Annual Financial Statements

In the normal course of its operations, Tongaat Hulett is inter alia exposed to capital, credit, foreign currency, interest, liquidity and commodity price risks. In order to manage these risks, Tongaat Hulett may enter into transactions, which make use of derivatives. They include forward exchange contracts (FEC's) and options, interest rate swaps and commodity futures and options. Separate committees are used to manage risks and hedging activities. Tongaat Hulett does not speculate in or engage in the trading of derivative instruments. Since derivative instruments are utilised for risk management, market risk relating to derivative instruments will be offset by changes in the valuation of the underlying assets, liabilities or transactions being hedged. The overall risk strategy remains unchanged from 2006.

Capital risk management
Tongaat Hulett's overall strategy around capital structure remains unchanged from 2006. Tongaat Hulett manages its capital to ensure that its operations are able to continue as a going concern while maximising the return to stakeholders through an appropriate debt and equity balance. The capital structure of Tongaat Hulett consists of debt, which includes borrowings, cash and cash equivalents and equity. It was reviewed in detail by the board in the corporate restructure process in 2007.

Credit risk
Financial instruments do not represent a concentration of credit risk. The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are a variety of major banks with high credit ratings assigned by international credit-rating agencies. Accounts receivable and loans are spread among a number of major industries, customers and geographic areas. In addition, appropriate credit committees review significant credit transactions before consummation. Where considered appropriate, use is made of credit guarantee insurance. A suitable provision is made for doubtful debts. Financial guarantee contracts are accounted for as insurance arrangements.

Past due trade receivables
Included in trade receivables are debtors which are past the original expected collection date (past due) at the reporting date, mainly due to delays in the property transfer process and no provision has been made as there has not been a significant change in credit quality and the amounts are still considered recoverable. A summarised age analysis of past due debtors is set out below.

Forward exchange contracts that constitute designated hedges of currency risk at year end are summarised as follows:

The fair value is the estimated amount that would be paid or received to terminate the forward exchange contracts in arm's length transactions at the balance sheet date.

Forward exchange contracts that do not constitute designated hedges of currency risk at year end are summarised as follows:

Tongaat Hulett has the following uncovered foreign receivables:

Commodity price risk
Commodity price risk arises from the risk of an adverse effect on current or future earnings resulting from fluctuations in the prices of commodities. To hedge prices for Tongaat Hulett's substantial commodity requirements, commodity futures and options are used, including fixed and spot-defined forward sales contracts and call and put options. Tongaat Hulett Sugar secures the premium on refined sugar exports from fluctuating international prices by using commodity futures. Tongaat Hulett Starch has secured its maize requirements for the current maize season to 31 May 2008 and a significant portion of its requirements for the year ending 31 May 2009 by means of unpriced procurement contracts and futures. At the year end the commodity futures contracts were:

Liquidity risk
Tongaat Hulett manages its liquidity risk by monitoring forecast cash flows on a weekly basis. There are unutilised committed banking facilities of R2,2 billion (2006 - R1,0 billion).

Borrowings inclusive of interest projected at current interest rates:
 

Defined Contribution Pension and Provident Schemes
There are three defined contribution schemes, one of which is located in Swaziland. The latest audited financial statements of these schemes all reflect a satisfactory state of affairs. Contributions of R18 million were expensed during the year (2006 - R16 million).

Defined Benefit Pension Scheme
There is one defined benefit scheme, The Tongaat-Hulett Pension Fund (the Fund), for employees including those of the Hulett Aluminium Joint Venture. The Fund is actuarially valued at intervals of not more than three years using the projected unit credit method. In the statutory actuarial valuation of the scheme as at 31 December 2001 the Fund was certified by the reporting actuary to be in a sound financial position. With effect from 7 December 2001 the Pension Funds Second Amendment Act was promulgated. This Act required the Fund to submit a plan for the apportionment on a fair basis to the employer and past and current members of the Fund of the actuarial surplus as at 31 December 2001. The 2001 apportionment plan was approved by the Financial Services Board in May 2007. The manner in which the Fund proceeds following the unbundling of Hulamin from Tongaat Hulett and the split between the employers participating in the Fund of the share of the actuarial surplus attributed to the employer surplus account has yet to be finalised. Accordingly, due to the uncertainty regarding the apportionment, no surplus has been recognised on the balance sheet.

An actuarial valuation of liabilities, based on the existing benefits, carried out as at 31 December 2007 in accordance with IAS 19 showed the present value of obligations to be adequately covered by the fair value of the scheme assets.

Post-Retirement Medical Aid Benefits
The obligation to pay medical aid contributions after retirement is no longer part of the conditions of employment for employees engaged after 30 June 1996. A number of pensioners and current employees, however, remain entitled to this benefit. The entitlement to this benefit for current employees is dependent upon the employee remaining in service until retirement and completing a minimum service period of ten years. The unfunded liability for post-retirement medical aid benefits is determined actuarially each year and comprises:

Share incentive gains
Following the approval by shareholders of the split of the Tongaat-Hulett Group into two separate listed entities, Tongaat Hulett and Hulamin and with the circular to shareholders relating to the corporate transactions including detail on the approach to the share incentive schemes, certain share incentive scheme transactions, prior to the corporate restructuring, were concluded. These transactions are included in the share incentive gains set out below and were settled by the delivery of shares, some of which were sold, inter alia to meet tax payments, with the remainder being held in shares in Tongaat Hulett.

Interest of directors of the company in share capital
The aggregate holdings as at 31 December 2007 of those directors of the company holding issued ordinary shares of the company are detailed below. Holdings are beneficial except where indicated otherwise. The comparative figures have been adjusted for the shareholding of those directors who retired during the year and for those directors who came off the board following the corporate restructuring and the unbundling of Hulamin.

Details of awards in terms of the company's share incentive schemes are as follows:
As a result of the unbundling of Hulamin, participants in these share schemes who had not exercised their rights at the unbundling date converted their existing Tongaat-Hulett Group Limited instruments into two components, a Tongaat Hulett Limited component and a Hulamin Limited component. The obligation to settle these share schemes is in accordance with the following principles, which are in accordance with the Unbundling Agreement. Tongaat Hulett is obliged to settle all benefits under these share schemes for its own employees only, using Tongaat Hulett shares. It will settle the outstanding share scheme instruments that arise after the award adjustments for its own employees, by purchasing Tongaat Hulett shares in the market, or issuing Tongaat Hulett shares. The benefit for the Hulamin component will be determined with reference to the Hulamin share price, and the Tongaat Hulett component with respect to the Tongaat Hulett share price, however, benefits arising from the Hulamin component will be settled using Tongaat Hulett shares.

The Tongaat-Hulett Employees Share Incentive Scheme and The Tongaat-Hulett Group Limited 2001 Share Option Scheme (the Original Share Option Schemes)
Under the original share option schemes, participating employees were awarded share options in the company. On vesting, the employee is entitled to purchase shares in the company and immediately sell the shares at the market price, thereby benefiting from the appreciation in the share price. The original strike price of each Tongaat-Hulett Group Limited option was apportioned between the Tongaat Hulett and Hulamin components with reference to the volume weighted average prices of both companies for the first 22 trading days after the unbundling. The VWAP was R93,89 and R29,04 respectively, with the expiry date being the same as that of the original options.

The significant inputs into the model for the 2003/4 awards of the original share option schemes were:  

In advance of the unbundling of Hulamin, partial accelerated vesting was permitted on the early vesting date based on full attainment of the performance conditions. The headline earnings per share (HEPS) performance to date relative to the HEPS performance condition applicable to the 2005 and 2006 award was tested on the early test date and this performance condition was fully met in respect of both the 2005 and 2006 awards. Vesting of the SARs was pro-rated with reference to the proportion of the performance period that had been served by participants up to the unbundling date. This pro-rata portion of the SARs was allowed to be exercised from the early vesting date up to the day before the unbundling date.

Following on the unbundling of Hulamin, participants in the share appreciation right scheme who had not exercised their rights at the unbundling date or whose rights had not vested, converted their existing Tongaat-Hulett Group Limited rights into two components, a Tongaat Hulett Limited component and a Hulamin Limited component with adjusted strike prices. The original strike price of each Tongaat-Hulett Group Limited right was apportioned between the Tongaat Hulett and Hulamin components with reference to the volume weighted average prices of both companies for the first 22 trading days after the unbundling. The VWAP was R93,89 and R29,04 respectively. Replacement SARs will not be subject to any performance conditions other than the passage of time. The vesting and lapse dates of both new SARs will be the same as that of the original SARs.

In advance of the unbundling of Hulamin, partial accelerated vesting was permitted based on the attainment of the performance conditions. In respect of both the 2005 and the 2006 awards, 50% of the award is subject to the TSR condition and 50% is subject to the ROCE condition. Both the TSR and ROCE performance to date relative to the TSR and ROCE performance condition applicable to the 2005 and 2006 awards were tested on the early test date. Both these performance conditions had been fully met in respect of both the 2005 and 2006 awards. Vesting of the conditional awards was pro-rated with reference to the proportion of the performance period that had been served by participants up to the unbundling date. This pro-rata portion of the conditional awards vested on the early vesting date and was settled with shares in The Tongaat-Hulett Group Limited.

Following upon the unbundling of Hulamin, that portion of The Tongaat-Hulett Group Limited conditional awards that did not vest early were converted into two components, a Tongaat Hulett Limited component and a Hulamin Limited component with adjusted strike prices. The original strike price of each Tongaat-Hulett Group Limited conditional awards was apportioned between the Tongaat Hulett and Hulamin components with reference to the volume weighted average prices of both companies for the first 22 trading days after the unbundling. The VWAP was R93,89 and R29,04 respectively. The replacement conditional awards will not be subject to new performance conditions and will be subject to the original vesting dates.

The full matching award based on the number of shares pledged in 2005 and 2006, and retained until the early vesting date, vested on the early vesting date and an appropriate number of Tongaat-Hulett Group Limited shares were delivered to each of the participants prior to the unbundling date.

The interest of the directors in share options of the company are shown in the table below:

The option price and number of unexercised options after the unbundling of Hulamin at the end of June 2007 were apportioned into a Tongaat Hulett component (Tongaat Hulett) and a Hulamin component (Hulamin) as follows:

463 600 options relating to directors who resigned during the year are excluded from the opening balance.

The interest of the directors in other share-based instruments of the company are shown in the table below:

The gains made by directors are reflected in note 32 under Directors' Emoluments and Interests. The interests of those directors who resigned during the year have been excluded from the opening balances of directors interests.

The ESOP scheme consists of a share appreciation right scheme and participants share in 50% of the dividend payable to ordinary shareholders. The MSOP scheme consists of two components namely a share appreciation right scheme and a share grant scheme.

The ESOP Trust and MSOP Trust were established to acquire and hold Tongaat Hulett Limited shares for the benefit of designated employees. Tongaat Hulett Limited and its subsidiaries have made contributions to the MSOP Trust and the ESOP Trust (refer note 3). Due to these shares having specific repurchase rights at maturity (five years from grant), they are a separate class of restricted shares which, other than for the repurchase terms, rank paripassu with ordinary shares and become ordinary shares on repurchase.

The number of shares repurchased at maturity is calculated such that the market value of the repurchased shares will be equal to : - The grant price of the shares allocated, plus the value of cash dividends paid to ESOP participants - 80% of the market value (at the outset) of the shares issued in terms of the share appreciation right component of the MSOP - Rnil in respect of the share grant component of the MSOP; and - The Trusts will distribute the remaining Tongaat Hulett shares to the beneficiaries.

Under the share appreciation right scheme, participating employees are awarded the right to receive shares equal in value to the difference between the exercise price which will be equal to the grant price plus the aggregate of all cash dividends received (in the instance of the ESOP) and the market value at maturity of the scheme. The employee therefore participates in the share price appreciation in Tongaat Hulett. Under the share grant scheme, participating employees were granted the right to obtain ordinary shares in Tongaat Hulett on vesting.The value of both the MSOP share appreciation scheme and the MSOP share grant scheme are capped at a level of 10% compounded growth per year.

The results of Hulamin up to the end of June 2007 and for the twelve months ended 31 December 2006 are as follows: