Annual Financial Report

RNS Number : 4717B

Cairn Energy PLC

17 April 2012

 



FOR IMMEDIATE RELEASE                                                                                         17 April 2012

CAIRN ENERGY PLC ("Cairn" or "the Company")

Report and Accounts and Circular

The Company's annual report and accounts for the year ended 31 December 2011 (the "Report and Accounts") and a circular (the "Circular") were posted to shareholders on 16 April 2012. The Circular contains a notice convening the 2012 Annual General Meeting (the "AGM") and details of the proposed renewal of the existing authority to dispose of the Company's residual interest in Cairn India. The AGM will be held in the Sir Walter Scott Suite of the Balmoral Hotel, 1 Princes Street, Edinburgh, EH2 2EQ at 12.00 noon on Thursday 17 May 2012.

A copy of the Report and Accounts and Circular have also been submitted to the National Storage Mechanism and will shortly be available for inspection at: www.Hemscott.com/nsm. The Report and Accounts and Circular are also available on the Company's website at www.cairnenergy.com.

Defined terms used in this announcement shall, unless otherwise specifically defined herein, have the same meanings as in the Circular.

Circular - Residual Cairn India interest Disposal Authority

Cairn's strategy has always been to focus on exploration, appraisal and development opportunities where the Board believes there is a strategic fit with Cairn's ongoing goal to add and, where appropriate, realise value for Shareholders. The Company's residual interest in Cairn India represents a substantial proportion of Cairn's assets and therefore due to its size, the sale of any material part of the residual interest would be subject to shareholder approval under the Listing Rules. The Board believes that, in order to obtain the best terms when disposing of all or part of its residual shareholding in Cairn India, it needs to be able to sell or agree to sell those shares on normal market terms without having to obtain prior approval from Shareholders.

At the General Meeting of the Company held on 30 January 2012, Shareholders authorised the Board to dispose of all or part of the Group's residual interest in Cairn India. The UK Listing Authority agreed that the authority may be granted for a maximum period of 12 months from the date of approval by Shareholders, and therefore, unless renewed, that authority will expire on 30 January 2013, which is likely to be before the Company's annual general meeting in 2013. 

The Board continues to believe that, in order to obtain the best terms when disposing of all or part of its residual shareholding in Cairn India, it needs to be able to sell or agree to sell those shares on normal market terms without having to obtain prior approval from Shareholders. The Board is therefore seeking to renew the existing authority from Shareholders for the Company to be able to sell its residual interest in Cairn India at or as close as reasonably possible to the prevailing market price if and when the Company considers it appropriate to make such disposals. If renewed, the authority to dispose of the residual interest in Cairn India will expire on the earlier of 30 June 2013 (the last date on which the Company's annual general meeting for 2013 could be held) and the end of the Company's annual general meeting for 2013. Prior to that date the Company will assess the necessity and desirability of renewing the authority. 

The Company only intends to utilise the Residual Interest Disposal Authority where it believes that a sale is in the best interests of Shareholders and in the meantime the Company will continue to benefit from the growth and success of the discoveries in Rajasthan and elsewhere through the retained interest in Cairn India. The purpose of any such sales would be to invest the proceeds elsewhere in the Company's portfolio and in other exploration, appraisal and development opportunities that it identifies in accordance with its stated strategy.

Cairn India is primarily engaged in the business of oil and gas exploration, production and transportation. It is based in India and has a strong institutional shareholder base both within India and internationally. As at 31 December 2011, the fair value of the Company's residual interest in Cairn India was US$2.463 billion (extracted without material adjustment from the Group's audited consolidated financial accounts for the year ended 31 December 2011).

Report and Accounts - Information required by Disclosure and Transparency Rule 6.3.5

The information set out below, which is extracted from the Report and Accounts, is included in this announcement for the sole purpose of complying with Disclosure and Transparency Rule 6.3.5 and the requirements it imposes on issuers as to how to make annual financial reports public.  It should be read in conjunction with the Company's preliminary results announcement, released on 20 March 2012 (the "Preliminary Results Announcement").  This material is not a substitute for reading the full Report and Accounts. Page numbers and cross-references in the extracted information below refer to page numbers and cross-references in the Report and Accounts.

Responsibility statement

The following statement is extracted from page 66 of the Report and Accounts. This statement is repeated here solely for the purposes of complying with Disclosure and Transparency Rule 6.3.5. This statement relates to and is extracted from the Report and Accounts. It is not connected to the extracted information presented in this announcement or in the Preliminary Results Announcement.

'Directors' Responsibility Statement

The directors are responsible for preparing the Annual Report and the Group and Company financial statements in accordance with applicable United Kingdom law and those IFRSs as adopted by the European Union.

Under Company Law the directors must not approve the Group and Company financial statements unless they are satisfied that they present fairly the financial position, financial performance and cash flows of the Group and Company for that period. In preparing those financial statements, the directors are required to:

·      select suitable accounting policies in accordance with IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors and then apply them consistently;

·      present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

·      provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group's financial position and financial performance;

·      state that the Group and Company has complied with IFRSs, subject to any material departures disclosed and explained in the financial statements; and

·      make judgements and estimates that are reasonable and prudent.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group and Company's transactions and disclose with reasonable accuracy at any time the financial position of the Group and Company and enable them to ensure that the Group and Company's financial statements comply with the Companies Act 2006 and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Group and Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Directors' Statement Pursuant to the Disclosure and Transparency Rules

Each of the directors, whose names are listed in the Board of Directors section on pages 54 and 55 confirms to the best of his knowledge that:

·      the financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and Company; and

·      the Directors' Report includes a fair review of the development and performance of the business and the position of the Group and Company, together with a description of the principal risks and uncertainties that it faces."

The names of the directors who have given this responsibility statement are:

Sir Bill Gammell (Non-Executive Chairman)

Todd Hunt (Non-Executive Director)

Iain McLaren (Non-Executive Director)

Dr James Buckee (Non-Executive Director)

M. Jacqueline Sheppard QC (Non-Executive Director)

Alexander Berger (Non-Executive Director)

Simon Thomson (Chief Executive)

Dr Mike Watts (Deputy Chief Executive)

Jann Brown (Managing Director and Chief Financial Officer)

Principal risks and uncertainties

The following description of the principal risks and uncertainties is extracted from pages 36 to 37 (inclusive) of the Report and Accounts:

"Principal Risks and Uncertainties

Managing Business Risks

Getting risk management right is an essential component of business success at Cairn. The identification, evaluation and management of risk, together with the way we respond to changes in the external operating environment, are key to our success and underpin the safe delivery of our business plans and strategic objectives, protect our licence to operate and reputation, and help to create long-term competitive advantage.

In pursuing its strategy, Cairn considers investment opportunities that provide the right mix of political, commercial and technical risks. Cairn's success in South Asia over the past fifteen years has been achieved through having the confidence in our technical and commercial acumen and ability to identify, assess and effectively manage uncertainties. We knowingly accept business risks which are appropriate for the component parts of our business in pursuit of our vision.

Risk Identification and Management

Risk management is embedded in Cairn's organisation structure, operations and management systems. Business risks across the Group are addressed in a systematic way through the risk management structure shown below. This ensures the Board's assessment of risk is informed by risk factors and mitigating controls originating from and identified by the Group's assets, functional departments and in-country operations, including CIL, the Company's majority owned subsidiary in India (until 8 December 2011).

Cairn has a detailed risk management system and procedures in place to support risk evaluation across the Group. The risks associated with the delivery of the business plan and annual work programmes, and the associated mitigation measures are maintained in asset or project risk matrices and registers. Functional departments also maintain their own risk matrices and registers. The project delivery process requires that each new project or new business opportunity also maintains a risk register. These are consolidated into the Group risk matrix and register which is regularly reviewed by the joint Management and Corporate Teams.

The Risk Management Committee is chaired by the Chief Executive and meets ahead of every Board meeting to review the consolidated Group risk matrix and register, and the effectiveness of the risk management process. They also consider any 'black swan' risks which though low probability could have a major impact on the company. Risk management updates are provided at each Audit Committee and Board meeting.

More details on Cairn's approach to risk management is provided in the Internal Control section of the Corporate Governance Statement on page 67.

Business Risk Management at Cairn

CAIRN ENERGY PLC BOARD
▲ AUDIT COMMITTEE
▲ RISK MANAGEMENT COMMITTEE
▲ INTEGRATED BUSINESS RISK MANAGEMENT SYSTEM, INCLUDING REVIEW BY THE JOINT MANAGEMENT AND CORPORATE TEAMS
▲ CORPORATE AND FUNCTIONAL DEPARTMENT RISKS	▲ ASSET RISKS (GREENLAND, MEDITERRANEAN AND NEPAL)	▲ CAIRN INDIA RISKS

Responding to Changing Risk Environment in 2011

We operate in a dynamic environment where the risks associated with internal and external changes need to be effectively managed if we are to deliver the Company's business strategy and objectives. There were significant changes to the business and external environment in 2011 and the following summarises a number of the key steps taken to manage these risks:

·      Following the re-organisation in July 2011, responsibility for reviewing business risks outside of CIL was taken over by the joint Management and Corporate Teams.

·      Oversight of the risk management process in CIL was achieved through the provision of Cairn India Risk Reports and availability of CIL risk managers at the Company's Risk Management Committee meetings to answer questions. Well design, drilling and HSE operational experiences gained from the 2010 Greenland drilling project were shared with CIL and a joint risk review held with the CIL drilling team during the preparations for the Sri Lanka drilling project.

·      Cairn's management system works to identify the potential for major accident hazards and to formulate measures to prevent these hazards from being realised.

·      Application of the project delivery process and drilling risk management system to the Greenland Drilling Project. This included performing a Hazard Identification Study (HAZID) assessment to identify and mitigate potential major accident and HSE risks throughout the design and operation of the drilling activities.

·      Application by CIL of the 'Ready For Start Up' (RFSU) assurance process on the Bhagyam Field in Rajasthan, which ensures that the facilities are built to applicable national and international standards and the risks of injury and/or release of hydrocarbons to the environment are minimised during the start up and commissioning phase. The basic objective of RFSU is to ensure a smooth and safe transition from a 'project construction' phase to an 'operational' phase. This is achieved through a systematic review of a range of critical HSE and operational aspects by a multi-disciplinary team of competent professionals.

·      Enhancements to the business risk management system in 2011 included:

·      use of 'bow ties' to better define the risk interdependencies, causes and consequences and to identify appropriate actions, responsibilities and timelines; and

·      amending the level of financial impact criteria for the period post the return of cash to shareholders.

·      With the completion of the Vedanta transaction in December 2011, the following enhancements to the business risk management system are currently underway:

·      re-articulation of our risk appetite in light of the change in portfolio and new business plan;

·      re-considering the methodology for determining the impact of a risk; and

·      putting greater emphasis on evaluating gross risks and controls to provide input to internal audits on key controls over high gross risks.

Principal Risks and Uncertainties

The Company has gone through significant change in 2011 and as a consequence the principal risks and uncertainties facing the Company have changed on a regular basis. With the completion of both the disposal of a majority shareholding in CIL and the Greenland Drilling Project at the end of 2011, Cairn's risk profile has changed considerably in early 2012. The Company is now entering a new phase during which it will be looking to develop a more balanced portfolio with additional investment opportunities. As we commence delivering this next phase of investments, the principal risks and uncertainties facing the Company in relation to the Group's financial and operational performance and the mitigating actions, are as follows:

Risk:	Potential Impact:	Mitigation:
Assessment of timing of monetising our remaining Stake in Cairn India	Sub optimal extraction of value from the remaining shareholding in Cairn India	Maintain options for realising value from Cairn India shareholding at appropriate time
Challenges of accessing the right opportunities at the right price to deliver our growth strategies	Limited or inappropriate investment opportunities Incorrect decisions leading to non realisation of value adding opportunities	Source and screen investment opportunities, proceeding with the evaluation of those that meet Cairn's investment objectives Rigorous application of Project Delivery Process and Investment Procedures, including due diligence processes on new business investment opportunities
Ineffective management of stakeholder relationships	Actions by third parties or organisations (including non-governmental organisations (NGOs) potentially impacting business activities and reputation	Maintaining effective Corporate and Asset stakeholder management and communications plans"

Related party transactions

The following description of related party transactions is extracted from page 126 of the Report and Accounts:

"6.4 Related Party Transactions

The Company's principal subsidiaries are listed in Appendix 1. The following table provides the Company's balances which are outstanding with subsidiary companies at the Balance Sheet date:

	At 31 December		At 31 December
	2011		2010
	$m		$m
Amounts owed from subsidiary undertakings	677.3		92.8
Amounts owed to subsidiary undertakings	(76.1)		(78.1)
	601.2		14.7

The amounts outstanding are unsecured, repayable on demand and will be settled in cash. Interest, where charged, is at market rates. No guarantees have been given.

During the year ended 31 December 2011, the Company has made a provision for doubtful debts relating to amounts owed by related parties (2010: nil). See Section 3.3 for further details.

The following table provides the Company's transactions with subsidiary companies recorded in the profit (2010: profit) for the year, all of which were carried out on an arm's length basis:

	2011		2010
	$m		$m
Amounts invoiced to subsidiaries	21.5		21.6
Amounts invoiced by subsidiaries	6.6		18.7

Remuneration of Key Management Personnel

The remuneration of the directors of the Company and of the members of the Management and Corporate teams who are the key management personnel of the Group is set out below in aggregate. Further information about the remuneration of individual directors is provided in the audited part of the Directors' Remuneration Report on pages 80 to 87.

	2011		2010
Company	$m		$m
Short-term employee benefits	10.3		7.5
Termination benefits	5.8		-
Pension contributions	0.6		0.6
Share-based payments	11.3		26.3
	28.0		34.4

In addition, employer's national insurance contributions for key management personnel in respect of short-term employee benefits were $2.2m (2010: $1.1m).

Other Transactions       

During the year the Group did not make any purchases in the ordinary course of business from an entity under common control (2010: $nil). There were no amounts owed to the party at the year end (2010: $nil)."

Forward looking statements

This announcement contains or may contain forward-looking statements regarding Cairn, our corporate plans, future financial condition, future results of operations, future business plans and strategies. All such forward-looking statements are based on our management's assumptions and beliefs in the light of information available to them at this time. These forward-looking statements are, by their nature, subject to significant risks and uncertainties and actual results, performance and achievements may be materially different from those expressed in such statements. Factors that may cause actual results, performance or achievements to differ from expectations include, but are not limited to, regulatory changes, future levels of industry product supply, demand and pricing, weather and weather related impacts, wars and acts of terrorism, development and use of technology, acts of competitors and other changes to business conditions. Cairn undertakes no obligation to revise any such forward-looking statements to reflect any changes in Cairn's expectations with regard thereto or any change in circumstances or events after the date hereof.

 

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