 Group Company Notes 2007 2006 2007 2006 £000 £000 £000 £000
Non-current assets Investments 13 - - 794 1 Goodwill 14 39,107 39,107 - - Property, plant and equipment 15 59,350 45,298 - -
98,457 84,405 794 1
Current assets Inventories 16 29,247 15,050 - - Trade and other receivables 17 136,307 65,023 67,250 1,001 Cash and cash equivalents 5,904 726 - - Derivative financial instruments 22 - 434 - -
171,458 81,233 67,250 1,001
Total assets 269,915 165,638 68,044 1,002
Current liabilities Trade and other payables 20 (106,728) (51,153) - - Current tax liabilities (1,030) (23) - (21) Interest bearing loans and borrowings 21 (5,148) (25,674) - -
(112,906) (76,850) - (21)
Net current assets 58,552 4,383 67,250 980
Non-current liabilities Interest bearing loans and borrowings 21 (47,439) (94,261) - - Deferred tax liabilities 19 (6,782) - - -
(54,221) (94,261) - -
Total liabilities (167,127) (171,111) - (21)
Net assets/(liabilities) 102,788 (5,473) 68,044 981
Shareholders’ equity Share capital 23,25 996 21 996 21 Share premium account 25 66,697 943 66,697 943 Translation reserve 25 7,351 (227) - - Capital redemption reserve 25 30 - 30 - Share based payment reserve 25 - - 793 - Retained earnings/(losses) 25 27,714 (6,210) (472) 17
Total equity/(deficit) 25 102,788 (5,473) 68,044 981
These financial statements were approved by the Board of directors and authorised for issue on 1 April 2008.
Signed on behalf of the Board of directors
Gordon Chapman Chris Gill Director Director 48723 MG Annual Report - End 17/4/08 11:37 Page 62
62 | Cash Flow Statements
Cash Flow Statements
For the year ended 31 December 2007
Group Company 2007 2006 2007 2006 £000 £000 £000 £000
Profit/(loss) for the year 29,013 25,409 (4,133) (21) Share based payments 4,467 - 3,674 - Depreciation of property, plant and equipment 5,275 4,231 - - Gain on disposal of property, plant and equipment (29) (237) - - Finance income (1,115) (402) - - Finance expenses 9,691 11,817 - - Tax 12,727 23 (5) 21 Foreign exchange gains on financing (2,755) (17,002) - - (Increase)/decrease in inventories (13,246) 2,811 - - Increase in receivables (65,696) (43,898) (66,244) - Increase in payables 54,332 17,403 - -
Cash from operations 32,664 155 (66,708) -
Income taxes paid (4,464) (32) (21) - Interest received 1,115 402 - - Interest paid (4,229) (5,234) - -
Net cash increase/(decrease) from operating activities 25,086 (4,709) (66,729) -
Investing activities Purchases of property, plant and equipment (16,744) (14,038) - - Proceeds on disposal of property, plant and equipment 38 403 - -
Net cash used in investing activities (16,706) (13,635) - -
Financing activities Gross proceeds of new debt 62,526 9,672 - - Repayments of debt (115,304) (6,713) - -
Net (repayment)/proceeds on new financing (52,778) 2,959 - - Proceeds on issue of share capital 75,063 - 75,063 - Redemption of own shares (30) - (30) - Costs of issuing equity (8,304) - (8,304) - Debt refinancing costs (1,088) (190) - -
Net cash increase from financing activities 12,863 2,769 66,729 -
Net increase/(decrease) in cash and cash equivalents 21,243 (15,575) - - Foreign exchange movements on translation of cash balances 374 2,902 - - Cash and cash equivalents at beginning of year (20,861) (8,188) - -
Cash and cash equivalents at end of year 756 (20,861) - -
Cash and cash equivalents and bank overdrafts at end of year comprise: Cash and cash equivalents 5,904 726 - - Bank overdrafts (5,148) (21,587) - -
756 (20,861) - -
Wellstream Holdings PLC Annual Report & Accounts 2007 48723 MG Annual Report - End 17/4/08 11:37 Page 63
Notes to the Accounts | 63
Accounting Policies
1 General information Wellstream Holdings PLC (“the Company”) is a Company incorporated in England and Wales under the Companies Act 1985 and is domiciled in the United Kingdom. The Group comprises Wellstream Holdings PLC and its subsidiaries. The nature of the Group’s operations and its principal activities are set out in note 4 and within the directors’ report.
The Company listed on the London Stock Exchange on 1 May 2007 and there is now a wider spread of investors, and stakeholders generally. Consequently, the directors have reconsidered the wording of the Group’s accounting policies in order to provide the most relevant and tailored information to stakeholders. It should be noted that the Group’s accounting policies are consistent with the prior year, with the exception of the adoption of new and revised standards.
2 Adoption of new and revised standards In the current year, the Group has adopted IFRS 7 Financial Instruments: Disclosures which is effective for annual reporting periods beginning on or after 1 January 2007, and the related amendment to IAS 1 Presentation of Financial Statements. The impact of the adoption of IFRS 7 and the changes to IAS 1 has been to expand the disclosures provided in these financial statements regarding the Group’s financial instruments and management of capital (see note 22). Four Interpretations issued by the International Financial Reporting Interpretations Committee are effective for the current period. These are: IFRIC 7 Applying the Restatement Approach under IAS 29, Financial Reporting in Hyperinflationary Economies; IFRIC 8 Scope of IFRS 2; IFRIC 9 Reassessment of Embedded Derivatives; and IFRIC 10 Interim Financial Reporting and Impairment. The adoption of these Interpretations has not led to any changes in the Group’s accounting policies. In addition, the Group has elected to adopt the following in advance of the effective date: • IFRS 8 Operating Segments (effective for accounting periods beginning on or after 1 January 2009) • IFRIC 11 IFRS 2: Group and treasury share transactions (effective for accounting periods beginning on or after 1 March 2007) IFRS 8 Operating Segments requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the Board to allocate resources to the segments and to assess their performance. In contrast, the predecessor Standard (IAS 14 Segment Reporting) required the Group to identify two sets of segments (business and geographical), using a risks and rewards approach, with the Group’s system of internal financial reporting to key management personnel serving only as the starting point for the identification of such segments. As a result, following the adoption of IFRS 8 Operating Segments, the identification of the Group’s reportable segments (note 5) has changed. IFRIC 11 IFRS2: Group and treasury share transactions provides guidance on applying IFRS 2 to Group share based payment transactions where the parent company grants rights to its equity instruments to employees of its subsidiary. The guidance requires the subsidiary to measure the services received using the requirements for equity-settled transactions in IFRS 2, and to recognise a corresponding increase in equity as a contribution from the parent. As this is the first period in which share based payment transactions have occurred, this has not required a change in accounting policy. At the date of authorisation of these financial statements the following standards and interpretations, were in issue but not yet effective: • IFRIC 12 Service Concession Arrangements (effective for accounting periods beginning on or after 1 January 2008) • IFRIC 14 IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective for accounting periods beginning on or after 1 January 2008) • IFRS 2 Share Based Payment: Vesting Conditions and Cancellations (effective 1 January 2009) • IFRS 3 Business Combinations (revised January 2008; effective 1 July 2009) • IAS 27 Consolidated and Separate Financial Statements (amended January 2008; effective 1 July 2009) • IFRIC 13 Customer Loyalty Programmes (effective 1 July 2008) • IAS 23 (Revised) Borrowing Costs (effective for accounting periods beginning on or after 1 January 2009) 48723 MG Annual Report - End 17/4/08 11:37 Page 64
64 | Notes to the Accounts continued
The directors anticipate that, with the exception of IAS 23 (Revised) Borrowing Costs, the adoption of these standards and interpretations in future periods will not have a material impact on the financial statements of the Group. IAS 23 (Revised) Borrowing Costs requires that all eligible borrowing costs incurred in respect of qualifying assets are capitalised as part of the cost of those assets. It is currently Group policy to expense all such borrowing costs as incurred and therefore the adoption of IAS 23 (Revised) may require a change in accounting policy. However, this change in accounting policy would not be retrospective and so would not impact on previously reported results. The impact of this future change in accounting policy on the Group’s financial statements is not reasonably estimable, as the nature of future borrowings, and the existence of qualifying assets is not yet known.
3 Significant accounting policies The consolidated financial information has been prepared under the historical cost convention, except for the revaluation of certain financial instruments, in accordance with International Financial Reporting Standards (“IFRSs”) and the Companies Act 1985 as applicable to companies reporting under IFRSs. The financial statements have been prepared in accordance with IFRSs adopted for use in the European Union and therefore comply with Article 4 of the EU IAS Regulation.
Basis of consolidation The consolidated financial information includes the results, cash flows and assets and liabilities of Wellstream Holdings PLC (the Company) and the enterprises under its control (its subsidiaries). Control is defined as the ability to govern the financial and operating policies of an investee enterprise so as to obtain benefits from its activities.
The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal. Adjustments are made, where necessary, to the financial statements of subsidiaries to bring their accounting policies into line with Group policies. All intra-Group transactions, balances, income and expenses are eliminated on consolidation.
Jointly controlled entities are those entities over which the Group has joint control established by contractual agreement. The consolidated financial statements include the Group’s proportionate share of the entities’ assets, liabilities, income and expenses with items of similar nature on a line by line basis, from the date that joint control commences, until the date that joint control ceases.
Goodwill On the acquisition of a business, fair values are attributed to the net assets acquired. Goodwill arises where the fair value of the consideration given exceeds the fair value of the net assets acquired. Goodwill is recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment at least annually, with impairments being recognised immediately in the income statement. Goodwill is allocated to cash generating units for the purpose of impairment testing. An impairment loss recognised for goodwill is not reversed in a subsequent period.
On the disposal of a business, goodwill relating to that business remaining on the balance sheet is included in the determination of the profit or loss on disposal.
Goodwill arising on acquisitions before the date of transition to IFRSs has been retained at the previous UK GAAP amounts subject to being tested for impairment at that date. Goodwill written off to reserves under UK GAAP prior to 1998 has not been reinstated and is not included in determining any subsequent profit or loss on disposal.
Property, plant and equipment Property, plant and equipment is shown at historical cost, net of accumulated depreciation and any provision for impairment. Depreciation is provided at rates calculated to write off the cost, less estimated residual value, of each asset on a straight-line basis over its expected useful life as follows:
• Leasehold improvements - between 15 and 30 years
• Freehold buildings - 30 years
• Plant and equipment - between 3 and 15 years
Freehold land is not depreciated.
Property, plant and equipment is impaired if its recoverable amount falls below its carrying value. Impairment losses are charged to the income statement immediately. A reversal of an impairment loss is recognised immediately in the income statement.
Wellstream Holdings PLC Annual Report & Accounts 2007 48723 MG Annual Report - End 17/4/08 11:37 Page 65
Notes to the Accounts continued | 65
Assets under construction represent buildings and plant pending installation, and are stated at cost less accumulated impairment losses. Costs include construction and other directly attributable costs. No provision for depreciation is made until such time when the assets are completed and ready for use.
Inventories Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where applicable, direct labour costs and overheads that have been incurred in bringing the inventories to their current location and condition. Cost is calculated using the average cost method. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution.
Cash and cash equivalents Cash and cash equivalents comprise cash-in-hand and bank overdrafts, where there is right of offset. Bank overdrafts are presented as current liabilities to the extent that there is no right of offset with cash balances.
The directors have reconsidered the classification of interest received within the cash flow statement. As a result interest received is now classified within operating activities as it represents interest received on operational working capital. As a result of this change in accounting policy, the comparatives have been restated accordingly.
Operating profit Operating profit is stated before exchange gains on financing, finance income and finance expenses.
Recognition of revenue and costs under construction contracts The Group follows the generally accepted practice of accounting for construction contracts. Under this method, revenue and costs are recognised according to the stage of completion reached in the contract by reference to the extent to which obligations identified at the commencement of the contract are considered to have been met. These obligations may be contractual or non-contractual. Variations in contract work and incentive payments are included to the extent that they have been formally agreed with the customer.
Profit is only recognised where the outcome of a contract can be reliably estimated. Typically, for pipe manufacture contracts, this means that profit is recognised on a stage of completion basis. For installation contracts, profit is recognised in accordance with the risk profile of the contract as assessed by management. The pattern of revenue recognition for installation contracts will depend on individual contract circumstances and terms.
Where the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised to the extent that it is probable that contract costs incurred will be recovered. Contract costs are recognised as expenses in the period in which they are incurred. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately.
Recognition of revenue other than under construction contracts Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of trade discounts, VAT and other sales related taxes. With the exception of goods sold under construction contracts, sales of goods are recognised when goods are delivered and title has passed.
Research and development Expenditure on research activities is charged as an expense in the period in which it is incurred. Development costs which are expected to generate probable future economic benefits are capitalised in accordance with IAS 38 Intangible Assets and amortised on a straight-line basis over their useful economic lives. All other development expenditure is charged to the income statement.
Borrowing costs Borrowing costs are recognised as an expense in the period in which they are incurred.
Government grants Government grants are recognised as income over the periods necessary to match them with the related costs.
Leasing Operating lease rentals are charged to the income statement on a straight line basis over the term of the lease.
Taxation The charge for taxation is based on the result for the year and takes into account current and deferred taxation. The charge is recognised in the income statement except to the extent that it relates to items recognised in equity, in which case it is recognised in equity. 48723 MG Annual Report - End 17/4/08 11:37 Page 66
66 | Notes to the Accounts continued
The current tax charge is based on the taxable profit for the year. Taxable profit differs from profit as reported in the income statement because it excludes items of income or expenses that are taxable or deductible in other years and it further excludes items that are never taxable or deductible.
Deferred taxation is provided for all temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reviewed at each balance sheet date and reduced to the extent that it is no longer probable that the related tax benefit will be realised.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.
Retirement benefits The Group operates a defined contribution scheme for eligible employees. The pension costs are charged to the income statement as they become payable. The assets of the scheme are held separately from those of the Group in independently administered funds. The amount charged against profits represents the contributions payable to the schemes in respect of the accounting period.
Foreign currencies The financial statements for each of the Group’s subsidiaries are prepared using their functional currency. The functional currency is the currency of the primary economic environment in which an entity operates.
In preparing the financial statements of the individual companies, transactions in currencies other than the entity’s functional currency (foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date.
On consolidation, assets and liabilities of overseas subsidiaries and associates are translated into sterling at the market rates ruling at the balance sheet date. Trading results are translated at the average rates for the period. Exchange differences arising on the consolidation of the investment in overseas subsidiaries and joint ventures, together with those on foreign currency loans accounted for as net investment hedges, are taken to equity.
On the disposal of a business, the cumulative exchange differences previously recognised in the foreign currency translation reserve relating to that business are transferred to the income statement as part of the gain or loss on disposal.
Financial guarantee contract liabilities Financial guarantee contract liabilities are measured initially at their fair values and are subsequently measured at the higher of:
• the amount of the obligation under the contract, as determined in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets; and
• the amount initially recognised less, where appropriate, cumulative amortisation recognised in accordance with the revenue recognition policies set out above.
Financial instruments Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument.
Loans and receivables Trade receivables, loans, and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as loans and receivables. Loans and receivables are measured at amortised cost, using the effective interest method, less any impairment. Finance income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial.
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Notes to the Accounts continued | 67
Bank borrowings Interest-bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are accounted for on an accruals basis to the income statement using the effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise.
Trade payables Trade payables are initially measured at fair value, and are subsequently measured at amortised cost.
Equity instruments Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs.
Derivative financial instruments and hedge accounting The Group’s activities expose it to the financial risks of changes in foreign currency exchange rates and interest rates. The Group uses derivative financial instruments, principally foreign currency and interest rate swaps and caps, to reduce its exposure to exchange rate and interest rate movements. The Group does not enter into derivatives for speculative or trading purposes. The use of financial derivatives is governed by the Group’s policies approved by the Board of directors.
Under IFRSs, derivative financial instruments are recognised as assets and liabilities measured at their fair values at the balance sheet date. The Group has chosen not to use hedge accounting to date and therefore changes in the fair value of any derivative instruments are recognised in the income statement as they arise.
Share based payments In accordance with IFRS 2 Share Based Payments, the fair value of equity settled share options granted is recognised as an employee expense with a corresponding increase in equity.
The fair value is measured at the date of grant and the charge is only amended if vesting does not take place due to non-market conditions not being met. The fair value determined at the grant date of the equity-settled share based payments is expensed over the vesting period, based on the Group’s estimate of awards that will eventually vest. Fair value is measured using the Black-Scholes option pricing model.
With respect to share based payments, a deferred tax asset is recognised on the relevant tax base. The tax base is then compared to the cumulative share based payment expense recognised in the income statement. Deferred tax arising on the excess of the tax base over the cumulative share based payment expense recognised in the income statement has been recognised directly in equity outside the SORIE as share based payments are considered to be transactions with shareholders.
Where the Company grants options over its own shares to the employees of its subsidiaries it recognises, in its own financial statements, an increase in the cost of investment in its subsidiaries equivalent to the equity based payment charge recognised in the consolidated financial statements with the corresponding credit being recognised in equity.
Key estimates and judgements in applying the Group’s accounting policies Management considers the key estimates and judgements made in the financial statements to be as follows:
• Recognition of revenue and costs under construction contracts
Revenue and costs under construction contracts are recognised by reference to the stage of completion of the contract activity at the balance sheet date, where the outcome of the contract can be estimated reliably. Stage of completion is determined by reference to the extent to which obligations identified at the commencement of the contract are considered to have been met. Where the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised to the extent that it is probable that contract costs incurred will be recovered.
The determination of whether the outcome of the contract can be estimated reliably, the stage of completion of contract activity and the probability that contract costs incurred will be recovered can be inherently difficult to estimate and require management judgement. The amounts recognised in the income statement in respect of construction contracts are regularly reviewed in light of the most current information available.
• Share based payments
Share based payment charges are calculated based upon the fair value of equity settled options granted to employees of the Group. The fair value is calculated using the Black-Scholes option pricing model. These calculations require the use of estimates (note 24). 48723 MG Annual Report - End 17/4/08 11:37 Page 68
68 | Notes to the Accounts continued
Notes to the Accounts
4 Revenue
An analysis of the Group’s revenue is as follows:
2007 2006 £000 £000 Revenue from construction contracts 255,637 139,438 Revenue from the sale of other product 11,173 7,783
266,810 147,221 Other operating income 1,096 1,237 Finance income (see note 9) 1,115 402
269,021 148,860
5 Operating segments
Operating segments The Group has adopted IFRS 8 Operating Segments in advance of its effective date, with effect from 1 January 2007. IFRS 8 requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the Board to allocate resources to the segments and to assess their performance. In contrast, the predecessor Standard (IAS 14 Segment Reporting) required the Group to identify two sets of segments (business and geographical), using a risks and rewards approach, with the Group’s system of internal financial reporting to key management personnel serving only as the starting point for the identification of such segments. As a result, following the adoption of IFRS 8, the identification of the Group’s reportable segments has changed.
The Group’s reportable segments under IFRS 8 Operating Segments are therefore as follows:
Offshore - The design, production and installation of flexible unbonded pipelines for use in the offshore oil and gas industry. Onshore - The design and production of flexible unbonded pipelines for use in the onshore oil and gas industry.
Segment revenues and results The following is an analysis of the Group’s revenue and results by reportable segment in 2007:
Consolidated Onshore Offshore year ended 2007 2007 2007 £000 £000 £000
Revenue External sales 11,173 255,637 266,810
Result EBITDA (217) 53,053 52,836
Depreciation (5,275)
Operating profit 47,561
Wellstream Holdings PLC Annual Report & Accounts 2007 48723 MG Annual Report - End 17/4/08 11:37 Page 69
Notes to the Accounts continued | 69
5 Operating segments (continued)
The following is an analysis of the Group’s revenue and results by reportable segment in 2006: Consolidated Onshore Offshore year ended 2006 2006 2006 £000 £000 £000
Revenue External sales 7,783 139,438 147,221
Result EBITDA (3,342) 27,418 24,076
Depreciation (4,231)
Operating profit 19,845
The accounting policies of the reportable segments are the same as the Group’s accounting policies described in note 3. Figures reported to the Board, as presented above, are based on the financial information used to produce the entity’s financial statements.
Segment assets
2007 2006 £000 £000 Onshore 10,689 7,704 Offshore 259,226 157,934
Segment assets 269,915 165,638 Unallocated assets - -
Consolidated assets 269,915 165,638
For the purposes of monitoring segment performance and allocating resources between segments, the Board monitors the tangible, intangible and financial assets attributable to each segment. Inter-segmental funding has been excluded from the segment assets disclosure. Goodwill has been allocated entirely to the Offshore segment. Assets used jointly by reportable segments are allocated on the basis of the revenues earned by individual reportable segments.
Segment liabilities 2007 2006 £000 £000
Onshore 1,704 1,341 Offshore 158,641 169,770
Segment liabilities 160,345 171,111 Deferred tax liabilities 6,782 -
Consolidated liabilities 167,127 171,111
For the purposes of monitoring segment performance and allocating resources between segments, the Board monitors the external liabilities attributable to each segment, and therefore inter-segmental funding is excluded from the segment liabilities disclosure. 48723 MG Annual Report - End 17/4/08 11:37 Page 70
70 | Notes to the Accounts continued
5 Operating segments (continued)
Geographic information Revenue from external customers: 2007 2006 £000 £000
UK 3,894 15,458 Rest of world 262,916 131,763
266,810 147,221
Included in revenues from external customers derived from outside of the UK is £216,692,000 (2006 - £80,017,000) derived from customers in Brazil and £24,671,000 (2006 - £1,571,000) derived from customers in the USA.
Non-current assets by location (excluding goodwill): 2007 2006 £000 £000
UK 36,522 32,728 Rest of world 22,828 12,570
59,350 45,298
Included in non-current assets located outside of the UK is £19,950,000 (2006 - £11,540,000) at net book value of assets located in Brazil.
Information about major customers Included in offshore revenues is an amount of £136,999,000 (2006 - £76,346,000) arising from sales to the Group's largest customer, and an amount of £72,521,000 (2006 - £nil) to the Group's second largest customer.
6 Operating profit
Operating profit for the year has been arrived at after charging / (crediting): 2007 2006 £000 £000
Net foreign exchange gains (2,257) (325) Research and development 3,187 2,321 Depreciation of property, plant and equipment 5,275 4,231 Gain on disposal of fixed assets (29) (237) Inventory impairment 505 439 Write back of credit balances (261) (1,456) Cost of inventories (raw materials) 137,898 77,207 Staff costs (all) 39,978 25,174
Net foreign exchange gains on trading items represent the effect of movements in exchange rates on foreign currency denominated working capital and other trading items during the year.
The write back of credit balances represents a reduction of £261,000 (2006 - £1,456,000) in accruals against warranty and other claims which in the view of the directors are no longer required.
Wellstream Holdings PLC Annual Report & Accounts 2007 48723 MG Annual Report - End 17/4/08 11:37 Page 71
Notes to the Accounts continued | 71
6 Operating profit (continued)
An analysis of amounts payable by the Group to the Company’s auditors, Deloitte & Touche LLP, and their associates is provided below:
2007 2006 £000 £000
Fees payable to the Company’s auditor for the audit of the Company’s annual accounts 65 20
Fees payable to the Company’s auditor and their associates for other services: The audit of the Company’s subsidiaries, pursuant to legislation 70 66
Total audit fees 135 86
Other services pursuant to legislation 37 - Tax services 158 129 Remuneration services 170 42 Corporate finance services 1,050 500 Other services - 20
Total non-audit fees 1,415 691
1,550 777
Fees payable to Deloitte & Touche LLP and their associates for non-audit services to the Company are not required to be disclosed because the consolidated financial statements are required to disclose such fees on a consolidated basis.
7 Staff costs
Group Company 2007 2006 2007 2006 £000 £000 £000 £000 Staff costs during the year (including directors) Wages and salaries 30,867 21,726 - - Social security costs 3,870 2,476 465 - Other pension costs 774 972 - - Share based payments 4,467 - 3,674 -
39,978 25,174 4,139 -
The share based payment expense of £4,467,000 is net of employer’s National Insurance contributions and consists of £3,624,000 relating to the granting of share options to Sir Graham Hearne on 19 March 2007, £793,000 relating to the Group’s employee share schemes, and £50,000 in relation to the exercise of warrants.
Social security costs include National Insurance payable in relation to share based payment expenses in addition to Employer’s National Insurance contributions on wages and salaries. 48723 MG Annual Report - End 17/4/08 11:37 Page 72
72 | Notes to the Accounts continued
7 Staff costs (continued)
Group Company 2007 2006 2007 2006 No. No. No. No. Average number of persons employed Administration 235 166 - - Sales 21 27 - - Manufacturing 562 486 - -
818 679 - -
Details of directors’ remuneration are given in the Directors’ Remuneration Report on pages 51 to 56.
8 Foreign exchange gains on financing
2007 2006 £000 £000
Foreign exchange gains on financial liabilities held at amortised cost 2,755 17,002
Exchange gains on financing reflects the change in value of the US dollar denominated bank debt and deep discount bonds.
9 Finance income 2007 2006 £000 £000 Interest income on loans and receivables Interest on bank deposits 1,115 402
10 Finance expenses 2007 2006 £000 £000
Interest expense on financial liabilities held at amortised cost Interest on bank overdrafts and loans 4,650 5,531 Accretion of discount of deep discount bonds 1,783 5,451 Amortisation of arrangement fees 344 677
6,777 11,659
Write off of arrangement fees on extinguishing of related debt 2,718 - Bank charges 224 268 Fair value gains on interest rate swaps (28) (110)
9,691 11,817
Deep discount bonds, bank loans, and overdrafts were fully repaid during the year and replaced with new facilities. Arrangement fees relating to those facilities repaid were expensed during the year.
During the year the Group made net losses of £6,740,000 (2006 - £5,343,000 gain) on financial liabilities held at amortised cost.
Wellstream Holdings PLC Annual Report & Accounts 2007 48723 MG Annual Report - End 17/4/08 11:37 Page 73
Notes to the Accounts continued | 73
11 Income tax expense
2007 2006 £000 £000 Current tax Current tax charge 5,273 23 Adjustments in respect of prior years 198 -
5,471 23 Deferred tax Origination and reversal of temporary differences 7,441 - Adjustments in respect of prior years (185) -
7,256 -
Total income tax in the income statement 12,727 23
UK corporation tax is calculated at 30% of the estimated assessable profit/(loss) for the year. Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.
2007 2007 2006 2006 % £000 % £000
Reconciliation of effective tax rate Profit before tax 41,740 25,432
Tax calculated at UK corporation tax rate 30.00% 12,522 30.00% 7,630
Non deductible expenses 0.58% 242 0.95% 242 Research and development tax relief -0.56% (236) -- Effect on deferred tax balances due to change in income tax rate from 30% to 28% -0.97% (403) -- Effect of higher tax rates in overseas jurisdictions 1.63% 682 -- Effect of utilisation of tax losses and tax offset not recognised -0.22% (93) -30.86% (7,849) Adjustments in respect of prior years 0.03% 13 --
Effective tax rate and income tax expense for the year 30.49% 12,727 0.09% 23
Income Deferred Total Total Tax Tax 2007 2007 2007 2006 £000 £000 £000 £000 Tax recognised directly in equity Relating to share based payments - 474 474 -
The UK Government has announced its intention to phase out and withdraw from 2011 capital allowances on qualifying buildings and that the necessary legislation will be enacted in the forthcoming Finance Act. This proposal, when enacted, will lead to an increase in the deferred tax provision required for accelerated tax depreciation in the region of £1,500,000 and will give rise to a one off deferred tax charge for this amount in the year ending 31 December 2008. 48723 MG Annual Report - End 17/4/08 11:37 Page 74
74 | Notes to the Accounts continued
12 Earnings per share
Basic earnings per ordinary share is calculated by dividing earnings by the weighted average number of ordinary shares in issue during the year.
Diluted earnings per ordinary share uses the same figure as the basic calculation except that the weighted average number of shares has been adjusted to reflect the dilutive effect of the outstanding share options allocated under employee share schemes where the market value exceeds the option price. It is assumed that all dilutive potential ordinary shares are converted at the beginning of the accounting period. Diluted earnings per ordinary share is calculated by dividing earnings by the diluted average number of ordinary shares.
Reconciliations of the earnings and the weighted average number of shares used in the calculations are outlined below:
Basic and diluted earnings per share The calculation of the basic and diluted earnings per share is based on the following data:
Earnings Weighted Earnings Weighted average number average number of ordinary shares of ordinary shares
2007 2007 2006 2006 £000 No. £000 No.
For basic earnings per share 29,013 91,291,391 25,409 73,500,000
Options and awards - 538,546 - -
For diluted earnings per share 29,013 91,829,937 25,409 73,500,000
Basic earnings per share (p) 31.8 34.6
Diluted earnings per share (p) 31.6 34.6
Adjusted diluted earnings per share 2007 2006
Adjusted earnings (£000) 31,828 8,407
Diluted weighted average number of shares 91,829,937 73,500,000
Adjusted diluted earnings per share (p) 34.7 11.4
Adjusted EPS is discussed further in the Financial Review on pages 30 to 33.
All ordinary shares had the same entitlement to share in profit for all periods presented. The weighted average number of ordinary shares outstanding for all periods presented has been adjusted for certain bonus issues and redesignations described in note 23 that have changed the number of ordinary shares outstanding without a corresponding change in resources.
All redeemable non-voting shares were issued and redeemed during the period and hence no separate earnings per share figure has been presented. At 1 January 2006 the Company had 2,000 warrants in issue for contingently issuable shares, and on 19 March 2007 it granted options for contingently issuable shares as described in note 23. These are both excluded from the calculation of diluted earnings per share in 2006 as the related conditions were not met until 1 May 2007 at which date the shares were issued.
The difference between the weighted average number of ordinary shares for the purposes of basic and diluted earnings per share is due to the dilutive effect of the Company’s Performance Share Plan, Save As You Earn scheme and Chairman’s award.
Wellstream Holdings PLC Annual Report & Accounts 2007 48723 MG Annual Report - End 17/4/08 11:37 Page 75
Notes to the Accounts continued | 75
13 Investments in subsidiaries and jointly controlled entities
Group
Subsidiary undertakings
The principal subsidiary undertakings of the Wellstream Group and the Company are summarised below:
Country of Activity Proportion of incorporation ordinary shares held
Wellstream Finance Limited Great Britain Dormant 100% Wellstream International Limited* Great Britain Sales and manufacturing 100% Wellstream do Brazil Industria e Servicos Ltda* Brazil Sales and manufacturing 100% Wellstream Canada Limited* Canada Sales and installation 100% Wellstream Australia Pty Limited* Australia Sales 100% Wellstream (Trustee) Limited* Great Britain Trustee to employee benefit trust 100%
*Investments held indirectly
Jointly controlled entity Country of incorporation Percentage of shares owned directly by Wellstream Australia Pty Ltd
Seastream JV Australia Pty Limited Australia 50%
Aggregated amounts relating to share of jointly controlled entity 2007 £000
Non-current assets 159 Current assets 3,611 Current liabilities (3,717) Non-current liabilities -
Net assets 53
Income 854
Expenses (801)
Wellstream Holdings PLC has put in place a joint and several guarantee of financial support, limited to the Group’s share of Seastream Australia Pty Limited’s liabilities, should the company find itself unable to pay liabilities as they fall due.
Company
Subsidiary undertakings 2007 2006 £000 £000
Cost At 1 January 1 1 Additions (note 7) 793 -
At 31 December 794 1 48723 MG Annual Report - End 17/4/08 11:37 Page 76
76 | Notes to the Accounts continued
14 Goodwill
Group 2007 2006 £000 £000
Cost and net book value at 1 January and 31 December 39,107 39,107
Accumulated amortisation is £nil at 1 January 2007 and 31 December 2007. Existing goodwill relates entirely to the initial purchase of the offshore business and has been allocated to that business, which is considered to be a single cash generating unit. Upon further acquisitions goodwill acquired in a business will be allocated to the cash generating units that expect to benefit from that business acquired. The basis on which the recoverable amount has been determined is the value in use. The Group calculates the value in use of each cash generating unit by applying an appropriate discount rate based on the Group’s borrowing profile, which was 10% at 31 December 2007. This discount rate is applied to the pre-tax cash flows within the latest approved forecast and this is compared to the carrying value of its net assets in order to test for impairment. No impairment of goodwill is evident for the year ended 31 December 2007.
15 Property, plant and equipment
Assets in the Leasehold Freehold land Plant and Total course of improvements and buildings equipment construction £000 £000 £000 £000 £000
Cost
At 1 January 2006 - 144 15,570 30,837 46,551 Additions 12,573 - 177 1,288 14,038 Exchange differences (254) (13) - (814) (1,081) Disposals - - - (216) (216)
At 1 January 2007 12,319 131 15,747 31,095 59,292 Additions 2,225 232 191 14,09616,744 Transfers (12,319) - - 12,319 - Exchange differences - 20 - 2,684 2,704 Disposals - (26) - (25) (51)
At 31 December 2007 2,225 357 15,938 60,169 78,689
Depreciation
At 1 January 2006 - 33 1,706 8,208 9,947 Charge for year - 23 602 3,606 4,231 Exchange differences - (4) - (129) (133) Eliminated on disposals - - - (51) (51)
At 1 January 2007 - 52 2,308 11,634 13,994 Charge for year - 48 623 4,604 5,275 Exchange differences - 2 - 110 112 Eliminated on disposals - (21) - (21) (42)
At 31 December 2007 - 81 2,931 16,327 19,339
Net book value At 31 December 2007 2,225 276 13,007 43,842 59,350
At 31 December 2006 12,319 79 13,439 19,461 45,298
The Company holds no property, plant or equipment.
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Notes to the Accounts continued | 77
16 Inventories
2007 2006 £000 £000
Raw materials 22,049 7,944 Work in progress 4,449 5,138 Finished goods 2,749 1,968
29,247 15,050
17 Trade and other receivables
Group 2007 2006 £000 £000
Trade receivables 81,970 15,962 Impairment provision - (102)
81,970 15,860
Amounts due from contract customers (note 18) 32,600 40,257 Prepayments 5,804 4,063 Other receivables 15,933 4,843
136,307 65,023
2007 2006 £000 £000 Movement in allowance for doubtful debts Balance at the beginning of the period 102 - Impairment losses recognised - 102 Amounts recovered in the year (102) -
- 102
2007 2006 £000 £000 Ageing of past due but not impaired receivables 1-30 days past due 4,924 9,182 31-90 days past due 1,447 922 91 days and more 541 99
6,912 10,203
The Group has not provided for these as they are considered recoverable.
Company 2007 2006 £000 £000
Amounts due from subsidiary undertaking 67,245 1,001 Corporation tax receivable 5 -
67,250 1,001
The above amount of £67,245,000 is owed by Wellstream International Limited to Wellstream Holdings PLC and is non- interest bearing with no fixed repayment terms.
The directors consider that the carrying amount of trade and other receivables approximates their fair value. Trade and other receivables are predominantly non-interest bearing. 48723 MG Annual Report - End 17/4/08 11:37 Page 78
78 | Notes to the Accounts continued
18 Construction contracts in progress at the balance sheet date
Group 2007 2006 £000 £000
Amounts due from contract customers included in trade and other receivables (note 17) 32,600 40,257
Amounts due to contract customers included in trade and other payables (note 20) (57,314) (29,981)
(24,714) 10,276
Contract costs incurred plus recognised profits less recognised losses to date 83,646 83,373 Less progress billings (108,360) (73,097)
(24,714) 10,276
At 31 December 2007 retentions held by customers for contract work amounted to £3,573,000 (2006 - £972,000).
Retentions held by customers for contract work are due for settlement after more than one year; all other trade receivables arising from construction contracts are all due for settlement within one year.
19 Deferred tax
The following are the major deferred tax liabilities and assets recognised by the Group and the movements thereon during the current and prior reporting periods:
Accelerated tax Share based Goodwill Other timing Tax Total depreciation payments differences losses £000 £000 £000 £000 £000 £000
At 1 January 2006 2,128 - 854 97 (3,079) -
Charge/(credit) to income 296 - 489 (97) (688) -
At 31 December 2006 2,424 - 1,343 - (3,767) -
Charge/(credit) to income 85 (222) 367 3,259 3,767 7,256 Credit to equity - (474) - - - (474)
At 31 December 2007 2,509 (696) 1,710 3,259 - 6,782
At the balance sheet date the aggregate amount of temporary differences associated with foreign exchange translation differences arising from overseas subsidiary companies for which deferred tax liabilities have not been recognised is £7,351,000 (2006 - temporary differences of £227,000 in respect of which a deferred tax asset was not recognised). 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 reverse in the foreseeable future.
20 Trade and other payables
Group 2007 2006 £000 £000
Trade payables 16,778 10,642 Accruals and deferred income 25,704 9,647 Amounts due to contract customers (note 18) 57,314 29,981 Other tax and social security 764 883 Other payables 6,168 -
106,728 51,153
Trade creditors and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for credit purchases is 45 days (2006 - 50 days). The directors consider that the carrying amount of trade and other payables approximates their fair value.
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Notes to the Accounts continued | 79
21 Interest bearing loans and borrowings
The carrying value and fair value of the Group’s short-term and long-term borrowings are as follows:
Group Company Current liabilities 2007 2006 2007 2006 £000 £000 £000 £000
Secured borrowings held at amortised cost
Bank loans - 4,087 - -
Bank overdrafts 5,148 21,587 - -
5,148 25,674 - -
Group Company Non-current liabilities 2007 2006 2007 2006 £000 £000 £000 £000
Secured borrowings held at amortised cost
Bank loans 44,000 40,975 - - Less: Unamortised costs (961) (1,653) - -
43,039 39,322 - -
Rio State Government loan 4,400 - - -
Deep discount bonds - 56,212 - - Less: Unamortised costs - (1,273) - -
- 54,939 - -
47,439 94,261 - -
Analysis of repayments
Group 2007 2006 £000 £000 Bank overdrafts Within one year 5,148 21,587
Bank loans Within one year - 4,087 In the second year - 4,087 In third to fifth years 31,500 22,481 After five years 12,500 14,407
44,000 45,062 Less: amounts due within one year - (4,087) Less: unamortised costs (961) (1,653)
Amount due after more than one year 43,039 39,322 48723 MG Annual Report - End 17/4/08 11:37 Page 80
80 | Notes to the Accounts continued
21 Interest bearing loans and borrowings (continued) Group 2007 2006 £000 £000 Rio State Government loan In third to fifth years 1,137 - After five years 3,263 -
4,400 -
Group 2007 2006 £000 £000 Deep discount bonds After five years - 56,212 Less unamortised cost - (1,273)
- 54,939
With respect to interest bearing borrowings, fair value approximates to book value: Fair Value 2007 2006 Group £000 £000
Bank overdrafts 5,148 21,587 Bank loans 43,039 43,409 Rio State Government Loan 4,400 - Deep discount bonds - 53,106
52,587 118,102
Principal features of the Group’s borrowings are as follows: Bank Loans and overdraft On 1 May 2007 the Group completed a refinancing of all its long term US Dollar denominated debt with an £85,000,000 Revolving Credit Facility. The facility will reduce to £nil over a six year period from 1 May 2007 to 1 May 2013, with staged reductions in the size of the facility occurring six monthly from 1 November 2008. Although the overdraft forms part of the revolving credit facility, this element is repayable on demand. Such a demand for repayment would result in a corresponding increase in the level of long term borrowings available, subject to the staged reductions in the overall size of the facility. Interest on drawn funds is charged at a margin of between 1.00% and 2.25% above LIBOR, by reference to the Group’s capital structure. The average effective interest rate for the year was 7.56% in respect of term borrowings, and 7.08% in respect of overdrafts. Borrowings under the Revolving Credit Facility are secured by fixed and floating charges over the net assets of Wellstream International Limited and a share pledge over that portion of Wellstream do Brazil Industrial e Servicos Ltda that is not secured under the Rio State Government loan (see below). At 31 December 2007 the Group had available £26,027,000 (2006 - £nil) of undrawn committed borrowing facilities.
Rio State Government loan This facility is provided by the State Government of Rio de Janeiro and has a maximum value of £21,280,000. The loan is drawn down progressively on a monthly basis. The value of the monthly draw down is calculated as the lesser of 9% of gross monthly revenue or 70% of the ICMS tax payable on sales in the month. Interest on the Rio State Government loan is charged at 6.0%. The average effective interest rate for the year was 6.0%. Borrowings under the Rio State Government loan are secured by fixed and floating charges over certain items of plant and equipment with a carrying value of £4,368,000.
Wellstream Holdings PLC Annual Report & Accounts 2007 48723 MG Annual Report - End 17/4/08 11:37 Page 81
Notes to the Accounts continued | 81
22 Financial instruments
Group
Categories of financial instruments: 2007 2006 £000 £000
Financial Assets Fair value through profit or loss (FVPL) - 434 Loans and receivables 96,858 19,069
Financial Liabilities Amortised cost 158,551 170,205
Capital risk management The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balance. The capital structure of the Group consists of debt, which includes the borrowings disclosed in note 21, cash and cash equivalents and equity attributable to equity holders of the parent, comprising issued capital, reserves and retained earnings as disclosed in note 25. Financial risk management objectives The Board monitors and manages the financial risks relating to the operations of the Group. These risks include market risk, credit risk and liquidity risk. Where appropriate, the Group seeks to minimise the effects of these risks by using derivative financial instruments to hedge these risk exposures. The use of financial derivatives is approved by the Finance Director and any such financial derivatives are reported to the Board of directors. The Group does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes. Market risk The Group’s activities expose its financial instruments to risks of changes in foreign currency exchange rates and interest rates. Foreign currency risk management The Group undertakes the bulk of its business in Sterling or in the local currency of its overseas operations. Trade carried out in any other currency is by exception and as such any exposure to transactional currency risk can be easily identified. In such circumstances natural hedges are first sought and if significant residual exposure exists, it is hedged using derivative financial instruments. There were no such contracts in existence at the year end. The Group has significant foreign currency denominated monetary assets and monetary liabilities by virtue of its overseas operations. At the reporting date they were as follows:
Liabilities Assets 2007 2006 2007 2006 £000 £000 £000 £000
Brazilian Real 15,108 2,981 59,127 2,112
US Dollar 6,481 128,695 13,423 27,213 48723 MG Annual Report - End 17/4/08 11:37 Page 82
82 | Notes to the Accounts continued
22 Financial instruments (continued)
Foreign currency sensitivity analysis The Group is mainly exposed to the Brazilian Real and US Dollar.
The following table details the Group’s sensitivity to a 10% increase and decrease in Sterling against the relevant foreign currencies, being management’s reasonable assessment of the possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a 10% change in foreign currency rates.
A positive number below indicates an increase in profit or equity where Sterling strengthens 10% against the relevant currency. For a 10% weakening of Sterling against the relevant currency, there would be an equal and opposite impact on the profit and other equity, and the balances below would be negative.
Real impact US Dollar impact
2007 2006 2007 2006 £000 £000 £000 £000
Recognised in equity (15,597) 363 (1,382) 19,862
The Group’s sensitivity to changes in the value of Sterling against the US Dollar has decreased during the current period mainly due to the settling of US dollar denominated debt. The increase in the scale of operations in Brazil during the year has increased the Group's exposure to changes in the value of the Brazilian Real. Foreign exchange gains and losses on foreign currency denominated monetary items arise primarily on consolidation and therefore are shown as recognised in equity in the table above. Interest rate risk management and sensitivity analysis The Group is exposed to interest rate risk as entities in the Group borrow funds at both fixed and floating interest rates. At the period end fixed interest rate loans represented 90% of total borrowings and were for periods of less than three months. The Group had no interest rate swaps at the year end.
If interest rates had been 0.5% higher/lower and all other variables were held constant, the Group’s profit for the year ended 31 December 2007 would decrease/increase by £298,000 (2006: decrease/ increase by £297,000).
Credit risk management Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group contracts all of its significant business in such a way that it receives regular stage payments from its customers that are appropriate to the stage of completion of the contract. This payment profile is approved by senior management in advance of accepting the contract and is monitored subsequent to acceptance at regular intervals. This approach and the Group’s customer profile which consists largely of national and international oil companies with well established and substantial credit histories, significantly mitigates the risk of financial loss from default.
At 31 December 2007 and 31 December 2006 there was credit risk associated with the concentration of the offshore business into a number of large contracts with a limited number of customers and counterparties. Information about these major customers and their geographic profile is included in note 5. No significant unrecovered receivables have arisen as a result of this risk.
The directors consider that the carrying amount of trade and other receivables approximates their fair value. Trade and other receivables are predominantly non-interest bearing.
The carrying amount of financial assets recorded in the financial statements, which is net of impairment losses, represents the Group’s maximum exposure to credit risk without taking account of the value of collateral obtained.
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Notes to the Accounts continued | 83
22 Financial instruments (continued)
Liquidity risk management The Group was contractually obliged to make repayments of principal and payments of interest at 31 December as detailed below:
Within one 1-2 years 2-5 years More than Total year or on 5 years demand £000 £000 £000 £000 £000
2007 Bank overdrafts 5,512 - - - 5,512 Bank borrowings* 3,142 3,142 39,198 12,798 58,280 Rio State Government loan 196 196 1,724 3,850 5,966
8,850 3,338 40,922 16,648 69,758
Within one 1-2 years 2-5 years More than Total year or on 5 years demand £000 £000 £000 £000 £000
2006 Bank overdrafts 23,115 - - - 23,115 Bank borrowings 7,077 6,754 29,206 17,249 60,286 Deep discount bonds - - - 100,481 100,481
30,192 6,754 29,206 117,730 183,882
*With respect to bank borrowings under the revolving credit facility, the timing of repayments assumes capital is repaid at the latest possible date, determined by staged reductions in the overall size of the facility. The facility offers the flexibility of repaying borrowings at one month’s notice. Ultimate responsibility for liquidity risk management rests with the Board of directors. Liquidity risk arising from the maturity profile of financial assets is detailed in the credit risk section above. The Group has access to financing facilities; the total unused amount at the balance sheet date is £31,382,000, being £26,027,000 of undrawn committed borrowing facilities in the UK and £5,355,000 of cash held overseas. The Group expects to meet its other obligations from operating cash flows and proceeds of maturing financial assets.
Company 2007 2006 £000 £000 Loans and receivables Intercompany receivables (note 17) 67,245 1,001
The Company has no financial assets or liabilities other than the intercompany balance with Wellstream International Limited. Where applicable the Company complies with Group policies and risk management procedures as outlined above. 48723 MG Annual Report - End 17/4/08 11:37 Page 84
84 | Notes to the Accounts continued
23 Share capital Authorised Authorised Issued Issued No. £ No. £ A Ordinary shares of £1.00 each At 1 January 2006 and 1 January 2007 27,263 27,263 20,000 20,000 Exercise of warrants - - 2,000 2,000 Exercise of options - - 1,523 1,523 Redesignation as A Ordinary shares of £0.01 each 2,699,037 - 2,328,777 - Redesignation as Ordinary shares of £0.01 each (2,726,300) (27,263) (2,352,300) (23,523)
At 31 December 2007 - - - -
Preferred Ordinary shares of £0.01 each At 1 January 2006 and 1 January 2007 78,000 780 78,000 780 Increase in share capital 7,722,000 77,220 - - 99 for 1 bonus issue - - 7,722,000 77,220 Redesignation as Ordinary shares of £0.01 each (7,800,000) (78,000) (7,800,000) (78,000)
At 31 December 2007 - - - -
Ordinary shares of £0.01 each At 1 January 2006 and 1 January 2007 - - - - Redesignation of A Ordinary and Preferred Ordinary shares 10,526,300 105,263 10,152,300 101,523 Increase in share capital 139,473,700 1,394,737 - - 6.5 for 1 bonus issue - - 65,989,950 659,900 Issue of shares - - 23,437,500 234,375
At 31 December 2007 150,000,000 1,500,000 99,579,750 995,798
Redeemable non-voting shares of £1.00 each At 1 January 2006 and 1 January 2007 - - - - Increase in share capital 30,000 30,000 - - Issue of shares - - 30,000 30,000 Redemption and cancellation (30,000) (30,000) (30,000) (30,000)
At 31 December 2007 - - - -
All issued share capital is called-up, allotted and fully paid. All changes affecting the Company’s authorised or issued A Ordinary Shares, Preferred Ordinary Shares, and Ordinary Shares during the period were effective from, and Conditional upon, the Company’s admission to the Official List of the UKLA which occurred on 1 May 2007. Redeemable non-voting shares were issued on 27 March 2007 and redeemed at par on 11 June 2007. They carried no rights to vote or entitlement to dividend but ranked pari passu with Ordinary shares on winding up. On 8 March 2003 the Company issued 2,000 warrants over its A Ordinary Shares. These warrants could be exercised at a price of £1 per share within 15 days of any sale, listing, or asset sale of the Company, and all such warrants were exercised and the resulting shares then issued on 1 May 2007. The Ordinary Shares, A Ordinary Shares and Preferred Ordinary Shares ranked pari passu except that, as further defined in the Company’s articles of association, the holders of the Preferred Ordinary Shares were entitled to receive a Preferred Dividend after a certain date and in certain circumstances the holders of the Preferred Ordinary Shares were entitled to exercise such multiple of votes which is equal to 95.01 per cent of the Preferred Ordinary Shares and the A Ordinary Shares taken as a whole.
Share options At 31 December 2007 the outstanding options to purchase ordinary shares in Wellstream Holdings PLC in accordance with the terms of the applicable schemes are as detailed in note 24.
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Notes to the Accounts continued | 85
24 Share based payments
As at 31 December 2007, the following material share based payment arrangements existed:
Type of arrangement Performance Save As You Earn Save As You Earn Chairman’s Award Share Plan scheme (5 year) scheme (3 year)
Timing of grant 30-Aug-07 29-May-07 29-May-07 1-May-07
1 year - 62,500 2 year - 62,500 Number of options granted in 2007 479,341 302,353 408,275 3 year - 109,375
1 year - 311 2 year - 301 Fair value per share for 2007 grant (p) 564 137 124 3 year - 293
Method of settlement Equity Equity Equity Equity
Contractual life 3 years 5 years 3 years 1, 2 or 3 years
Vesting conditions See note (i) See note (ii) See note (ii) See note (iii)
Notes: (i) Options granted by invitation at an exercise price of £0.01. Options are exercisable at the end of a three year incentive plan, with vesting subject to performance conditions based on aggregate earnings per share over a 3 year period from 1 January 2007. Participants are not entitled to dividends in the period prior to exercise of the options. (ii) Options granted at a 10% discount to the market price at the date of invitation. Options are exercisable at the end of a three or five year sharesave contract. Participants are not entitled to dividends in the period prior to exercise of the options. (iii) Where three fair values are given for the Chairman’s award the first relates to an award which may vest in 2008, the second to an award which may vest in 2009 and the third to an award which may vest in 2010. Further details on the operation of share based payment arrangements can be found in the Directors’ Remuneration Report. Details of movements for equity-settled share option schemes during the year ended 31 December 2007 were as follows: Save As Save As Performance You Earn You Earn Share scheme scheme Chairman’s Plan (5 year) (3 year) Award Weighted Weighted Weighted Weighted average average average average Number of excercise Number of excercise Number of excercise Number of excercise options price (p) options price (p) options price (p) shares price (p) Outstanding at start of the year - - - - Granted during the year 479,341 1 302,353 339 408,275 339 234,375 nil Exercised during the year - - - - Forfeited/Lapsed during the year (25,640) - (2,619) -
Outstanding at end of year 453,701 1 302,353 339 405,656 339 234,375 nil
Exercisable at end of year - - - - 48723 MG Annual Report - End 17/4/08 11:37 Page 86
86 | Notes to the Accounts continued
24 Share based payments (continued)
Assumptions used in the Black-Scholes models to determine the fair value of share options at grant date were as follows:
Performance Save As You Earn Save As You Earn Chairman’s Award Share Plan scheme (5 year) scheme (3 year)
Grant date 30-Aug-07 29-May-07 29-May-07 1-May-07 Share price at date of grant (p) 618 423 423 377 Exercise price (p) 1 339 339 nil-cost Volatility 30.00% 30.00% 30.00% 30.00% Average expected term to exercise (minimum months) 36 61 37 12, 24, 36 Date of vesting 30-Aug-10 30-Jun-12 30-Jun-10 1-May-08, 1-May-09 and 1-May-10 Risk free rate (%) 4.50% 4.50% 4.50% 4.50% Assumed long term dividend yield(%) 3.00% 3.00% 3.00% 3.00%
Shares of the Company became listed for the first time on admission to the London Stock Exchange on 1 May 2007. The directors therefore do not consider the Company’s historic share price volatility to be a suitable basis on which to set an expectation for the purpose of option valuations. Therefore the expected share price volatility was determined by reference to historic volatilities in the share prices of a selection of UK companies operating in the same industry as the Group.
The average expected term to exercise used in the models has been adjusted, based on management's best estimate for the effects of exercise restrictions, behavioural conditions and forfeiture. The risk free rate has been determined by reference to yields on UK government gilts. Prior to IPO share options were issued to Sir Graham Hearne, a non-executive director. These were exercised and converted into shares at IPO, giving rise to a share based payment expense of £3,624,000 in the year. The weighted average share price at exercise of these share options was 320p.
25 Statement of changes in equity
Share Capital Share Translation Capital Retained Total premium reserve redemption earnings reserve £000 £000 £000 £000 £000 £000 Group At 1 January 2006 21 943 1,660 - (31,619) (28,995) Profit for the year - - - - 25,409 25,409 Exchange difference on translation of overseas operations - - (1,887) - - (1,887)
At 1 January 2007 21 943 (227) - (6,210) (5,473) Profit for the year - - - - 29,013 29,013 Bonus issues 737 (737) - - - - Issue of share capital 264 74,766 - - - 75,030 Write off of expenses on new issue - (8,304) - - - (8,304) Redemption of own shares (30) - - 30 (30) (30) Share options exercised 2 29 - - 3,624 3,655 Exercise of warrants 2 - - - 50 52 Exchange difference on translation of overseas operations - - 7,578 - - 7,578 Charge in relation to share options and tax thereon - - - - 1,267 1,267
At 31 December 2007 996 66,697 7,351 30 27,714 102,788
Wellstream Holdings PLC Annual Report & Accounts 2007 48723 MG Annual Report - End 17/4/08 11:37 Page 87
Notes to the Accounts continued | 87
25 Statement of changes in equity (continued)
Share Share Capital Share based Retained Total Capital premium redemption payment earnings reserve reserve £000 £000 £000 £000 £000 £000 Company At 1 January 2006 21 943 - - 38 1,002 Loss for the year - - - - (21) (21)
At 1 January 2007 21 943 - - 17 981 Loss for the year - - - - (4,133) (4,133) Share based payment charge - IFRIC 8 - - - 793 - 793 Bonus issues 737 (737) - - - - Issue of share capital 264 74,766 - - - 75,030 Write off of expenses on new issue - (8,304) - - - (8,304) Redemption of own shares (30) - 30 - (30) (30) Share options exercised 2 29 - - 3,624 3,655 Exercise of warrants 2 - - - 50 52
At 31 December 2007 996 66,697 30 793 (472) 68,044
26 Commitments
Group
Operating lease commitments The Group has entered into commercial leases on certain properties, motor vehicles and items of machinery. The leases have various terms, escalation clauses, purchase options and renewal rights.
Lease commitments include a property lease incepted on 1 January 2006. This lease relates to the factory in Brazil, for which there is an initial lease term of 10 years, which may be extended for a further 10 years at the Group’s option with a revised rental based on the prevailing market value. The terms of the lease include a base rental, included in the table below, and a contingent element to be calculated by reference to Group revenue.
Future minimum lease payments under non-cancellable operating leases comprise:
2007 2006 £000 £000
Within one year 7,279 3,154 In the second to fifth years inclusive 23,359 11,240 After five years 18,131 11,464
48,769 25,858
Capital and other financial commitments 2007 2006 £000 £000
Contracts placed for future capital expenditure not provided in the financial statements 6,024 6,000 Purchase commitments - -
6,024 6,000
Company
The commitments of the Company were £nil (2006 - £nil). 48723 MG Annual Report - End 17/4/08 11:37 Page 88
88 | Notes to the Accounts continued
27 Contingent liabilities
At 31 December 2007 the Group had granted guarantees and performance bonds to third parties totalling £10,374,000 (2006 - £4,676,000). Of this total £8,404,000 (2006 - £nil) was in respect of Seastream Australia Pty Limited, the jointly controlled entity in which the Group has a 50% holding.
Performance bonds are entered into in the normal course of operations and require the Group to make payments to third parties in the event that the Group does not satisfy its obligations under the terms of any related contracts.
The Group has put in place a joint and several guarantee of financial support, limited to the Group’s share of Seastream Australia Pty Limited’s liabilities, should the jointly controlled entity find itself unable to pay liabilities as they fall due.
The Company is liable, jointly and severally with other members of the Group under guarantees given to the Group’s bankers in respect of overdrawn balances on certain Group bank accounts and in respect of other overdrafts, loans and guarantees given by the banks to or on behalf of other Group undertakings. At 31 December 2007 there were bank overdrafts of £5,148,000 (2006 - £21,587,000) and loans of £48,400,000 (2006 - £101,274,000).
28 Pension costs
Contributions are made to personal money purchase pension plans for eligible employees.
The pension charge for the directors for the year was £90,000 (2006 - £53,000). The charge for the personal pension plans for all other employees was £684,000 (2006 - £919,000).
29 Ultimate parent company and controlling party
As at 31 December 2006 the majority shareholders in Wellstream Holdings PLC, and hence the Company’s ultimate controlling party were Candover Partners Limited and its associates (“Candover”), who together controlled 79.59% (2005: 79.59%; 2004: 81.67%) of the allotted share capital of the Company.
Candover was also the sole holder of the deep discount bonds disclosed within note 21. The amount due to bondholders at 31 December 2007 was £nil (2006 - £56,212,000) and the amount of interest accruing during the year was £1,783,000 (2006 - £5,451,000).
On 5 April 2007 the Company was re-registered as Wellstream Holdings PLC. In April 2007 Wellstream Holdings PLC issued a Prospectus for the Global Offer of new shares and some existing shares in the Company. The result was that Wellstream Holdings PLC became listed on the London Stock Exchange on 1 May 2007. Upon this flotation, Candover Partners Limited ceased to be deemed the ultimate controlling party of the Company.
At 31 December 2007 there is no controlling party.
30 Related party transactions
Group Transactions between fellow subsidiaries which are related parties have been eliminated on consolidation and are not disclosed.
Transactions with key management personnel The directors believe that the Board of directors is the Group’s key management personnel as defined by IAS 24 “Related party transactions”. Compensation paid to the Company’s Board of directors is disclosed in the Directors’ Remuneration Report.
During the year ended 31 December 2007, and since, neither any director nor any other executive officer, nor any associate of any director or any other executive officer, was indebted to the Group.
During the year the Group incurred a share based payment charge of £4,042,000 (2006 - £nil) in respect of share options granted to key management personnel.
Other than as disclosed above, the Group has not been, and is not now, a party to any material transaction, or proposed transactions, in which any member of the key management personnel (including directors, any spouse or relative of the directors, or any relative of such spouse), had or was to have a direct or indirect material interest.
Wellstream Holdings PLC Annual Report & Accounts 2007 48723 MG Annual Report - End 17/4/08 11:37 Page 89
Notes to the Accounts continued | 89
30 Related party transactions (continued)
Transactions with Candover, the Group’s former ultimate controlling party The deep discount bonds disclosed in note 21 were all held by Candover. Other transactions between the Company and Candover are set out below: Goods and services Amounts owing from provided related party 2007 2006 2007 2006 £000 £000 £000 £000
Directors’ fees 43 38 - -
2007 2006 £000 £000 Transactions with jointly controlled entity Amounts invoiced to and owed by jointly controlled entity in respect of corporate administration fees: 687 -
Group guarantees in respect of the jointly controlled entity are disclosed in note 27.
Company 2007 2006 £000 £000
Amounts due from subsidiary undertaking 67,245 1,001
During the year the Company made cash advances of £66,244,000 (2006 - £nil) to Wellstream International Limited. During the year the Company incurred a share based payment charge of £3,624,000 (2006 - £nil) in respect of share options granted to Sir Graham Hearne, a non-executive director. 48723 MG Annual Report - End 17/4/08 11:37 Page 90
90 | Historical Results
Historical Results IFRS 2007 2006 2005 2004 £000 £000 £000 £000
Income statement Revenue 266,810 147,221 90,109 50,069
Operating profit/(loss) 47,561 19,845 5,354 (9,735) Foreign exchange gains/(losses) on financing 2,755 17,002 (14,258) 6,010 Finance income 1,115 402 1 2 Finance expenses (9,691) (11,817) (10,551) (7,993)
Profit/(loss) before tax 41,740 25,432 (19,454) (11,716) Tax (12,727) (23) (289) (229)
Profit/(loss) for the year (all attributable 29,013 25,409 (19,743) (11,945) to equity holders of the parent)
Balance sheet Assets Non-current assets 98,457 84,405 75,711 77,358 Current assets 171,458 81,233 55,356 23,326
Liabilities Current liabilities (112,906) (76,850) (61,736) (25,404) Non-current liabilities (54,221) (94,261) (98,326) (85,648)
Net assets/(liabilities) 102,788 (5,473) (28,995) (10,368)
Equity
Total equity/(deficit) 102,788 (5,473) (28,995) (10,368)
The amounts disclosed above relate to the year ended 31 December 2004 and subsequent years. Earlier years were reported under UK GAAP and it is not practical to restate amounts to International Financial Reporting Standards (IFRSs) for periods prior to the date of transition to IFRSs. 48723 MG Annual Report - End 17/4/08 11:37 Page 91
Shareholder information | 91
Shareholder information
Payment of dividends Legal Advisors to the Company As stated in the Prospectus there will no payment Clifford Chance LLP of a dividend for 2007. 10 Upper Bank Street, Canary Wharf London, E14 5JJ Officers and Advisers Tel: +44 (0)20 7006 1000 Company Secretary & Registered Office Rob Lamb Registrar Wellstream Holdings PLC Equiniti Wellstream House, Wincomblee Road Aspect House Walker Riverside, Newcastle upon Tyne Spencer Road NE6 3PF, UK Lancing, BN99 6DA Tel: +44 (0)191 295 9000 Tel: +44 (0)871 384 2030 Company Number 4601199 Corporate and Financial PR Auditors Tulchan Communications Deloitte & Touche LLP 6th Floor, Kildare House, 3 Dorset Rise Gainsborough House London, EC4Y 8EN 34-40 Grey Street Tel: +44 (0)20 7353 4200 Newcastle upon Tyne NE1 6AE Brokers Tel: +44 (0)191 261 4111 Credit Suisse One Cabot Square Investor Relations Manager Canary Wharf Jason Nunn London, E14 4QJ Wellstream Holdings PLC Tel: +44 (0)20 7888 8888 Bennet House, 54 St James Street London, SW1A 1JT, UK Tel: +44 (0)20 7318 1986
Annual General Meeting 19 May 2008 Interim results to be announced around end of August 2008.
Website www.wellstream.com Our shares are traded under the London Stock Exchange ticker WSM. All announcements and press releases are listed on our website under investor relations.
The Company’s share register is open to the public by law. If you receive unsolicited mail you can limit what you receive by registering with the Mailing Preference Society Freepost 22 London W1E 7EZ. 48723 MG Annual Report - End 17/4/08 11:37 Page 92
92 | Glossary
Glossary
Continuous Improvement Programme - km - Kilometres Wellstream’s programme to improve efficiency nkm - A normalised km is based on the work and production at its manufacturing facilities centre hours required to produce a standard Deepwater - Water depths greater than eight inch ID offshore pipe or a standard four 500 metres inch ID onshore pipe. A relative time factor is EBITDA - Earnings before interest, tax, applied to other pipes, where applicable, to depreciation and amortisation convert actual production lengths and composition into normalised km E&P - Exploration and production OHSAS 18001 - An international occupational Flexbarrier - Polymer fluid barrier layer of flexible health and safety management system offshore pipe specification FlexSteel™ - A specially designed flexible pipe PA12 - A new grade of nylon polymer developed for use in onshore applications jointly by Wellstream International Limited and Flowlines - Static pipelines used to carry fluids Degussa, using Degussa’s trademarked product on the sea bed VESTAMID_ LX9020 Fluid transfer lines - Large diameter dynamic Reels - Devices around which lengthy pipelines often hanging in a large “U” bend in the continuous items such as cables or flexible pipes water column connecting to two structures which are wrapped for transportation or storage are often dynamic Revenue Backlog - Is the aggregate of revenue FPSO - Floating Production, Storage and that has not yet been recognised in the accounts Offloading; a converted or custom-built ship- from contracts that have been entered into and shaped floater, employed to process oil and gas from contracts that the directors are confident will for temporary storage of oil prior to transhipment be entered into HSE - Health, Safety and Environmental Riser - A pipe or assembly of pipes used to transfer produced fluids from the seabed to the HSEQ - Health, Safety, Environmental and Quality surface facilities or to transfer injection fluids, ID - Internal diameter control fluids or lift gas from the surface facilities ISO 14001 - A global certification administered and the seabed. Risers can be flexible or hybrids by the International Organisation for Standardisation of flexible and rigid pipe confirming low environmental impact ISO 9001 - A global certification administered by the International Organisation for Standardisation confirming efficient and effective production processes 48723 MG Annual Report - End 17/4/08 11:37 Page 93
Notice of AGM | 93
Annual General Meeting to be held at 3pm on 19 May 2008
The Notice of Annual General Meeting of the Company to be held at 3pm on Monday, 19 May 2008, at Credit Suisse, One Cabot Square, Canary Wharf, London E14 4QJ, is set out on pages 93 to 100.
The action to be taken by Shareholders is set out on page 95.
This Document Is Important And Requires Your Immediate Attention.
If you are in any doubt as to what action you should take, you are recommended to consult immediately your stockbroker, bank manager, solicitor, accountant or other independent financial advisor duly authorised under the Financial Services and Markets Act 2000 if you are resident in the United Kingdom or, if you reside elsewhere, another appropriately authorised financial advisor. If you have sold or otherwise transferred all your ordinary shares in Wellstream Holdings PLC (the “Company”) please forward this document, together with the accompanying documents to the purchaser or transferee of your ordinary shares or to the bank, stockbroker or other agent through whom the sale or transfer was effected, for transmission to the purchaser or transferee. 48723 MG Annual Report - End 17/4/08 11:37 Page 94
94 | Notice of AGM continued
Wellstream Holdings PLC Wellstream House Wincomblee Road Walker Riverside Newcastle upon Tyne NE6 3PF Tel: +44 (0)191 295 9000 Fax: +44 (0)191 295 9001
Letter from the Chairman
16 April 2008
Dear Shareholder
2008 Annual General Meeting It is my great pleasure to be writing to you enclosing the Notice convening the first Annual General Meeting of the Company, to be held at 3pm on Monday, 19 May 2008 at Credit Suisse, One Cabot Square, Canary Wharf, London E14 4QJ. The Notice details the business to be considered at the meeting and is set out on pages 96 to 98 of this document. The purpose of this letter is to explain certain elements of that business to you. A summary of the action to be taken by Shareholders is set out at the end of this letter, on page 95.
This year, as well as the ordinary business usually dealt with at an Annual General Meeting (“AGM”), there are four additional items of special business (Resolutions 12 to 15). The ordinary business includes motions to re-elect individually all of the directors. Under the Company’s Articles of Association, a director of the Company appointed by the board may only hold office until the next following AGM, unless reappointed at that AGM. Further, a director appointed more than three years prior to an AGM must also retire from office at that AGM. Those directors who were appointed by the board in 2007 will be proposed for election at the AGM (see Resolutions 3 to 6). All the remaining directors were appointed more than three years prior to the AGM and so will also be proposed for re-election at the AGM (see Resolutions 7 to 10). Short biographical details of each director appear on pages 34 and 35 of the Annual Report. Having considered the performance of and contribution made by each of the directors, the board remains satisfied that the performance of each director continues to be effective and to demonstrate commitment to the role and, as such, recommends their re-election.
On 8 April 2008, Candover, a major shareholder, sold its shares in the Company, as announced to the London Stock Exchange. Consequently Nils Stoesser, their representative on the Board, resigned as a non-executive director on 8 April 2008. Because this was after the date of the Annual Report (1 April) but before the date of this letter to you, references in the Annual Report do not reflect the fact of the share sale or Nils Stoesser’s resignation. I would like to thank Nils for his very valuable contribution and support over the years. We appreciated his counsel and wish him well for the future.
The four additional items of special business for consideration at the AGM, of which resolutions 13, 14 and 15 will be proposed as special resolutions, are explained in this letter:
Resolutions 12 and 13 - directors’ power to allot shares and dis-application of pre-emption rights Resolution 12 will be proposed to continue the directors’ authority to allot ordinary shares up to an aggregate nominal amount of £331,900, being slightly under one-third of the Company’s issued ordinary share capital on 16 April 2008. This authority will expire at the earlier of the end of the next AGM or 20 August 2009, unless renewed at the AGM in 2009. The directors do not intend to exercise the authority, however they do consider it prudent to maintain the flexibility that this authority provides.
If shares are being issued for cash, the Companies Act 1985 says that they must in the first instance be offered to existing Shareholders in proportion to their holdings. Resolution 13 will be proposed to continue the directors’ power to allot new ordinary shares for cash otherwise than in proportion to existing holdings. In the case of allotments other than for rights issues or other pre-emptive offers, the authority is limited to shares representing an aggregate nominal amount of £49,789.88, amounting to 5% of the Company’s issued ordinary share capital. This power will expire at the earlier of the end of the next AGM or 20 August 2009, unless renewed at the AGM in 2009. 48723 MG Annual Report - End 17/4/08 11:37 Page 95
Notice of AGM continued | 95
Resolution 14 - Power to purchase shares Resolution 14 will be proposed to enable the Company to purchase in the market up to a maximum of 9,957,975 ordinary shares (representing 10 per cent of the Company’s issued ordinary share capital on 16 April 2008) for cancellation at a minimum price of £0.01 per share and a maximum price of not more than 5 per cent above the average of the middle market quotations for an ordinary share as derived from The London Stock Exchange Daily Official List for the five business days immediately preceding the day on which that ordinary share is purchased. This authority will lapse on the earlier of the end of the next AGM or 20 August 2009, unless renewed at the AGM in 2009.
The directors would not expect to purchase ordinary shares in the market unless, in the light of market conditions prevailing at the time, they considered that to do so would enhance earnings per share and would be in the best interests of Shareholders generally. Further, the directors expect that if any ordinary shares were to be purchased, such shares would be cancelled. Any purchases made by the Company will be announced no later than 7.30am on the business day following the transaction.
Resolution 15 - Adoption of new Articles of Association Resolution 15 will be proposed to adopt new Articles of Association in order to update the Company’s current Articles of Association primarily to take account of changes in English company law brought about by the Companies Act 2006. The principal changes introduced in the new Articles of Association are summarised in the Appendix on pages 99 to 100 of this document. Other changes, which are of a minor, technical or clarificatory nature and also some more minor changes which merely reflect changes brought in by the Companies Act 2006 have not been noted in the Appendix.
Copies of the proposed new Articles of Association (marked to show the proposed amendments) are available for inspection at the Company’s registered office, Wellstream House, Wincomblee Road, Walker Riverside, Newcastle upon Tyne, NE6 3PF, and at Clifford Chance LLP, 10 Upper Bank Street, Canary Wharf, London E14 5JJ, during usual business hours on any weekday (public holidays excluded) from the date of this notice until the close of the AGM and a copy will also be available for inspection at Credit Suisse, One Cabot Square, Canary Wharf, London E14 4QJ from 2.45pm on Monday 19 May 2008 until the end of the meeting.
Action to be taken by Shareholders Accompanying this document are the Annual Report and Accounts 2007 and a Form of Proxy.
You are asked to complete and sign the Form of Proxy and return it to the Company’s registrars, Equiniti, at Aspect House, Spencer Road, Lancing BN99 6ZR by 3pm on Thursday 15 May 2008.
A map showing how to get to Credit Suisse, One Cabot Square, Canary Wharf, London E14 4QJ has also been included.
Recommendation The directors consider that all the resolutions to be proposed at the Annual General Meeting are in the best interests of the Company and recommend you to vote in favour of them, as the directors intend to do in respect of their own beneficial holdings.
John W. Kennedy Chairman 48723 MG Annual Report - End 17/4/08 11:37 Page 96
96 | Notice of AGM continued
NOTICE IS HEREBY GIVEN that the FIRST ANNUAL GENERAL MEETING of the Company will be held at Credit Suisse, One Cabot Square, Canary Wharf, London E14 4QJ on Monday, 19 May 2008 at 3pm. Resolutions 13 to 15 will be proposed as Special Resolutions and the remainder as Ordinary Resolutions. Pursuant to the Company’s Articles of Association, items 1 to 11 are Ordinary Business and items 12 to 15 are deemed Special Business.
Resolution 1 To receive the Company’s annual accounts for the financial year ended 31 December 2007, together with the Directors’ Report, the Directors’ Remuneration Report and the auditors’ report on those accounts and on the auditable part of the Directors’ Remuneration Report.
Resolution 2 To reappoint Deloitte & Touche LLP as auditors to hold office from the conclusion of this meeting until the conclusion of the next general meeting of the Company at which accounts are laid and to authorise the directors to fix their remuneration.
Resolution 3 To elect Mr Neil Gaskell as a director of the Company.
Resolution 4 To elect Mr Christopher Gill as a director of the Company.
Resolution 5 To elect Mr Francisco Gros as a director of the Company.
Resolution 6 To elect Mr Patrick Murray as a director of the Company.
Resolution 7 To re-elect Mr Christopher Braithwaite as a director of the Company.
Resolution 8 To re-elect Mr Gordon Chapman as a director of the Company.
Resolution 9 To re-elect Sir Graham Hearne as a director of the Company.
Resolution 10 To re-elect Mr John Kennedy as a director of the Company.
Resolution 11 To approve the Directors’ Remuneration Report for the financial year ended 31 December 2007.
Resolution 12 THAT in substitution for all existing authorities the directors be generally and unconditionally authorised in accordance with section 80 of the Companies Act 1985 to exercise all the powers of the Company to allot relevant securities (within the meaning of that section) up to an aggregate nominal amount of £331,900 for a period expiring on the date of the next Annual General Meeting of the Company after the passing of this resolution or, if earlier, 20 August 2009, but the Company may before such expiry make an offer or agreement which would or might require relevant securities to be allotted after expiry of this authority and the directors may allot relevant securities in pursuance of that offer or agreement as if the authority conferred by this resolution had not expired. 48723 MG Annual Report - End 17/4/08 11:37 Page 97
Notice of AGM continued | 97
Resolution 13 THAT, in substitution for all existing powers and subject to the passing of resolution 12, the directors be generally empowered pursuant to section 95 of the Companies Act 1985 (the "Act") to allot equity securities (within the meaning of section 94(2) of the Act) for cash pursuant to the general authority conferred by resolution 12 as if section 89(1) of the Act did not apply to the allotment, provided that the power conferred by this resolution:
(A) will expire on the date of the next Annual General Meeting of the Company after the passing of this resolution or, if earlier, 20 August 2009, but the Company may before such expiry make an offer or agreement which would or might require equity securities to be allotted after expiry of this power and the directors may allot equity securities in pursuance of that offer or agreement as if the power conferred by this resolution had not expired; and
(B) is limited to:
(i) allotments of equity securities in connection with a rights issue; and
(ii) allotments of equity securities for cash otherwise than pursuant to paragraph (B)(i) up to an aggregate nominal amount of £49,789.88.
For the purpose of this resolution 13, "rights issue" means an offer of equity securities, open for acceptance for a period fixed by the directors, to holders of ordinary shares made in proportion (as nearly as may be) to their respective existing holdings of ordinary shares but subject to the directors having a right to make such exclusions or other arrangements in connection with the offer as they deem necessary or expedient:
(a) to deal with equity securities representing fractional entitlements; and
(b) to deal with legal or practical problems arising in any overseas territory or by virtue of shares being represented by depositary receipts, the requirements of any regulatory body or stock exchange, or any other matter whatsoever.
The power conferred on the directors by this resolution 13 shall also apply to a sale of treasury shares, which is an allotment of equity securities by virtue of section 94(3A) of the Act, but with the omission of the words “pursuant to the general authority conferred by resolution 12”.
Resolution 14 THAT the Company be generally and unconditionally authorised to make one or more market purchases (within the meaning of section 163(3) of the Companies Act 1985) of ordinary shares of £0.01 each in the capital of the Company (“ordinary shares”) provided that:
(a) the maximum aggregate number of ordinary shares authorised to be purchased is 9,957,975 (representing 10 per cent of the issued ordinary share capital);
(b) the minimum price which may be paid for an ordinary share is £0.01;
(c) the maximum price which may be paid for an ordinary share is an amount equal to 105 per cent of the average of the middle market quotations for an ordinary share as derived from The London Stock Exchange Daily Official List for the five business days immediately preceding the day on which that ordinary share is purchased;
(d) this authority expires the date of the next Annual General Meeting of the Company after the passing of this resolution or, if earlier, 20 August 2009; and
the Company may make a contract to purchase ordinary shares under this authority before the expiry of the authority which will or may be executed wholly or partly after the expiry of the authority, and may make a purchase of ordinary shares in pursuance of any such contract. 48723 MG Annual Report - End 17/4/08 11:37 Page 98
98 | Notice of AGM continued
Resolution 15 THAT the form of the Articles of Association produced to the meeting and initialled by the Chairman for the purposes of identification be and are hereby adopted as the new Articles of Association of the Company in substitution for and to the exclusion of all existing Articles of Association of the Company.
By order of the Board Rob Lamb Company Secretary 16 April 2008 Registered Office: Wellstream House Wincomblee Road Walker Riverside Newcastle upon Tyne NE6 3PF Registered in England and Wales No. 4601199
NOTES
1. A member of the Company is entitled to appoint a proxy to exercise all or any of his rights to attend, speak and vote at a general meeting of the Company. A member may appoint more than one proxy, provided that each proxy is appointed to exercise the rights attached to different shares.
2. A person who is not a member of the Company, but has been nominated by a member of the Company (the “relevant member”) to enjoy information rights (the “nominated person”), does not have a right to appoint any proxies under note 1 above. A nominated person may have a right under an agreement with the relevant member to be appointed or to have somebody else appointed as a proxy for the meeting. If a nominated person does not have such a right, or has such a right and does not wish to exercise it, he may have a right under an agreement with the relevant member to give instructions as to the exercise of voting rights.
3. To be effective, the instrument appointing a proxy and any authority under which it is executed (or a notarially certified copy of such authority) must be deposited at the Company’s registrars, Equiniti, at Aspect House, Spencer Road, Lancing BN99 6ZR by 3pm on Saturday 17 May 2008. A form of proxy is enclosed with this Notice. Delivery or receipt of an appointment of proxy does not prevent a member attending and voting in person at the meeting.
4. In accordance with Regulation 41 of the Uncertificated Securities Regulations 2001, only those members entered on the relevant register of members of the Company as at 6pm on 17 May 2008 shall be entitled to attend or vote at the meeting in respect of the number of shares registered in their name at that time. Changes to entries on the relevant register of members after 6pm on 17 May 2008 shall be disregarded in determining the rights of any person to attend or vote at the meeting.
5. The register referred to in note 4 means the issuer register of members and the operator register of members maintained in accordance with Regulation 20 of the Uncertificated Securities Regulations 2001.
6. Copies of the letters of appointment for the non-executive directors of the Company and a copy of the Articles of Association of the Company (marked to show the proposed amendments) will be available for inspection at the Company’s registered office, Wellstream House, Wincomblee Road, Walker Riverside, Newcastle upon Tyne, NE6 3PF, and at Clifford Chance LLP, 10 Upper Bank Street, London E14 5JJ, during usual business hours on any weekday (public holidays excluded) from the date of this Notice until the close of the AGM and will also be available for inspection at Credit Suisse, One Cabot Square, Canary Wharf, London E14 4QJ from 2.45pm on Monday 19 May 2008 until the end of the meeting. 48723 MG Annual Report - End 17/4/08 11:37 Page 99
Notice of AGM continued | 99
7. At 15 April 2008 (being the last business day prior to the publication of this Notice) the issued share capital of the Company consists of 99,579,750 ordinary shares, carrying one vote each. Therefore, the total voting rights in the Company as at 15 April 2008 are 99,579,750.
8. In order to facilitate voting by corporate representatives at the meeting, arrangements will be put in place at the meeting so that: (i) if a corporate Shareholder has appointed the Chairman of the meeting as its corporate representative with instructions to vote on a poll in accordance with the directions of all of the other corporate representatives for that Shareholder at the meeting, then on a poll those corporate representatives will give voting directions to the Chairman and the Chairman will vote (or withhold a vote) as corporate representative in accordance with those directions; and (ii) if more than one corporate representative for the same corporate Shareholder attends the meeting but the corporate Shareholder has not appointed the Chairman of the meeting as its corporate representative, a designated corporate representative will be nominated, from those corporate representatives who attend, who will vote on a poll and the other corporate representatives will give voting directions to that designated corporate representative. Corporate Shareholders are referred to the guidance issued by the Institute of Chartered Secretaries and Administrators on proxies and corporate representatives (www.icsa.org.uk) for further details of this procedure. The guidance includes a sample form of representation letter if the Chairman is being appointed as described in (i) above.
Appendix
Explanatory Notes on Principal Changes to the Company’s Articles of Association
1. Articles which duplicate statutory provisions Provisions in the current Articles of Association, which replicate provisions contained in the Companies Act 2006, are in the main amended to bring them into line with the Companies Act 2006. Certain examples of such provisions include provisions as to the form of resolutions, the variation of class rights and provisions regarding the period of notice required to convene general meetings. The main changes proposed to reflect this approach are detailed below.
2. Form of resolution The current Articles of Association contain a provision that, where for any purpose an ordinary resolution is required, a special or extraordinary resolution is also effective. This provision is being amended as the concept of extraordinary resolutions has not been retained under the Companies Act 2006.
3. Variation of class rights The current Articles of Association contain provisions regarding the variation of class rights. The proceedings and specific quorum requirements for a meeting convened to vary class rights are contained in the Companies Act 2006. The relevant provisions have therefore been amended in the new Articles of Association.
4. Convening extraordinary and annual general meetings The provisions in the current Articles of Association dealing with the convening of general meetings and the length of notice required to convene general meetings are being amended to conform to new provisions in the Companies Act 2006. In particular a general meeting to consider a special resolution can be convened on 14 days’ notice, whereas previously 21 days’ notice was required.
5. Votes of members Under the Companies Act 2006 proxies are entitled to vote on a show of hands whereas under the current Articles of Association proxies are only entitled to vote on a poll. The time limits for the appointment or termination of a proxy appointment have been altered by the Companies Act 2006 so that the articles cannot provide that they should be received more than 48 hours before the meeting or in the case of a poll taken more than 48 hours after the meeting, more than 24 hours before the time for the taking of a poll, with weekends and bank holidays being permitted to be excluded for this purpose. Multiple proxies may be appointed provided that each proxy is appointed to exercise the rights attached to a different share held by the Shareholder. Multiple corporate representatives may also be appointed in accordance with the Companies Act 2006. The new Articles of Association reflect all of these new provisions. 48723 MG Annual Report - End 17/4/08 11:37 Page 100
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6. Conflicts of interest The Companies Act 2006 sets out directors’ general duties which largely codify the existing law but with some changes. Under the Companies Act 2006, from 1 October 2008 a director must avoid a situation where he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the Company’s interests. The requirement is very broad and could apply, for example, if a director becomes a director of another company or a trustee of another organisation. The Companies Act 2006 allows directors of public companies to authorise conflicts and potential conflicts where appropriate, provided that the articles of association contain a provision to this effect. The Companies Act 2006 also allows the articles of association to contain other provisions for dealing with directors’ conflicts of interest to avoid a breach of duty. The new Articles of Association give the directors authority to approve such situations and to include other provisions to allow conflicts of interest to be dealt with in a similar way to the current position.
There are safeguards that will apply when directors decide whether to authorise a conflict or potential conflict. Firstly, only directors who have no interest in the matter being considered will be able to take the relevant decision and, secondly, in taking the decision the directors must act in a way they consider, in good faith, will be most likely to promote the Company’s success. The directors will be able to impose limits or conditions when giving authorisation if they think this is appropriate.
It is also proposed that the new Articles of Association should contain provisions relating to confidential information, attendance at board meetings and availability of board papers to protect a director being in breach of duty if a conflict of interest or potential conflict of interest arises. These provisions will only apply where the position giving rise to the potential conflict has previously been authorised by the directors.
It is the Board’s intention to report annually on the Company’s procedures for ensuring that the Board’s powers to authorise conflicts are operated effectively.
7. Directors’ indemnities and loans to fund expenditure The Companies Act 2006 has in some areas widened the scope of the powers of a company to indemnify directors and to fund expenditure incurred in connection with certain actions against directors. In addition, the existing exemption allowing a company to provide money for the purpose of funding a directors’ defence in court proceedings now expressly covers regulatory proceedings and applies to associated companies.
8. General Generally the opportunity has been taken to bring clearer language into the new Articles of Association and in some areas to conform the language of the new Articles of Association.