Final Results

Thursday 7 March 2013

Aggreko plc

Another strong performance, with trading profit up 13% and earnings per share up 16%

Aggreko plc, the world leader in the supply of temporary power and temperature control, announces its results for the twelve months to 31 December 2012.

·; Both the Local business and Power Projects continue to deliver strong revenue growth. Group reported revenues excluding pass-through fuel up 20% and trading profit up 13%.

·; Local business reported revenues up 23% and trading profit up 41%.

o Flawless execution of London Olympics

o 30%+ growth in emerging markets

o Strong performance in North America

o Poit Energia acquisition completed and integration progressing well

·; Power Projects reported revenues excluding pass-through fuel up 15% and trading profit down 1%.

o 1,029 MW of new work won in the year

o Strong growth in gas-powered generation: 750 MW on rent at year end; + 77% more on rent y-o-y

o 100 MW cross-border project in Mozambique operating as an Independent Power Producer

o Trading margin impacted by increased debt provision and higher mobilisation costs

·; Successful implementation of new organisational structure.

·; Strategy Review confirms Aggreko is the global leader in fast-growing markets and is well-placed to deliver further growth over the next five years.

o Structural drivers of growth remain in place in Power Projects market

o Investment in growing our depot network in emerging markets will drive growth in the Local business

o Investment in new product development has delivered highly-efficient engine designed to deliver lowest-cost temporary power generation

o For the next five years, and subject to year-to-year variation, we expect double-digit average annual growth in revenues and trading profit, with returns on capital employed of over 20%

o Whilst delivering good growth, we expect to be able to increase significantly cash returns to shareholders over the next five years

o Presentation of the outcome of the Strategy Review will be webcast live from 9.00am this morning

Ken Hanna, Chairman, commented:

"I am pleased to report that Aggreko delivered another year of good progress in 2012. Reported revenues and trading profit both increased by 13%, and the Board is recommending an increase in the dividend of 15%. The recently-completed Strategy Review underlines the strong position the Group holds in fast-growing markets, and the exciting prospects that lie ahead for the next five years."

Rupert Soames, Chief Executive, commented:

"The Local business has had a very strong start to the year, with almost 20% more power on rent than a year ago, helped in part by our acquisition of Poit Energia in April 2012. Encouragingly, growth in the Local business has been broadly spread, with most areas other than Europe showing healthy year-on-year increases in MW on hire.

In Power Projects, we have signed new contracts totalling 140 MW in the year to date, and importantly, we have secured our first large order for our new Heavy Fuel Oil engine, with a 56 MW contract in the Caribbean. We have also secured a contract for 57 MW of diesel-powered generation in Djibouti. Trading continues to be subdued and is likely to remain so in the first half; however, in recent weeks there has been some improvement in the prospect pipeline.

Our expectations for the year as a whole remain unchanged from previous guidance."

Regional performance metrics:

Aggreko Plc will make a presentation to investment analysts at 9.00am GMT today at the office of UBS, 100 Liverpool Street, London. The presentation will be broadcast live through the Group's Investor website. To register, please go to http://ir.aggreko.com . A recording of the webcast will also be available on demand later today.

- ENDS -

Enquiries to:

CHAIRMAN'S STATEMENT

Introduction

I am delighted to be able to introduce my first Chairman's Statement. My predecessor, Philip Rogerson, stepped down at the AGM in April 2012 after ten years as Chairman and fifteen years on the Board and, on behalf of all my colleagues on the Board, I would like to thank Philip for his enormous contribution to Aggreko.

During my two years on the Board and the last year as Chairman, I have had the opportunity to meet many of the leaders of the Aggreko business, travelled to most of the Group's major locations, attended the opening of our new manufacturing facility in Dumbarton and witnessed the Aggreko team deliver a flawless service at the London Olympics. I have to say I have been immensely impressed by the culture, passion and commitment of everyone I have met. There is a real drive for excellence and superior customer service that has undoubtedly contributed to the success of the company over the last few years.

Performance (1)

I am pleased to report that Aggreko delivered another year of good progress in 2012. Reported revenues and trading profit (2) both increased by 13%, whilst on an underlying (3) basis revenues increased 14% and trading profit increased 6%. Underlying results exclude revenues and trading profit from the Poit Energia acquisition, pass-through fuel (4) and currency movements, as well as major events such as the Asian Games in 2011, and the London Olympics which contributed nearly £60 million to revenues in 2012.

Performance was strong in both our business segments. Power Projects grew underlying revenues by 15%, and the Local business by 13%. Trading margins in Power Projects were 33%, six points lower than 2011, principally due to increased bad debt provisions, mobilisation costs on our Mozambique contract and the reduction in revenues from our US Military contracts. Underlying trading margins in our Local business increased by one point to 17%, which enabled the business to deliver 20% growth in underlying trading profit.

At a Group level, profit before tax increased by 11% to £360 million (2011: £324 million). Diluted earnings per share increased by 16% to 100.40 pence (2011: 86.76 pence).

Strategy

As we announced in last year's annual report, we have been working on an update of the group strategy for the period 2013 to 2017. We have traditionally followed a five year planning cycle and later in this report we have explained the strategy we will follow for the next five years.

I am very pleased to report that our strategy for the period 2008 to 2012 has successfully delivered on all its financial targets. In 2008, we announced that we believed the Aggreko business could deliver, on average, double digit revenue and earnings growth over the period. Performance has exceeded our expectations despite the five year period incorporating one of the most severe economic downturns in living memory with compound annual growth of 20% in revenues and 24% in trading profit. In addition to the financial targets, we have substantially enhanced the business and developed the capabilities and infrastructure to be able to continue growing for the next five years. Over the last five years we have:

·; Increased EPS by 234%

·; Nearly doubled the number of our employees

·; Entered sixteen new countries and opened seventy three new locations (5)

·; Improved our NPS (customer satisfaction level) by 10 percentage points

·; Invested over £1.5bn in capital expenditure

·; Opened a new manufacturing facility in Dumbarton, Scotland

·; Acquired strategically important businesses in Brazil, North America, New Zealand and India

·; Successfully delivered a number of major global events (e.g. FIFA World Cup, London Olympics)

·; Returned £149 million to shareholders in the form of a special dividend

·; Delivered Total Shareholder Return of 257%.

Dividend

The Board is recommending a 15% increase in the dividend for the year as a whole; this will comprise a final dividend of 15.63 pence per ordinary share which, when added to the interim dividend of 8.28 pence, gives a total for the year of 23.91 pence. At this level, the dividend would be covered 4.2 times on a pre-exceptional basis. Subject to approval by shareholders, the final dividend will be paid on 23 May 2013 to ordinary shareholders on the register as at 26 April 2013, with an ex-dividend date of 24 April 2013.

Board and Governance

Governance is the framework that articulates a company's values and supports its behaviours. The Corporate Governance Report in the 2012 Annual Report sets out clearly the changes made in the last year which include an update of the Terms of Reference for all Board Committees and significant changes to the Board composition. We now consider that the Group complies with all of the provisions of the UK Corporate Governance Code and that the Board is appropriately balanced in terms of diversity and specialist skills.

Diana Layfield (May 2012) and Rebecca McDonald (October 2012) joined the Board during the year as Non Executive Directors. I am delighted with these new appointments and, between them, Diana and Rebecca bring a deep knowledge of Emerging Markets and the Global Energy Sector.

In September 2012, we announced a new organisation structure and three Executive Directors stepped down from their roles: Bill Caplan (November 2012), Kash Pandya (December 2012) and George Walker (December 2012). All three Regional Executive Directors were key contributors to the success of the Group's five year strategy and I would like to thank them on behalf of the Board.

The new organisation, which will take effect from 1 January 2013 comprises three regions of approximately equal size that incorporate both the Local and Power Project businesses. We are delighted that we have been able to promote to the Board, two internal appointments: Asterios Satrazemis (January 2013) will run the Americas Region and Debajit Das (January 2013) will run the Asia Pacific Region. And on 22 February 2013 we announced the appointment of David Taylor-Smith who will join the Board on 11 March 2013 and become the Regional Executive Director for Europe, the Middle East and Africa.

Employees

It has always been my belief that the most important investment that a company can make is in its people, and there is no doubt in my mind that the outstanding success of your Company is due to its dedicated and talented management team, and to the quality and determination of its workforce worldwide. On behalf of all the owners of the business, I would like to thank them all for their contribution to the success of your Company.

Outlook for 2013

The Local business has had a very strong start to the year, with almost 20% more power on rent than a year ago, helped in part by our acquisition of Poit Energia in April 2012. Encouragingly, growth in the Local business has been broadly spread, with most areas other than Europe showing healthy year-on-year increases in MW on hire.

In Power Projects, we have signed new contracts totalling 140 MW in the year to date, and importantly, we have secured our first large order for our new Heavy Fuel Oil engine, with a 56 MW contract in the Caribbean. We have also secured a contract for 57 MW of diesel-powered generation in Djibouti. Trading continues to be subdued and is likely to remain so in the first half; however, in recent weeks there has been some improvement in the prospect pipeline.

Our expectations for the year as a whole remain unchanged from previous guidance.

Ken Hanna

Chairman

7 March 2013

Group Strategy

The objective of our strategy is to deliver long-term value to shareholders, excellent service to customers and rewarding careers to our employees by being the leading global provider of temporary power and temperature control. Our strategy is founded on the belief that, in our market sector, it is possible to create competitive advantage by building a truly global business - i.e. one which operates in the same way around the world and can use the same fleet everywhere, the same processes, the same skills and the same infrastructure. This homogeneity means that significant operating advantages and efficiencies accrue to those who have global scale; the focus of our efforts, is therefore directed towards building global scale and securing these advantages and efficiencies for ourselves.

Our current strategy was developed following an in-depth review of Aggreko's business in 2003, and has been consistently applied (with the occasional tweak of the tiller) and which we have worked relentlessly to implement for the last nine years. We believe that this consistency of purpose has been a major contributor to our success and that the result - 19% compound growth in revenues and 28% compound growth in trading profit - is the proof of the strategy's success.

Whilst it is tempting (particularly to current management) to ascribe this success to our own brilliance, the fact is that we know we stand on the shoulders of giants. Aggreko's success over the last ten years has been made possible by the skilful and patient investment made over the previous forty years by our predecessors. It was they who built a network of service centres in North America, Europe and Australia; understood that designing and building our own equipment had major advantages; created a hard-working, entrepreneurial and customer-focused culture; and built a brand. The lesson we see every day is that it takes decades to achieve the sort of global scale which Aggreko now enjoys, and there are no short cuts.

We have a policy of thoroughly reviewing our strategy every five years, with interim updates every two years; since the first strategy review in 2003, we completed major reviews in 2007 and, most recently, in 2012. Aggreko's strategy is developed by the senior management team, led by the Chief Executive, and involves internal and external research, much of it proprietary. We seek to develop a deep understanding of the drivers of demand, changing customer requirements, and the competitive environment as well as developments in technology and regulation. We look at our own strengths and weaknesses, and at the opportunities and threats that are likely to face us. From this analysis, we develop a list of investment and operational options and analyse their relative risks and rewards, bearing in mind the capabilities and resources of the Group.

At the time of the 2007 review we set ourselves a target of growing the business at over 10% during the five years to 2012, subject to the vagaries of the world economy. We did not anticipate that there would be a financial crisis and global recession in that period, but it is a tribute to the structural drivers of growth in our business that we have bettered our targets by a significant margin, as shown in the table below.

Both our Power Projects and Local businesses have contributed to the growth we achieved; Power Projects grew trading profit at a 34% CAGR, whilst the Local business (which was hit harder by the recession) grew at a 16% CAGR.

We have now completed the 2012 Strategy Review which has incorporated a significant amount of proprietary research, as well as detailed input from many of the senior managers in the business. The process took around 14 months and included regular updates to the Board; the principal conclusions of the review are:

·; The strategic initiatives of the last 5 years have generally worked well, and Aggreko is a much stronger business now than it was in 2007. Set out below is our assessment of our scorecard against our stated targets.

Achievements against 2007 objectives

·; We said: we would grow revenues over 5 years at double-digit rates

o Revenues up 2.4x, CAGR 20%

·; We said: we expected there would be some margin dilution

o Trading margin +4pp to 25%; trading profit up 2.9x, CAGR 24%

·; We said: focus on expanding Local business in emerging markets to grow faster than underlying market growth of GDP + 2-3%

o Local Revenues 13% CAGR ex Events, 15% incl Events

·; We said: Power Projects market MW on hire would grow at around 20% per annum, and that our growth rate would be market +/- 5%

o Power Projects MW on hire: 20% CAGR

·; We said: we would spend around £1bn on new fleet and fund our growth without recourse to shareholders

o Fleet capital expenditure £1.5bn

o £350m cash paid to shareholders through dividends and return of value; dividend per share CAGR 24%

·; We said: we would create further value for shareholders

o Total Shareholder Return: 257% (FTSE-100 11%)

o Average Return on Equity over last 5 years of 30%; +7pp on previous strategy cycle

·; There have been some disappointments. In 2007 we said we would grow our temperature control business, but revenues from this product line have barely moved over the period. We also said that we thought there would be an opportunity to use our technology to provide smoothing of power generation in developed countries as wind became a larger proportion of capacity. So far, we have singularly failed in this endeavour, although we have found a parallel market supporting wind farm construction and commissioning.

Looking ahead to the next 5 years, we believe that:

·; Our Local business will continue to offer attractive opportunities for growth, particularly in emerging markets. We believe that the underlying market for power and temperature control rental grows at around 2 times GDP. The reason why emerging markets are so attractive is that their GDP is growing faster, and 2 x 6% is better than 2 x 1%. We have invested in opening or acquiring some 64 new locations in emerging markets since 2006; many of them have yet to achieve the $5 million annual revenues we would expect of a mature depot, so we expect to get the benefit as they grow to scale in the next five years. We will also take the opportunity through our new organisation structure to exploit the synergies that exist between the Local and Power Projects businesses; as we open Local businesses in new countries, contracts which previously might have been done by Power Projects can be executed at lower cost by depots. In terms of our expectation of the rates of growth the Local business will deliver over the next five years, we would expect revenue growth of between 8% and 12%; margins of between 17% and 20%; and a return on capital employed of between 18% and 21%. It should be emphasised that these are the averages we would expect over a five year period, and there will be years when we may be outside one of these ranges.

·; Our Power Projects business is focused on emerging markets and the growth in its markets are driven by structural issues. Growth in demand for electricity in emerging markets is growing faster than GDP, and few countries have been able to finance the additional permanent generating and transmission capacity needed to keep up with demand. Our review has confirmed that these structural issues are likely to remain in place for the foreseeable future; we believe that the shortfall between supply and demand will grow at about 13% CAGR for the next five years. We think this will translate into an increase in market demand for temporary power in the range of 10-15% per annum. In terms of our expectation of the rates of growth the Power Projects business will deliver over the next five years, we would expect underlying revenue growth of between 10% and 15%; margins of between 27% and 32%; and a return on capital employed of between 25% and 30%. As with the Local business, it should be emphasised that these are the averages we would expect over a five year period, and there will be years when we may be outside one of these ranges. Our reference to "underlying growth" above means the growth we would expect to achieve once we have adjusted for our contracts in Japan and with the US Military, which we expect to largely disappear over the course of 2013 and 2014.

·; Product innovation will continue to be an important source of growth. Aggreko is unique amongst operators in the market in designing, developing and manufacturing its own equipment, and we use this to drive down the capital cost of our rental fleet and to develop new products. In 2006 we launched a range of gas-powered generators which, because of the lower price of gas, allows customers to generate power at much lower cost per kWh than they can with diesel. Over the last five years, revenues from this product have grown by 63% CAGR to over $250 million, and we expect gas to account for around 40% of Power Projects' revenues in 2013. Encouraged by the success of our gas development, in 2009 we launched a £6 million development programme with Ricardo plc to develop an engine which would both be able to run on Heavy Fuel Oil, a much cheaper fuel than diesel, and would also improve on the performance of our existing diesel engines. Our new engine was launched in early 2013 and we have high hopes for it.

·; Longer term, we believe that the key to expanding the market for Power Projects is to be able to deliver a cost per kWh which makes temporary power competitive with permanent power. If we can marry the advantages of speed of deployment and flexibility of temporary power with the costs of permanent power, we should be able to greatly expand the market.

·; In all our businesses, there are opportunities to improve the efficiency of operations, whilst maintaining our prized agility. There are plenty of things we can do better and we will continue to develop our capability to improve the way we do things in the business; following the launch of our 2008 Orange Excellence programme, we have now trained over 900 people in continuous improvement techniques.

·; At a Group level, our expectation is that over the next five years we should achieve, on average and subject to year-on-year variation, double-digit rates of growth in revenues, with margins and returns on capital in excess of 20%.

Our strategy for each of the business lines is set out in more detail below.

Business line operational strategy

Supporting the Group strategy, Aggreko has developed operational strategies for our two different lines of business:

·; The Local business rents power and temperature control systems, ranging from small generators up to large industrial cooling towers, to customers who are typically within a few hours' driving time of our service centres;

·; The Power Projects business builds and then operates temporary power plants, selling their capacity and electricity to utilities, the military and major mining and oil companies, mainly in emerging markets.

The Local business

The Local business serves customers from 194 service centres in 47 countries in North, Central & South America, Europe, the Middle East, Africa, Asia and Australasia. This is a business with high transaction volumes: average contracts (excluding major events) have a value of around £17,000 and last a handful of weeks. The Local business represents 59% of Aggreko's revenues, excluding pass-through fuel, and 45% of trading profit. Since our first strategy review in 2003, revenues and trading profit have increased at a compound growth rate of 15% and 23% respectively:

The table below shows our progress since the last major strategy review five years ago:

There are three elements to our strategy for the Local business:-

1. Maintain a clear differentiation between our offering and that of our competitors through superior service.

2. Use the benefits of global scale to be extremely efficient. This should enable us to make attractive returns whilst delivering a superior service at competitive prices.

3. Offering superior service at competitive prices will allow us to increase market share and extend our global reach, delivering growing revenues at attractive margins. In terms of markets we serve, we have been very focussed on expanding our presence in countries that have high rates of GDP growth, particularly emerging markets. This enables us to obtain higher levels of growth, and increase our scale and global reach.

Against the first objective - to maintain a clear differentiation between our offering and that of our competitors - third-party research shows that Aggreko is one of the world's best-performing companies in terms of customer satisfaction. We are determined to maintain this reputation for premium service and we do this through the attitude and expertise of our staff, the geographic reach of our operations, the design, availability and reliability of our equipment, and the ability to respond to our customers 24 hours a day, 7 days a week.

The claim to be one of the world's best-performing companies in terms of customer satisfaction is a big one, but we think we have good reason to make it. For each of the last three years we have been asking about 20,000 customers what they think of the service they have received from us, and we measure our Net Promoter Score. This is an objective measure of customer satisfaction which reflects the balance between those who think we are wonderful and those who think we are dreadful. Happily, the former greatly outnumber the latter. Over the last seven years our score has improved by twelve percentage points and Satmetrix, a global leader in customer experience programmes who manage over 11 million customer responses annually (including Aggreko's), have confirmed that our Net Promoter Score in 2012 was amongst the top five highest of all their customers benchmarked world-wide in the business-to-business segment.

The second objective of our strategy for the Local business is to be extremely efficient in the way we run our operations. This is essential if we are to provide superior customer service at a competitive price and, at the same time, deliver to our shareholders an attractive return on capital. In a business in which lead-times are short, logistics are complex and we process a large number of low-value transactions, a pre-condition of efficiency is having high-quality systems and robust processes.

The operation of our Local businesses in most areas is based on a "hub-and-spoke" model which has two types of service centre: hubs hold our larger items of equipment as well as providing service and repair facilities; spokes are smaller and act as logistics points from which equipment can be delivered quickly to a customer's site. The hubs and spokes have been organised into areas in which a manager has responsibility for the revenues, profitability and the return on capital employed within that area. In this model, most administrative and call handling functions are carried out in central rental centres.

Our Local business enjoys numerous advantages as a result of its global scale. Standardised operating processes and the investment in a single global IT platform bring visibility and homogeneity. Global utilisation statistics allow us to spot where equipment is under-utilised and where it can be moved to for the best return, and this is reflected in the increase in sales / gross rental assets which is a financial measure of utilisation; between 2004 and 2012, sales / gross rental assets in the Local business increased from 62% to 78%. Building our own equipment allows us to stock our fleet with premium-quality equipment at competitive cost. Global reach allows us to deliver service to customers (such as major events customers) wherever they go. Global processes allow us to disseminate best practice quickly. The benefits of our global scale accrue to both customers and shareholders. Our Net Promoter Scores tell us that the model works well for customers and, for our shareholders, the benefit has been a compound growth in trading profit of 23% over the last 9 years and a return on capital employed that has improved from 11% to 20% over the same period. Some people ask us why the return on capital in the Local business is lower than in Power Projects; the main answer to this is that, inherently, the risks - political, economic and people-related - we run in the Local business are far lower than in Power Projects and, therefore, the rewards are consequently (and properly) lower.

The third objective of our strategy for the Local business is to deliver growth in revenues by increasing market share and global reach. In our more mature markets, such as North America and Europe, we know that the most profitable businesses are those where we have dense networks of service centres which can share equipment, staff and customers, and benefit from the low transport costs that come from being physically close to customers. So, in these markets, we focus on adding new service centres and upgrading existing centres to make them more capable. In the last 5 years, in our mature markets in Australia / New Zealand, North America and Europe, we have opened or upgraded service centres and offices, including those acquired as part of an acquisition in:

However, we know that our businesses grow fastest where there is strong growth in GDP. So a core part of our strategy has been expanding our Local business in the faster-growing economies of South America, the Middle East, Africa and Asia. The acquisition of GE Energy Rentals in 2006 helped us to expand our footprint in Brazil, Chile and Mexico and, in the last 5 years, we have opened or upgraded service centres and offices in:

Power Projects

This business serves the requirements of power utilities, governments, armed forces and major industrial users for utility-quality, temporary power generation. Whereas in the Local business we rent equipment to customers who operate it for themselves, in the Power Projects business we contract to provide power generated by plants financed, built, commissioned and operated by our own staff. The power plants can range in size from 10 MW to 200 MW on a single site.

Most often, the business operates in areas where we do not have a large Local business. The majority of the customers are power utilities in Africa, Asia, Central and South America. As described in the "What we do" section in the 2012 Annual Report, the driver of demand in these markets is that our customers' economies are growing, with consequent increases in demand for additional power which cannot be met by the current generating capacity. As a result, many of our customers face chronic power shortages which damage their ability to support economic growth and increased prosperity. These shortages are often caused or exacerbated by the variability of supply arising from the use of hydro-electric power plants whose output is cyclical and dependent on rainfall.

Power Projects now represents 41% of Group revenues and 55% of trading profit, excluding pass-through fuel. Since 2003, Power Projects revenue excluding pass-through fuel and trading profit have grown at a compound annual growth rate of 29% and 34% respectively:

The table below shows our progress since the last major strategy review five years ago:

Note: pass-through fuel refers to revenues we generate from three customers for whom we have agreed to manage the provision of fuel on a "pass-through" basis. This revenue stream fluctuates with the cost of fuel and the volumes taken, while having an immaterial impact on our profitability. We therefore exclude pass-through fuel from most discussions of our business.

The strategy for this business is straightforward: grow as fast as we prudently can, to secure for ourselves the operating efficiencies and competitive advantages which come from being the largest global operator. So far, we have been successful in executing this strategy and our Power Projects business is now many times larger than its next largest competitor.

The reason why it is advantageous to be a global operator in Power Projects is because demand can shift rapidly between continents. In 2003, South America and Asia were probably the largest markets, and Africa was only a small proportion of global demand. In 2009, the market in Africa was larger than South America and Asia combined. In the last couple of years, the position (as measured by our fleet-on-rent) reversed with South America and Asia representing around 50% of our average fleet on rent. These shifts in demand were driven in part by rainfall patterns, in part by the relationship between economic growth and investment in permanent power generation and, in part, by geo-political issues. To be successful in the long-term, therefore, requires the ability to serve demand globally, and that requires sales, marketing and operational infrastructure to be present in all major markets.

The reason we want to be big - and bigger than any of our competitors - is because we believe that, as in the Local business, scale brings significant competitive advantages in Power Projects. There are numerous reasons for this:-

·; Being able to address demand on a world-wide basis means higher utilisation. When fleet returns from a customer at the end of a contract, the speed with which it can be put back on contract again is a major determinant of profitability and returns on capital. Fleet will find new work far more quickly if it can address the total pool of world demand than if it is only able to operate in a single region.

By the time customers have decided they really do have to spend money on temporary power, they generally want it as fast as possible. Being able to offer very fast delivery of large amounts of generating capacity is a significant competitive advantage. Small operators cannot afford to keep 250-300 MW of capacity (say, £30-£40 million of capital) sitting idle waiting for the next job. Because the equipment used in Power Projects is also used in the Local business fleet, we manage our large generators as a common global pool. Between the Local business and Power Projects, we currently have a fleet of over 6,000 of these large generators, and can deploy hundreds of MW of capacity from our various businesses around the world on very short notice. A good example of our speed of delivery would be the power contract in Japan where, in response to the Fukushima disaster, we were able to deliver and commission 200 MW across 2 sites within 70 days of the contract signature; most of our competitors would find it difficult to deploy that amount of fleet in that lead time.

·; The management of risk is a critical part of our business; we place tens of millions of pounds worth of capital assets in countries where the operational, political and payment risks are high - sometimes very high. While we take great care to mitigate these risks, it is probable that sooner or later we will have a loss of either receivables or equipment, or both. However, because of our scale, such a loss would not imperil the Group as a whole. We treat our risks in the same way investors do: we minimise the risk of losses doing material damage to the business by having a broad portfolio of exposures, none of them correlated. For smaller companies, their portfolio of country risk is inevitably much more concentrated; the probability of loss in any one country for smaller companies is no less than it is for us, but their ability to withstand the consequences of a large loss is. Scale therefore allows us to deal in markets where others might, with good reason, fear to tread.

·; Returns from rental businesses are heavily dependent upon the underlying capital cost of the rental fleet. Clearly, large buyers should get better terms than small buyers and, since we are by far the largest purchaser of power generation for rental applications in the world, we believe that we are advantaged in this area, and we estimate that our capital cost / MW is typically 20-40% lower than competitors'. The fact that we have the scale to justify having our own manufacturing and design facilities also means that we can source equipment which is better suited to our precise requirements, and more cheaply, than smaller operators.

In summary, a large operator will have lower volatility of demand, better lifetime utilisation of equipment, be better able to respond to customer requirements, and will have a lower capital cost per MW of fleet. In Power Projects, bigger is better - and Aggreko is now much larger than any other competitor in this market.

Review of Trading

Group Trading Performance

I am pleased to report that Aggreko has delivered a good performance in 2012, with reported revenues and trading profit1 increasing by 13%; excluding pass-through fuel, reported revenues increased by 20%. On an underlying2 basis revenues increased 14% while trading profit increased 6%. Underlying results exclude revenues and trading profit from major events (Asian Games in 2011 and London Olympics in 2012), the Poit Energia acquisition, pass-through fuel3 and currency movements.

To give added perspective, the table below shows the reported versus underlying growth rates for both 2011 and 2012.

A summarised Income Statement for 2012 is set out below.  All numbers in this section are pre-exceptional items unless otherwise stated.

As reported, Group revenues at £1,583 million (2011: £1,396 million) were 13% higher than 2011, while Group trading profit of £381 million (2011: £338 million) was also 13% ahead of 2011. This delivered a Group trading margin of 24% (2011: 24%). Underlying revenues and trading profit increased by 14% and 6% respectively. On the same basis trading margin decreased to 24% (2011: 26%).

Group profit before tax increased by 11% to £360 million (2011: £324 million), and profit after tax increased by 15% to £266 million (2011: £232 million) reflecting the reduction in the effective tax rate from 28.5% to 26.0%. Diluted earnings per share grew 16% to 100.40 pence (2011: 86.76 pence). Return on capital employed, measured as operating profit divided by average net operating assets, decreased by four percentage points to 24% (2011: 28%) due to lower trading margins and increased working capital in our Power Projects business and the impact of the Poit Energia acquisition. The ratio of revenue (excluding pass-through fuel) to average gross rental assets was in line with last year at 71%.

The movement in exchange rates in the year had the effect of decreasing revenue by £6 million and trading profit by £1 million. Pass-through fuel accounted for £40 million (2011: £108 million) of reported revenue of £1,583 million.

Fleet capital expenditure for the year was £415 million (2011: £392 million) which represented 94% of total capital expenditure. This fleet spend was 1.9 times the depreciation charge in the period, with part of the year-on-year increase accounted for by equipment purchased to service the London Olympics contract, which, following the Games, has been put to use in the wider business. The fleet spend was evenly split between the Local and Power Projects businesses. In addition, we acquired £47 million of property, plant and equipment as part of the Poit Energia acquisition. The total cash paid in the year for this acquisition was £136 million.

Net debt of £593 million at 31 December 2012 was £228 million higher than the same period last year driven by: the acquisition of Poit Energia (£136 million); higher capital expenditure and increased levels of working capital in Power Projects. These increased outflows were in part offset by higher EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation).

Acquisition of Poit Energia

On 16 April 2012 we completed the acquisition of the entire share capital of Companhia Brasileira de Locacoes ("Poit Energia"), a leading provider of temporary power solutions in South America. The initial transaction price of £138 million (R$404 million) was made up of £105 million consideration payable to the owners of Poit Energia, plus £33 million of debt to be paid off by Aggreko on behalf of Poit Energia. In addition to the initial transaction price of £138 million, there was a further amount of up to £20 million conditional on the business achieving stretching performance targets for the year to 31 December 2012. We completed the acquisition and legal merger of the two businesses earlier than we anticipated and, accordingly, we agreed with the vendors that we would terminate the earn out period early in return for a payment of £3 million. This has allowed us to move ahead faster with the operational integration of the businesses; we have made good progress on the integration and anticipate its completion by the end of the first quarter of 2013.

The acquisition of Poit Energia supports Aggreko's strategy of expanding its Local businesses in fast growing economies; it strengthens Aggreko's business in South America, both in terms of geographic footprint and in accessing sectors to which Aggreko previously had limited exposure.

Regional Trading Performance

The performance of each of our regional businesses is described below. Our Power Projects business grew underlying revenues in constant currency and excluding pass-through fuel by 15%, and secured 1,029 MW of new work in 13 countries. Our Local business delivered headline growth in revenues of 23%, and an underlying growth rate of 13%.

Regional Trading Performance as reported in £ million

The performance of each of these regions is described below:

Local business: North America

Our North American business delivered a strong performance in 2012. Underlying revenues, which in the case of our North American business adjusts only for the impact of currency translation, increased by 16% to $482 million and trading profit by 32% to $105 million. Trading margin improved from 19% to 22%.

Rental revenues grew by 15% and services revenues were up 19%. Power rental revenues were up 31% with strong performances in construction, events and oil & gas. Temperature control revenues decreased by 1%, largely due to lower volumes in our Cooling Towers business, with the prior year containing some large projects which did not recur in 2012. Oil-free compressed air rental revenues grew by 2%.

Most geographic areas of the North American business achieved strong base business growth over the same period last year, with performances in our Canada and North business units being particularly strong.

The North American business has taken significant steps in upgrading its diesel generator fleet with the latest emissions technology. The next stage of this has begun and we started taking delivery of the first Tier 4 interim engines during 2012. By the end of 2013, almost 50% of the fleet will be Tier 3 or Tier 4 compliant.

Local business: Europe & Middle East

Europe

Middle East & Developing Europe

Our Europe & Middle East business had a very strong year with the successful execution of the London Olympics contract delivering revenues of £60 million (2011: £4 million) and contributing to a 65% increase in reported trading profit. On an underlying basis (i.e. excluding London Olympics and the impact of currency) revenues increased by 5% and trading profit increased 4%. On the same basis trading margin was in line with the prior year at 13%.

Revenues in Europe, on an underlying basis, were 3% up on the prior year. Rental revenues increased by 1% and services revenues increased by 6%. Within rental revenues, power increased by 3% but temperature control decreased by 4%. Area performance continued to be mixed with increases in the UK, Spain and Italy partially offset by decreases in Germany and France. From a sector perspective we saw increases in oil & gas and petrochemical & refining but decreases in contracting and construction. On an underlying basis trading profits increased by 36% and trading margin increased from 6% to 8% mainly driven by the UK business which benefited from London Olympics related work.

Revenues in the Middle East & Developing Europe of AED843 million (£145 million) were 8% ahead of the prior year on an underlying basis. Rental revenues increased by 10%, with power increasing by 12% but temperature control decreasing by 13%, albeit off a small base, reflecting the off hire of some large cooling projects in the UAE. Services revenues increased by 4%.  Trading margins fell by 3pp to 19% due to the absence in 2012 of some large projects which typically attract better margins than our day-to-day business. We saw good growth in Oman and Saudi Arabia and benefitted from an emergency contract in Cyprus. In terms of our newer geographies our business in Russia continued to grow with over 160 MW on rent at the end of the year; we are also continuing to build our businesses in Iraq and Eastern Europe.

Aggreko International's Local business

Aggreko International's Local business operates in 23 countries across Africa, Asia, Australasia and Latin America. This business had a strong year with underlying revenues (excluding currency translation, Asian Games in 2011 and the Poit Energia acquisition in 2012) increasing by 20% and trading profit by 18%. On the same underlying basis trading margin was in line with last year at 16%.

On an underlying basis rental revenues increased 20% and services revenues increased 18%. Within rental revenue, power increased 20% and temperature control increased 19%. Revenues in nearly all geographies increased as compared with the prior year, most notably in our more mature business in Australia Pacific where revenue increased 27%, driven by a strong performance in the mining sector, and in Brazil where revenue (excluding the Poit Energia acquisition) increased 34% driven by the mining, utilities and events sectors. In 2012 we continued our expansion into faster growing economies and opened 18 new locations: 5 in South America; 2 in Central America; 6 in Asia; 4 in Africa; and one in Australia. In addition, through the acquisition of Poit Energia, the international Local Business gained 8 new locations.

Aggreko International: Power Projects (1)

(1) The International Power Projects business has been renamed as the Power Projects business.

Our Power Projects business grew underlying revenues, in constant currency and excluding pass-through fuel, by 15% to $1,012million. Trading margin, however, decreased from 39% to 33%, for three reasons. First, we increased bad debt provisions by $39 million; second, mobilisation costs on our large Mozambique contract were unusually high; and third, we have seen a continued reduction in revenues from our Military and Japanese contracts, which typically attract higher margins. As a consequence of these three factors, trading profit decreased by 1%; excluding the impact of the increased bad debt provision, trading profit increased by 10%.

As we have said before, cash collection is a key challenge in our Power Projects business. Unpredictable and inconsistent customer payment behaviour is a feature of the Power Projects business and is a key factor that we consider in determining our bad debt provision. Although we take measures to reduce our exposures, we continue to take a conservative view when it comes to providing for overdue debt. The increase in the bad debt provision in 2012 year was principally in respect of two customers; they are not disputing the payment liability, and we are receiving cash, but more slowly than we would like. At 31 December 2012 bad debt provisions amounted to around 26% of our 2012 Power Projects gross debtors (2011: 17%). 

In 2012 we secured 23 new contracts in 13 countries and 1,029 MW of new work, comprising 280 MW in Asia, 606 MW in Africa & Middle East and 143 MW in Latin America. Revenues from our gas-powered fleet continued to grow strongly with the number of MW of gas on rent increasing on average by nearly 80% year-on-year. At the start of 2013, our order book stood at almost 37,000 MW-months, an increase of 3% over the prior year and the equivalent of 12 months' revenue at the current run-rate.

On a geographic basis, Asia continued to deliver strong growth along with South & East Africa and North & West Africa. As anticipated, Military revenues continued to decline in line with US troops withdrawal from Afghanistan. In 2012, 84% of Power Projects' revenues came from utilities; military projects represented about 8%, and oil & gas, mining and manufacturing together contributed the remaining 8%. At the start of 2013, the Power Projects fleet, at over 5,000 MW, is 13% larger than 12 months earlier and includes around 1,100 MW of gas-powered fleet.

Outlook for 2013

The Local business has had a very strong start to the year, with almost 20% more power on rent than a year ago, helped in part by our acquisition of Poit Energia in April 2012. Encouragingly, growth in the Local business has been broadly spread, with most areas other than Europe showing healthy year-on-year increases in MW on hire.

In Power Projects, we have signed new contracts totalling 140 MW in the year to date, and importantly, we have secured our first large order for our new Heavy Fuel Oil engine, with a 56 MW contract in the Caribbean. We have also secured a contract for 57 MW of diesel-powered generation in Djibouti. Trading continues to be subdued and is likely to remain so in the first half; however, in recent weeks there has been some improvement in the prospect pipeline.

Our expectations for the year as a whole remain unchanged from previous guidance.

Critical Accounting Policies

The Group's significant accounting policies are set out in Note 1 to the Group's Annual Report & Accounts.

Preparation of the consolidated financial statements requires Directors to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual outcomes could differ from those estimated.

The Directors believe that the accounting policies discussed below represent those which require the greatest exercise of judgement. The Directors have used their best judgement in determining the estimates and assumptions used in these areas but a different set of judgements could result in material changes to our reported results. The discussion below should be read in conjunction with the full statement of accounting policies, set out in Note 1 to the Group's Annual Report & Accounts.

Property, plant and equipment

Rental fleet accounts for £1,196 million, or around 94%, of the net book value of property, plant and equipment used in our business; the great majority of equipment in the rental fleet is depreciated on a straight-line basis to a residual value of zero over 8 years, although we do have some classes of non-power fleet which we depreciate over 10 years. The annual fleet depreciation charge of £222 million (2011: £175 million) relates to the estimated service lives allocated to each class of fleet asset. Asset lives are reviewed regularly and changed if necessary to reflect current thinking on their remaining lives in light of technological change, prospective economic utilisation and the physical condition of the assets.

Intangible assets

In accordance with IFRS 3 (revised) 'Business Combinations', goodwill arising on acquisition of assets and subsidiaries is capitalised and included in intangible assets. IFRS 3 (revised) also requires the identification of other acquired intangible assets. The techniques used to value these intangible assets are in line with internationally used models but do require the use of estimates and forecasts which may differ from actual outcomes. Future results are impacted by the amortisation period adopted for these items and, potentially, by any differences between forecast and actual outcomes related to individual intangible assets. The amortisation charge for intangible assets in 2012 was £5 million (2011: £4 million). Substantially all of this charge relates to the amortisation of intangible assets arising from business combinations.

Goodwill of £143 million (2011: £65 million) is not amortised, but is tested annually for impairment and carried at cost less accumulated impairment losses. The impairment review calculations require the use of forecasts related to the future profitability and cash generating ability of the acquired assets. There were no impairment charges in 2012 and 2011.

Taxation

Aggreko's pre-exceptional effective tax charge of 26.0% is based on the profit for the year and tax rates in force at the balance sheet date. As well as corporation tax, Aggreko is subject to indirect taxes such as sales and employment taxes across various tax jurisdictions in the approximately 100 countries in which the Group operates. The varying nature and complexity of tax law requires the Group to review its tax positions and make appropriate judgements at the balance sheet date. In addition, the recognition of deferred tax assets is dependent upon an estimation of future taxable profits that will be available, against which deductible temporary differences can be utilised. In the event that actual taxable profits are different, such differences may impact the carrying value of such deferred tax assets in future periods. Further information, including a detailed tax reconciliation, is shown at Notes 10 and 22 to the Annual Report and Accounts.

Trade receivables

Trade receivables are recognised initially at fair value and subsequently measured at amortised cost. An impairment is recorded for the difference between the carrying amount and the recoverable amount where there is objective evidence that the Group may not be able to collect all amounts due. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation and default, or large and old outstanding balances, particularly in countries where the legal system is not easily used to enforce recovery, are considered indicators that the trade receivable is impaired.

The majority of the contracts into which the Group enters are small relative to the size of the Group and, if a customer fails to pay a debt, this is dealt with in the normal course of business. However, some of the contracts the Group undertakes in developing countries are very large, and are in jurisdictions where payment practices can be unpredictable. The Group monitors the risk profile and debtor position of all such contracts regularly, and deploys a variety of techniques to mitigate the risks of delayed or non-payment; these include securing advance payments and guarantees. As a result of this rigorous approach to risk management, historically the Group has had a low level of bad debt write-offs. When a trade receivable is uncollectable it is written off against the provision for impairment of trade receivables. At 31 December 2012, the provision for impairment of trade receivables in the balance sheet was £63 million (2011: £36 million).

Currency Translation

The movement of exchange rates during the year decreased revenue and trading profit by £6 million and £1 million respectively as a result of currency movement. Currency translation also gave rise to a £58 million decrease in the value of net assets as a result of year-on-year movements in the exchange rates. Set out in the table below are the principal exchange rates which affect the Group's profits and net assets.

Reconciliation of underlying growth to reported growth 

The table below reconciles the reported and underlying revenue and trading profit growth rates:

Exceptional items

The definition of exceptional items is contained within Note 1 of the 2012 Annual Report & Accounts. An exceptional credit of £7 million before tax was recorded in the year to 31 December 2012 in respect of the Group's acquisition of Poit Energia and costs associated with the recent Group reorganisation. There are three elements to the net exceptional credit. The first element is an exceptional credit relating to the release of £17 million of the £20 million deferred consideration relating to the Poit Energia acquisition earn out period. We completed the acquisition and the legal merger of the two businesses earlier than we anticipated and, accordingly we agreed with the Vendors that we would terminate the earn out period early in return for a payment of £3 million of the possible £20 million. Secondly, and partially offsetting this credit, there are £4 million of integration costs incurred to date for the Poit Energia acquisition. Thirdly there are £6 million of costs relating to the Group reorganisation. These costs include professional fees, severance costs, relocation costs and travel/expenses directly related to the reorganisation.

Interest

The net interest charge was £25 million, an increase of £7 million on 2011, reflecting the higher level of average net debt. This was mainly as a consequence of increased levels of capital expenditure, the Poit Energia acquisition and higher levels of working capital in our Power Projects business. Interest cover, measured against rolling 12-month EBITDA, remains very strong at 25.3 times (2011: 28.4 times).

Taxation

Tax Strategy

Our tax strategy, which is applicable to all taxes, both direct and indirect, is to pay the appropriate amount of tax in each country where we operate, whilst ensuring that we respect the applicable tax legislation and take advantage ,where appropriate, of any legislative reliefs available.

Responsibility for tax policy and risk management sits with our Chief Financial Officer including the role of Senior Accounting Officer (SAO) where we ensure as a Group that our systems are appropriate for the purposes of calculating the Group's UK tax liabilities.

Our tax strategy is aligned with the Group's business strategy and is reviewed and endorsed by the Board. In addition, the profile of our tax risk is reviewed on a regular basis. The tax strategy is executed by a global team of tax professionals who are integrated into our business and who are based in a variety of locations across the world where they work closely with the Aggreko operations, local tax authorities and local advisors.

Given the varied nature of the tax environment in many of the 100 countries in which we operate, local compliance is a key area of focus for Aggreko. This is particularly so for our Power Projects business, where we will generally only be in a country for a relatively short period of time. The complexity and often uncertain nature of tax rules in certain countries means we seek to manage compliance proactively by engaging with local tax authorities and advisors as appropriate, to agree and confirm our tax positions in a timely manner.

We recognise the importance of tax receipts to the countries in which we do business and as such we aim to be transparent with our stakeholders in terms of the geographic spread of where we pay tax.

Total Taxes

In 2012, Aggreko's worldwide operations resulted in direct and indirect taxes of £147 million (2011: £154 million) being paid to tax authorities. This amount represents all corporate taxes paid on operations, payroll taxes paid and collected, import duties and miscellaneous other local taxes.

The most significant changes in the regional split of corporate tax paid year-on-year are: the reduction in the proportion of taxes paid in Europe, primarily due to the reduction in UK tax paid on Power Projects business activities, following the branch profits election; and an increase in corporate tax paid in both Asia (£6 million increase on 2011) and Latin America (£5 million increase on 2011), as our businesses in both these areas have grown.

Tax Charge

The Group's pre-exceptional effective corporation tax rate for the year was 26.0% (2011: 28.5%) based on a tax charge of £94 million (2011: £92 million) on profit before taxation of £360 million (2011: £324 million). The change in the effective rate from 2011 to 2012 mainly resulted from the combination of the impact of the branch profits election on the Power Projects business and the mix of profits across operating territories. In terms of the branch profits election, the UK Finance Act 2011 introduced legislation exempting the profits of foreign branches of UK resident companies from UK corporation tax. With effect from 1 January 2012 this is applicable to a significant portion of our Power Projects business.

Further information, including a detailed tax reconciliation of the current year tax charge, is shown at Note 10 in the Annual Report and Accounts.

Reconciliation of Income statement tax charge and cash tax paid

The Group's total cash taxes borne and collected was £147 million which differs from the tax charge reported in the income statement of £94 million. The income statement tax charge figure comprises corporate taxes only. These two figures are reconciled below:

Dividends

If the proposed final dividend of 15.63 pence is approved by shareholders, it will result in a full year dividend of 23.91 pence (2011: 20.79 pence) per ordinary share, giving dividend cover, on a pre-exceptional basis, of 4.2 times (2011: 4.2 times).

Cashflow

The net cash inflow from operations during the year totalled £479 million (2011: £509 million). This funded capital expenditure of £440 million. This spend was made up of £415 million of fleet and £25 million of non fleet with 67% of the fleet investment supporting the continued expansion of our International business. Net debt at 31 December 2012 was £228 million higher than the previous year with the main drivers being the acquisition of Poit Energia in April 2012, and higher levels of both capital expenditure and working capital.  As a result of the increase in net debt, gearing (net debt as a percentage of equity) at 31 December 2012 increased to 57% from 42% at 31 December 2011 while net debt to EBITDA increased to 0.9 times (2011: 0.7 times).

There was a £163 million working capital outflow in the year mainly driven by higher levels of activity across the business and an increase in working capital balances in our Power Projects business. In terms of the latter, the Power Projects business saw a 23 day increase in debtor days to 90 days, mainly caused by two countries where payments were slower than usual. In addition the Power Projects creditors balance was lower than the prior year driven by reduced fuel creditors on two contracts where Aggreko was responsible for the fuel management. Our manufacturing operation also saw a reduction in creditors driven by decreasing activity levels in the last quarter.

Net Operating Assets

The net operating assets of the Group (including goodwill) at 31 December 2012 totalled £1,709 million, £355 million higher than 2011. The main components of net operating assets are:-

A key measure of Aggreko's performance is the return (expressed as operating profit) generated from average net operating assets (ROCE). We calculate the average net operating assets for a period by taking the average of the net operating assets as at 1 January, 30 June and 31 December; this is the basis on which we report our calculations of ROCE. The average net operating assets in 2012 were £1,577 million, up 29% on 2011. In 2012, the ROCE decreased to 24.4% compared with 28.0% in 2011. This decrease was mainly due to lower margins and increased working capital in our Power Projects business, as well as the first year impact of the Poit Energia acquisition.

Acquisitions

On 16 April 2012, we completed the acquisition of the entire share capital of Companhia Brasileira de Locacoes ("Poit Energia"), a leading provider of temporary power solutions in South America. The initial transaction price of £138 million (R$404 million) was made up of £105 million consideration payable to the owners of Poit Energia, plus £33 million of debt to be paid off by Aggreko on behalf of Poit Energia. In addition to the initial transaction price of £138 million, there was a further amount of up to £20 million conditional on the business achieving stretching performance targets for the year to 31 December 2012. We completed the acquisition and the legal merger of the two businesses earlier than we anticipated and, accordingly, we agreed with the Vendors that we would terminate the earn out period early in return for a payment of £3 million of the possible £20 million.

The total purchase consideration for accounting purposes was £125 million comprising the £105 million cash consideration plus the deferred consideration of £20 million. The fair value of net assets acquired was £37 million resulting in goodwill of £88 million. For accounting purposes the £33 million of debt does not form part of the purchase consideration. During the year it was agreed that only £3 million would be paid out in relation to deferred consideration, the balance of £17 million has been taken as an exceptional credit through the income statement. The detailed acquisition note is contained in Note 17 in the Accounts.

Shareholders' Equity

Shareholders' equity increased by £164 million to £1,045 million, represented by the net assets of the Group of £1,638 million before net debt of £593 million. The movements in shareholders' equity are analysed in the table below:

The £267 million of post-tax profit (pre-exceptional items) in the year represents a return of 26% on shareholders' equity (2011: 26%) which compares to a Group weighted average cost of capital of 8.9%.

Pensions

Pension arrangements for our employees vary depending on best practice and regulation in each country. The Group operates a defined benefit scheme for UK employees, which was closed to new employees joining the Group after 1 April 2002; most of the other schemes in operation around the world are varieties of defined contribution schemes. A formal valuation of the UK Defined Benefit Scheme was carried out at 31 December 2011. At the valuation date, based on the assumptions adopted, the market value of the Scheme's assets (excluding AVCs) was £59 million which was sufficient to cover 78% of the benefits that had accrued to members, after making allowances for future increases in earnings.

Under IAS 19: 'Employee Benefits', Aggreko has recognised a pre-tax pension deficit of £4 million at 31 December 2012 (2011:£6 million) which is determined using actuarial assumptions. The decrease in the pension deficit is a result of higher than expected returns achieved on Scheme assets over the year and the additional contributions made by the Company during the year over and above the cost of accrual of benefits. This has been partially offset by lower net interest rates used to value the liabilities. The Company paid £0.6 million in January 2012 under the previous Recovery Plan and £3.5 million in December 2012 in line with the Recovery Plan agreed for the Scheme following the actuarial valuation at 31 December 2011.

The main assumptions used in the IAS 19 valuation for the previous two years are shown in Note 27 of the Annual Report & Accounts. The sensitivities regarding these assumptions are shown in the table below.

Capital Structure & Dividend Policy

The intention of Aggreko's strategy is to deliver long-term value to its shareholders whilst maintaining a balance sheet structure that safeguards the Group's financial position through economic cycles. From an ordinary dividend perspective our objective is to provide a progressive through cycle dividend recognising the inherent lack of visibility and potential volatility of our business.

Given the proven ability of the business to fund organic growth from operating cashflows, and the nature of our business model, we believe it is sensible to run the business with a modest amount of debt. We say "modest" because we are strongly of the view that it is unwise to run a business which has high levels of operational gearing with high levels of financial gearing. Given the above considerations, we believe that a Net Debt to EBITDA ratio of around 1 times is appropriate for the Group over the longer term. Absent a major acquisition, or the requirement for an unusual level of fleet investment, this level gives us the ability to deal with the normal fluctuations in capital expenditure (which can be quite sharp: +/- £100 million in a year) and working capital, and is well within our covenants to lenders which stand at 3 times Net Debt to EBITDA.

At the end of 2012, Net Debt to EBITDA had increased to 0.9 times compared to 31 December 2011 when the ratio of Net Debt to EBITDA was 0.7 times.

With respect to our ordinary dividend policy, at the end of 2012 the dividend cover on a pre-exceptional basis was 4.2 times. 

Treasury

The Group's operations expose it to a variety of financial risks that include liquidity, the effects of changes in foreign currency exchange rates, interest rates, and credit risk. The Group has a centralised treasury operation whose primary role is to ensure that adequate liquidity is available to meet the Group's funding requirements as they arise, and that financial risk arising from the Group's underlying operations is effectively identified and managed.

The treasury operations are conducted in accordance with policies and procedures approved by the Board and are reviewed annually. Financial instruments are only executed for hedging purposes, and transactions that are speculative in nature are expressly forbidden. Monthly reports are provided to senior management and treasury operations are subject to periodic internal and external review.

Liquidity and funding

The Group maintains sufficient facilities to meet its normal funding requirements over the medium term. At 31 December 2012, these facilities totalled £863 million in the form of committed bank facilities arranged on a bilateral basis with a number of international banks and private placement notes. US$100 million (£62 million) of private placement notes were issued during June 2012. In addition, during the year committed bank facilities of £154 million were arranged.The financial covenants attached to these facilities are that EBITDA should be no less than 4 times interest and net debt should be no more than 3 times EBITDA; at 31 December 2012, these stood at 25.3 times and 0.9 times respectively. The Group does not consider that these covenants are restrictive to its operations. The maturity profile of the borrowings is detailed in Note 18 in the Annual Report & Accounts. Since the year end £30 million of committed facilities have matured.

Net debt amounted to £593 million at 31 December 2012 and, at that date, un-drawn committed facilities were £294 million.

The Group's policy is to manage the exposure to interest rates by ensuring an appropriate balance of fixed and floating rates. The Group's primary funding is at floating rates through its bank facilities. In order to manage the associated interest rate risk, the Group uses interest rate swaps to vary the mix of fixed and floating rates. At 31 December 2012, £311 million of the net debt of £593 million was at fixed rates of interest resulting in a fixed to floating rate net debt ratio of 52:48 (2011: 71:29).

The Group is subject to currency exposure on the translation into Sterling of its net investments in overseas subsidiaries. In order to reduce the currency risk arising, the Group uses direct borrowings in the same currency as those investments. Group borrowings are predominantly drawn down in the principal currencies used by the Group, namely US Dollar, Canadian dollar, Euro and Brazilian Reals.

The Group manages its currency flows to minimise foreign exchange risk arising on transactions denominated in foreign currencies and uses forward contracts and forward currency options, where appropriate, in order to hedge net currency flows.

Cash deposits and other financial instruments give rise to credit risk on amounts due from counterparties. The Group manages this risk by limiting the aggregate amounts and their duration depending on external credit ratings of the relevant counterparty. In the case of financial assets exposed to credit risk, the carrying amount in the balance sheet, net of any applicable provision for loss, represents the amount exposed to credit risk.

Insurance

The Group operates a policy of buying cover against the material risks which the business faces, where it is possible to purchase such cover on reasonable terms. Where this is not possible, or where the risks would not have a material impact on the Group as a whole, we self-insure.

Principal risks and uncertainties

In the day-to-day operations of the Group we face many risks and uncertainties. Our job is to mitigate and manage these risks, and the Board has developed a formal risk management process to support this. Set out below are the principal risks and uncertainties which we believe could adversely affect us, potentially impacting our employees, operations, revenue, profits, cash flows or assets. This list is not exhaustive - there are many things that could go wrong in an operation as large and geographically diverse as ours - and the list might change as something that seems immaterial today assumes greater importance tomorrow.

The foundation upon which the Group's risk management process is built is the Group Risk Register. This is compiled based on input from the businesses across the world as well as a top-down review by members of the Executive Committee and Board. This forms the basis of the mitigation strategies put in place for all the key identified risks. In the section below, we have picked from the Risk Register those items we currently consider to be our most important risks. The order in which they are presented is not significant.

Economic conditions

There is a link in our business between demand for our services and levels of economic activity; this link is particularly evident in the Local business. If GDP growth goes negative, demand for rental equipment is likely to shrink even faster and this impact is likely to be multiplied by pricing weakness at times of low demand. As we have experienced in recent years, the operational gearing inherent in our business models means that variations in demand can lead to much larger variations in profitability. We also have some businesses which, by their nature, are exposed to particular sectors - for instance, our Australian business is highly dependent on mining activity, our Singapore business has a high proportion of shipping activity, and a material proportion of our North American business comes from upstream and downstream oil & gas.

We mitigate this risk in a number of ways. First, having a global footprint is a great advantage because we can move rental fleet from lower-growth economies to higher-growth environments; for example, in 2011, we moved fleet out of Western Europe into Russia to support its rapid growth. Secondly, we try to ensure that, as they grow, our businesses build a customer-base which is as diverse as possible, to minimise exposure to any single sector. In Brazil we continue to invest in temperature control to reduce our sectoral exposure to offshore oil & gas; while in South Africa we are expanding our geographic footprint to enable us to develop under-penetrated sectors such as shipping. Thirdly, in the event of a more generalised downturn in demand, as we experienced in 2009, we can quickly reduce capital expenditure which was demonstrated by our new fleet investment being £107 million lower in 2009 than 2008. Given the large depreciation element in the business' cost base (£236 million in 2012), reducing capital expenditure to a level close to depreciation makes the business very cash generative which, in turn, reduces debt and interest cost.

Another economic factor to consider is the price of fuel, which is usually the single biggest element in the cost of running a generator. Over the last five years, the price of fuel has been volatile, with the Brent Blend price1 ranging from $35 to $145, but this does not seem to have had any noticeable impact on people's willingness to rent; people rent generators because they need power, not because it is a cheap way of generating electricity. The major impact of the oil-price on our business is that, at times when it has been high it has produced huge wealth in oil-producing countries which has been re-cycled into infrastructure investment and this, in turn, stimulated demand for our services. If the oil-price is persistently low - by which we mean under $50 per barrel - we would expect to see an adverse impact on our business in a number of oil-producing countries.

Exchange rate fluctuations can have a material impact on our performance reflected in Sterling: the Group's asset values, earnings and cash flows are influenced by a wide variety of currencies owing to the geographic diversity of the Group's customers and areas of operation. Around 70% of the Group's revenue and costs are denominated in US Dollars; the next largest currency exposure is to the Euro which accounts for around 6% of our revenues and costs, and the Australian dollar which accounts also for 6% of revenue and costs with the Brazilian Real accounting for 3%. The relative value of currencies can fluctuate widely and could have a material impact on the Group's asset values, costs, earnings, debt levels and cash flows, expressed in Sterling. We manage the transactional exchange impact through hedging and denomination of borrowings but we do not try and manage translational exchange impact. In terms of translational exchange, a 5 cent movement in the Sterling/Dollar exchange rate had an impact in 2012 of around £33 million on revenue and £9 million on trading profit.

Political Risk

This section should be read in conjunction with the subsequent section on failure to collect payments. The Group operates in around 100 countries, many in Africa, Asia and Latin America. In some jurisdictions there are significant risks of political instability which can result in civil unrest, equipment seizure, renegotiation or nullification of existing agreements, changes in laws, taxation policies or currency restrictions. Any of these could have a damaging effect on the profitability of our operations in a country.

Prior to undertaking a contract in a new country, we carry out a risk assessment process to consider risks to our people, to assets and to payments. By far the greatest exposure to political risk is in the Power Projects business. In all cases, the safety of our employees is always our first concern, and if the level of risk is considered unacceptable we will decline to participate in any contract; where there are potential risks, we develop detailed security plans to ensure the safety of our employees. In terms of asset risks, the Group uses a wide range of tools and techniques to manage risk, including insurances, bonds, guarantees and cash advances. Power Projects' financial exposures are monitored by the Board on a monthly basis and action plans to address assets, payments or tax exposures are reviewed.

Generally, we find that Governments are keen to behave in a fair way to suppliers of critical infrastructure, such as Aggreko. In the last five years, we have had two incidents, both of which were subsequently resolved, where our equipment was seized by authorities as a result of tax or import duty disputes. Neither of these were material to a Group of our size, but either could have been fatal to a small company. Both are indicative of the fact that we operate in countries where the behaviour of the authorities can be unpredictable, and not always in line with contractual commitments.

The quantum of political risk faced by the business has grown in recent years with the rapid expansion of our Power Projects business, but the benefit of scale is that the risk becomes more diversified.

Failure to collect payments or to recover assets

In practice, the biggest risk is non-payment. The vast majority of the contracts into which the Group enters are small relative to the size of the Group and, if a customer fails to pay a debt, this is dealt with in the normal course. However, the Group has some large contracts in developing countries where payment practices can be unpredictable. The truth is that, with contracts in around 100 countries, there are always two or three large customers who are misbehaving as far as payment is concerned, and we constantly monitor the risk profile and debtor position of such contracts, deploying a variety of techniques to mitigate the risks of delayed or non-payment. This mitigation will vary from customer to customer, but our armoury includes obtaining advance payments, letters of credit, bank guarantees and, in some cases, insurance against losses. As a result of the rigorous approach to risk management, the Group has never had a significant loss although we have had some very near misses. While the scale in our Power Projects business makes it less likely that any bad debt would be material to the Group's balance sheet, the increased number of contracts and countries in which we operate increases the likelihood of a loss and makes it highly likely that, at some stage, a major customer will default or prevent us from repatriating assets.

The risk of non-payment of a receivable presents a particular risk for a public company such as Aggreko, because our customers are rarely attuned to our obligations to update the market regularly on our performance. While we seek to ensure that no single country could cause the company material medium or long-term damage, failure to collect a major debt could result in an unexpected, and possibly significant, reduction in our profits in any given reporting period. The impact of failure to collect a debt is twofold; first we make a provision or write-off the debt, and secondly, we lose future revenue and profit. We continually make judgements as to whether we need to book a provision against particular debts and, if the debts are material, they could cause us to miss a forecast and lead to a negative share price reaction. Unless a customer actually seizes equipment, deciding whether a receivable will be collected or not is more art than science and there have been several occasions when we have had to make difficult judgements as to when to provide for a debt. The potential for volatility was illustrated during 2012. During the year the bad debt provision in Power Projects increased by £25 million reflecting the heightened risk of non-payment in two countries.

Even though we have an ever broader portfolio of contracts, and therefore a more diversified portfolio of risk, we caution investors that the current high returns on capital that we earn, particularly in our Power Projects business, are in effect "risk-unadjusted". So far, no customer has behaved badly enough to adjust them but, as we repeatedly tell people, it is probably only a matter of time before they do.

Events

The business is, by nature, driven by events. People hire generators because some event or need makes it essential. Aggreko's revenues, cashflows and profits can be influenced significantly by external events as evidenced by the Japanese tsunami or by the contracts to supply power to the military camps in the Middle East. These events are, by their nature, difficult to predict and, combined with the high operational gearing inherent in our business, can lead to volatility in trading outcomes. By developing the business globally, as well as by increasing and broadening the Group's revenue base, the impact of a single event on the overall Group will reduce. Additionally, the ability to move equipment around the world allows the Group to adjust to changes in utilisation caused by any changes in demand.

Failure to conduct business dealings with integrity and honesty

Some of the countries in which the Group operates have a reputation for corruption and, given that many of our contracts involve large sums of money, we are at risk of being accused of bribery and other unethical behaviour. The first and most important way of avoiding this risk is to ensure that people, both inside and outside the Group, know that Aggreko does not engage in, and will not tolerate, bribery, corruption or unethical behaviour. We have a strict Ethics Policy, a copy of which is available on our website www.aggreko.com. Rather than just publishing it, we get every employee to sign it when they join the business; every consultant acting on our behalf agrees in writing to abide by it, and every consultancy or agency agreement has an explicit term stating that the agreement will be terminated immediately if the consultant or agent does not abide by our policy. Last year we rolled out a confidential, multi-lingual hotline, available world-wide, which allows any employee who has any ethical concerns to report them to an independent third party on an anonymous basis.

While the risk of unethical behaviour can take many forms, the most significant risk we run in this area is the behaviour of third party sales agents and consultants in our Power Projects business. Given the ephemeral nature of this business - there might be no business for us in a country for five years and then suddenly a power crisis might present an opportunity to supply 100 MW for six months - it is not practical to maintain full-time salespeople in each of the 100 countries where we do, or could conceivably do, business. Instead, we make agreements with organisations which know a country well, can keep our services on the radar of decision makers, and keep us briefed on opportunities. When an opportunity arises, we send in our own salespeople to work with them. These consultants do not get paid a retainer and may receive no compensation other than a "thank you" and a pat on the back for years; the reason why they are prepared to do this is because when we do win a contract they are well rewarded. And they work hard for the money, often taking responsibility for the supply of critical elements of the project such as finding power-plant sites, providing administration and technical services, labour and security. The fact that they are only paid on results might be seen to raise the risk that they are tempted to indulge in bribery to secure their income. How do we protect against this? In our view, it is all down to the choice of the sales consultant and, to this end, we carry out comprehensive due diligence on all potential candidates. Before we appoint an agent or consultant, we use specialist third-party investigators to conduct comprehensive background checks on them; these checks include obtaining bank references and searches for previous records of inappropriate behaviour or of any family or other links with the customer or government. Once a sales consultant has been appointed, we keep a close eye on them. Payments made to agents and sales consultants are subject to audit by internal auditors to ensure they are in accordance with the agreements, and we have a full-time Compliance Officer who continuously monitors our dealings with sales consultants and agents. In addition, we carry out regular training by outside lawyers of managers and salespeople who deal in at-risk jurisdictions and, from time to time, we conduct independent reviews of contract files. We also structure our sales consultancy agreements to allow us to terminate any agreement immediately and without compensation in the event that we suspect any inappropriate behaviour. Given that these sales consultants have much to gain by working for us, this is a powerful incentive to behave.

We model our compliance regime around the requirements of the UK Bribery Act and the US Foreign Corrupt Practices Act (FCPA). A sub committee of the main Board was formed in 2011, the Board Ethics Committee, which is composed entirely of Non-Executive Directors, who meet to approve our ethics-related policies and procedures, and the compliance thereof. A report from the Committee is set out in the Annual Report and Accounts.

Safety

The business of the Group involves transporting, installing and operating large amounts of heavy equipment, which produces lethal voltages or very high pressure air and involves the use of millions of litres of fuel which could cause serious damage to the environment. Every day, we manage the risks associated with this business, and we have carefully designed procedures to minimise the risk of an accident. If these procedures are not followed however, accidents can happen and might result in injury to people, claims against the Group, damage to its reputation and its chances of winning and retaining contracts.

The Group has a proactive operational culture that puts health and safety at the top of its agenda in order to reduce the likelihood of an accident. We work very closely with our customers, employees and Health & Safety authorities, to evaluate and assess major risks to ensure that health and safety procedures are rigorously followed. The Group has developed health and safety KPI's which are reviewed by the Board on a regular basis.

Competition 

Aggreko operates in a highly competitive business. The barriers to entry are low, particularly in the Local business and, in every major market in which we operate, competitors are constantly entering or leaving the market. We welcome this competition as it keeps us sharp and also helps to grow the overall rental market which, in many countries, is under-developed.

We monitor competitor activity carefully but, ultimately, our only protection from suffering material damage to our business by competitors is to work relentlessly to provide our customers with a high quality and differentiated service proposition at a price that they believe provides good value.

Product technology & emissions regulation

The majority of Aggreko's fleet is diesel-powered, and some of our equipment is over ten years old. As part of the increasing focus on environmental issues, countries continue to introduce legislation related to permissible levels of emissions and this has the potential to affect our business. Our engines are sourced from major manufacturers who, in turn, have to develop products which conform to legislation, so we are dependent on them being able to respond to legislation. We also have to be aware that when we buy a generator we want to be able to rent it for its useful life and to be able to move it between countries.

To mitigate these risks, we adopt a number of strategies. First, we retain considerable in-house expertise on engine technology and emissions - so we have a good understanding of these issues. Secondly, we have very close relationships with engine manufacturers so we get good forward visibility of their product development pipeline. When new products appear - particularly those with improved emissions performance - we aim to introduce them into the fleet as quickly as possible to ensure that, over time, our fleet evolves to ever-better levels of emissions performance. An example of this is the significant investment we have made in the development of our gas-fuelled technology in recent years: these engines have significantly reduced emissions compared with other fuel types. Gas powered generation now accounts for over 1,000 MW of our fleet. Thirdly, if emissions-compliance becomes such an issue that it begins to impact our business in a material way in some territories, our global footprint will be a major advantage as it gives us numerous options for the re-deployment of our fleet. An example of this is in our North American business where, by the end of 2013, almost 50% of the fleet will be either Tier 3 or Tier 4 compliant, with the previous fleet being re-deployed to other parts of the Group.

People

Aggreko knows that it is people who make the difference between great performance and mediocre performance. This is true at all levels within the business. We are keenly aware of the need to attract the right people, establish them in their roles and manage their development. As a framework for people development, we have in place a talent management programme which covers most of the management population. Under this programme, we try to identify the development needs of each individual from the outset, as well as identifying successor candidates for senior roles, which has been demonstrated in our recent reorganisation where internal candidates have filled two of the open Regional Executive Director roles. We also have an ongoing relationship with one of the world's leading business schools, IMD, to deliver a tailor-made Group-wide management education programme.

Another risk is that competitors seek to recruit our key personnel. For many years, Aggreko has been a target for recruitment and we manage this on a daily basis. We actually regard it as a compliment that so many companies want to recruit our people. The main mitigation for this is to make sure that people enjoy working for Aggreko, that they feel that they are recognised, cared for, and have challenging and interesting jobs. Reward is also an important part of the equation, and there can be little doubt that our policy of rewarding people well for good performance, and of having a successful Long-Term Incentive Plan, has acted as a powerful retention tool.

Group Income Statement

for the year ended 31 December 2012

The above results relates to continuing operations and all profit for the period is attributable to equity shareholders of the Company

Group Statement of Comprehensive Income

for the year ended 31 December 2012

Group Balance Sheet (Company Number: SC177553)

as at 31 December 2012

The financial statements on pages 35 to 55 were approved and authorised for issue by the Board of Directors on 7 March 2013 and were signed on its behalf by:

Group Cash Flow Statement

for the year ended 31 December 2012

Reconciliation of net cash flow to movement in net debt

for the year ended 31 December 2012

Group statement of changes in equity

For the year ended 31 December 2012