2014 ANNUAL REpoRt Focused Performance FInAnCIAL CALenDAR Contents YeAR ended 31 decembeR 2014 07 MAY 2015 Annual General Meeting YeAR ending 31 decembeR 2015* 24 AUGUst 2015 Half year results and interim dividend announcement 08 sePteMBeR 2015 Record date for interim dividend entitlement 30 sePteMBeR 2015 Interim dividend payable if declared 22 FeBRUARY 2016 Full year results and final dividend announcement 08 MARCH 2016 Record date for final dividend entitlement 31 MARCH 2016 Final dividend payable if declared * These dates are subject to change. 6. Basic and diluted earnings per share 1 With you all the way 2 Report from the Chairman and the Managing Director & Ceo 4 Corporate Governance statement 16 2014 Financial Report for Caltex Australia Limited 17 Directors’ Report 62 Consolidated income statement 63 Consolidated statement of comprehensive income 64 Consolidated balance sheet 65 Consolidated statement of changes in equity 66 Consolidated cash flow statement 67 notes to the financial statements 1. Significant accounting policies 67 2. Revenue and other income 76 3. Costs and expenses 76 4. Income tax expense 77 5. Dividends 79 79 80 81 81 81 82 83 85 85 86 86 87 93 96 97 98 98 102 23. Investments accounted for using the equity method 104 24. Interest in joint venture operations 104 25. Notes to the cash flow statements 105 26. Business combinations 107 27. Financing arrangements 107 28. Related party information 111 29. Net tangible assets per share 112 30. Segmented reporting 114 31. Parent entity disclosures 114 32. Events subsequent to the end of the year 7. Receivables 8. Inventories 9. Other assets 10. Other investments 11. Intangibles 12. Property, plant and equipment 13. Payables 14. Interest bearing liabilities 15. Provisions 16. Issued capital 17. Financial instruments 18. Employee benefits 19. Commitments 20. Contingent assets and liabilities 21. Auditor’s remuneration 22. Particulars in relation to controlled entities 115 Comparative Financial Information 116 Replacement Cost of sales operating Profit Basis of Accounting 117 shareholder Information 119 statistical Information 120 Directory 1 With a commitment to Australia tracing back to 1900, Caltex has grown to become the nation’s outright leader in transport fuel. Caltex supplies one-third of all Australia’s transport fuels and is unique in this market for being the only major brand listed on the Australian Securities Exchange. through a flexible fuel supply chain, Caltex has forged its reputation for providing safe and reliable supply of high-quality fuels to a diverse number of customer segments, including retail, mining, agriculture, aviation, transport, small-to-medium enterprises, marine, automotive and government. Caltex is also one of Australia’s largest convenience retailers and franchisors, with over 85% of its stores operated by franchisees. During 2014, Caltex launched its largest advertising campaign in almost a decade. Its aim was to demonstrate that Caltex moves more Australians than any other name, and no matter where you are in Australia, or what you drive, Caltex is with you all the way. 2014 Annual Report This 2014 Annual Report for Caltex Australia Limited has been prepared as at 23 February 2015. The 2014 Annual Report provides a summary of Caltex’s main operating activities and performance for the year ended 31 December 2014. The 2014 Financial Report, which forms part of the 2014 Annual Report, provides detailed financial information for the Caltex Australia Group for the year ended 31 December 2014. These and other reports are available from our website (www.caltex.com.au). When we refer to the Caltex Australia Group in this 2014 Annual Report, we are referring to: • Caltex Australia Limited (ACN 004 201 307), which is the parent company of the Caltex Australia Group and is listed on the Australian Securities Exchange (ASX) • our major operating companies, including Caltex Australia Petroleum Pty Ltd, Caltex Refineries (NSW) Pty Ltd, Caltex Refineries (Qld) Pty Ltd, Caltex Petroleum Services Pty Ltd and Calstores Pty Ltd • a number of wholly owned entities and other companies that are controlled by the Group. Please note that terms such as Caltex and Caltex Australia have the same meaning in the 2014 Annual Report as the Caltex Australia Group, unless the context requires otherwise. Shareholders can request a printed copy of the 2014 Annual Report (and 2014 Financial Report) and/or the 2014 Annual Review, free of charge, by writing to the Company Secretary, Caltex Australia Limited, Level 24, 2 Market Street, Sydney NSW 2000 Australia. 2 Report from the Chairman and the Managing Director & CEo 2014 was a significant year for Caltex. It was a transformational year that built upon the success of the past 114 years and laid a strong foundation for the future. Elizabeth Bryan AM Chairman Julian Segal Managing Director & CEO 71% share price increase in 2014. On 31 December 2014, the share price closed at $34.21, compared with $20.05 on 31 December 2013. TRAnsfoRming ouR business In 2011, the articulation of Caltex’s vision – to be the outright leader in transport fuels across Australia – became a catalyst for change. Since then, this vision, as measured by top quartile total shareholder returns, has driven rapid and significant change at Caltex. It was this clear vision and an effective culture that has enabled Caltex to confidently embark on its transformation path, including the supply chain restructure announced in 2012. This path has culminated in the successful conversion of the Kurnell refinery into Australia’s largest fuel terminal, increased investment in our distribution infrastructure, and the establishment of a product sourcing capability in Singapore. Each of these elements is key in the transformation of our business into an integrated transport fuels supply chain company. successful TRAnsiTion October 2014 saw the shutdown of the last of Kurnell refinery’s process units and the commencement of the new Kurnell terminal, now Australia’s largest transport fuels terminal. This was the most significant achievement of 2014 and a milestone for the transition project announced in July 2012. The purpose of the project was to enable continued reliable supply of transport fuels to Caltex customers, while stemming Kurnell refinery operating losses and reducing our exposure to volatile refining margins. The new terminal supplies fuel to retail sites and commercial customers across New South Wales and the Australian Capital Territory. It will provide 660 million litres of storage capacity once stage two is completed in 2016. The total cost of the terminal conversion is approximately $270 million, with close to $50 million remaining to be spent in 2015. This includes additional upgrades to the wharf and the final tank conversions once the refinery is closed. Further site works, including demolition of redundant plant and remediation, will be carried out over a number of years. conTinued focus on sAfeTY Overall, the total treated injury frequency rate (TTIFR) was slightly higher than the record 2013 result at 1.75 per million hours worked, compared with 1.36 per million hours worked in 2013. The lost time injury frequency rate (LTIFR) was also slightly higher than the previous year at 0.77 per million hours worked, compared with 0.63 per million hours worked in 2013. The Board and management are committed to driving continued improvement in our safety performance and, given the slippage in our personal safety performance in 2014, are taking additional steps to do this in 2015. finAnciAl ResulTs For the 2014 full year, Caltex recorded an after tax profit of $20 million on a statutory, or historic cost of sales operating profit measure, including a loss relating to significant items of approximately $112 million after tax. This compares with the 2013 full year profit of $530 million. The 2014 result includes a product and crude oil inventory loss of $361 million after tax and reflects a significant fall in Brent crude oil prices in the latter months of 2014. On a replacement cost of sales operating profit (RCOP) basis, which is our preferred measure, as it excludes net inventory gains and losses, Caltex recorded an after tax profit for the 2014 full year of $493 million, excluding significant items. This compares with an RCOP after tax profit of $332 million for the 2013 full year, excluding significant items. Caltex / 2014 annual RePORt 3 660m litres will be the total capacity of the Kurnell terminal in 2016 when the stage two conversion works are completed. Caltex’s new business model is in line with our origins when the business began in 1900. It is based on one integrated supply chain and presents Caltex with significant opportunities to optimise our entire value chain. dividend The Board declared a final dividend of 50 cents per share (fully franked) for the second half of 2014. Combined with the interim dividend of 20 cents per share for the first half, paid in September 2014, this equates to a total dividend of 70 cents per share for 2014, fully franked. This compares with a total dividend payout of 34 cents per share (fully franked) for 2013, and is at the upper end of the reduced payout ratio (20% to 40%) during the Kurnell closure period. conTinued mARkeTing gRowTh Marketing delivered another record year with earnings before interest and tax (EBIT) of $812 million. This is 6% higher than the $764 million achieved in 2013. The strong result was delivered despite the loss of earnings from the Sydney bitumen business, which was divested in December 2013. Driving sales of premium fuels (including Vortex Diesel), remains a focus for Marketing. Higher sales of premium grades of petrol and diesel, and jet fuel, continue to offset the long term decline in demand for unleaded petrol, including E10. Continued investment in growth, including new retail service stations and diesel stops and the refurbishment of existing service stations, underpinned the increased penetration of premium Vortex products. Recent acquisitions, such as the Queensland Fuel Group in 2013 and the Scott’s Fuel Divisions, which was completed in June 2014, also contributed to the strong Marketing result. Refining impRovemenT Refining and Supply, now known as Supply Chain, delivered an EBIT result of $64 million for the 2014 full year. This compares with an EBIT loss of $171 million for 2013, and a 2014 first half loss of $65 million. The 2014 result has benefited from the impact of favourable externalities, particularly in the fourth quarter of the year. Lytton refinery’s strong operating performance during this period enabled the refinery to take advantage of these favourable conditions. In a year dominated by the Kurnell conversion project, the Kurnell refinery generated a 2014 EBIT loss of approximately $69 million. The influence of exTeRnAliTies The realised Caltex Refiner Margin (CRM) averaged US$12.42 per barrel for the 2014 full year. The strong July to December 2014 average CRM of US$16.38 per barrel compares favourably with both the 2014 first half average of US$9.20 per barrel and the 2013 full year average of US$9.34 per barrel. The sharp decline in Brent crude oil prices in the latter part of the year was a major contributor to the stronger average refiner margin in the second half as product prices did not fall as quickly as the crude price. The fall in the Australian dollar has had a favourable impact on the Australian dollar denominated refiner margin, but resulted in a net loss after hedging on US dollar payables of approximately $26 million (before tax). On 1 August 2014, the company changed its policy of hedging outstanding US dollar payables from 50% to 80%, which mitigates the impact of the fall in the Australian dollar. cApiTAl mAnAgemenT Caltex remains committed to delivering top quartile growth for our shareholders. To this end, in February 2014 we commenced a company-wide cost and efficiency review. Within this review, numerous initiatives have been developed that will provide Caltex with the financial strength to maintain and enhance its market leadership position and to enable the business to capture future growth opportunities. Following the successful closure of the Kurnell refinery, the Board has determined that as of 2015, a target dividend payout ratio of 40-60% of RCOP net profit after tax will be reinstated. ouR people 2014 was a challenging year for many people across Caltex. As part of the above-mentioned cost and efficiency review, employee headcount was reduced by approximately 350 people across operational and support functions. This reduction is in addition to the previously announced reductions relating to the conversion of the Kurnell refinery. Caltex is committed to supporting those people affected by the changes with the highest level of care and respect. Caltex has ensured that redeployment opportunities have been explored, in addition to generous redundancy entitlements and outplacement support. Despite the uncertainty generated by the review, our people have delivered upon a range of significant financial and operational targets and must be commended for their professionalism, passion and dedication during 2014. fuTuRe gRowTh While the Australian fuels industry continues to go through a significant period of change, particularly with new competitors entering the market, Caltex is well positioned and prepared for the pace and intensity of this change. Caltex will continue to leverage and optimise its strong supply chain in order to target higher growth, in addition to expanding both the breadth and quality of our retail and reseller network. The Board and management are confident that Caltex is well positioned to remain the outright leader in transport fuels across Australia. 4 Corporate Governance Statement The Board is committed to conducting the business and operations of Caltex Australia Limited and its group companies (Caltex) in accordance with high standards of corporate governance, and in the best interests of our shareholders. The Corporate Governance Statement provides information about the Caltex Group’s corporate governance practices for 2014, including compliance with the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations for the year ended 31 December 2014 and as at the date of this Annual Report. A graphical representation of Caltex’s Corporate Governance Framework (CG Framework) is set out below. Assurance • External auditors External Auditor Policy • Internal Audit Independent Advice • Independent legal or other professional advice Board n o i t a g e e D l h g u o r h t t h g i s r e v O g n i t r o p e r Delegation Accountability • Board Charter • Board Tenure Policy • Board Composition, Appointment, Induction & Election • Charter of Director Independence • Delegation of Authority • Performance Evaluation Process • Policy for Transactions with Chevron • Risk Management Summary • Continuous Disclosure Policy • Securities Trading Policy • Shareholder Communications Policy • Code of Conduct • Diversity and Inclusion Policy MD & CEO y t i l i b a t n u o c c A n o i t a g e e D l Caltex Leadership Team (CLT) Audit Committee OHS & Environmental Risk Committee Human Resources Committee Nomination Committee • Audit Committee Charter • OHS & Environmental Risk Charter • Human Resources Committee Charter • Nomination Committee Charter The CG Framework is regularly reviewed and updated in response to changes in Caltex’s business, Australian corporate governance practice and the law. 1. the Board 1.1 Role of the Board The Board oversees and directs Caltex management in seeking to deliver superior business and operational performance and long term growth in shareholder value. The Board has delegated responsibility for managing Caltex’s day-to-day business and operations to the Managing Director & CEO within the limits set out in delegations of authority approved by the Board. The Managing Director & CEO has in turn delegated authority for certain matters to the Caltex Leadership Team (CLT) who, along with the Managing Director & CEO, are accountable to the Board. The Board Charter and Caltex’s delegations of authority policy balance giving Caltex’s Managing Director & CEO and the CLT the authority to manage Caltex’s day-to-day operations, while reserving important strategic, business, operational and governance matters to the Board. The Board’s key responsibilities under the Board Charter include: • approving Caltex’s strategic direction, business plan and annual budget • evaluating and monitoring Caltex’s performance against financial, operational and safety objectives • approving Caltex’s financial statements and reports to shareholders • approving Caltex’s dividend policy and determining Caltex’s capital structure • assessing and monitoring Caltex’s material business risks and the effectiveness of internal controls and risk management systems and policies • establishing and promoting Caltex’s culture, including high standards of ethical conduct, corporate integrity, safety, corporate governance, and legal and regulatory compliance • approving a policy for transactions between Caltex and Chevron and approving significant transactions with Chevron • appointing, and reviewing the performance of, the Managing Director & CEO • reviewing succession planning for the Board, the Managing Director & CEO and the CLT • approving remuneration of the Managing Director & CEO and the CLT, and • reviewing Board performance and approving non-executive director fees. The Board Charter is available on the Corporate Governance page of the Caltex website (www.caltex.com.au). Caltex / 2014 annual RePORt 5 1.2 Composition of the Board There are currently eight directors on the Caltex Board, comprising four independent, non-executive directors, three non-executive directors and the Managing Director & CEO. Details of Caltex’s directors and their appointment dates are set out in the table below1. DIReCtoR Elizabeth Bryan Julian Segal Trevor Bourne Greig Gailey Bruce Morgan Richard Brown2 Barbara Burger2 Ryan Krogmeier2 tItLe APPoInteD Chairman Independent Non-executive Director 18 July 2002 (Chairman: 1 October 2007) Managing Director & CEO 1 July 2009 Independent Non-executive Director 2 March 2006 Independent Non-executive Director 11 December 2007 Independent Non-executive Director Non-executive Director Non-executive Director Non-executive Director 29 June 2013 28 June 2012 28 June 2012 30 March 2012 1. On 6 March 2015, Caltex announced the appointment of an additional Independent Non-executive Director, Barbara Ward, effective from 1 April 2015. 2. Mr Brown, Ms Burger and Mr Krogmeier each serve as alternate directors for each other. The Board Charter requires that the Chairman is an independent non-executive director. Elizabeth Bryan is the Chairman of the Caltex Board and, among other things, she is responsible for: • facilitating the work of the Board • overseeing the provision of appropriate information to the Board • approving the agenda for each meeting in consultation with management • managing Board activities to assist their efficient and effective conduct, and • fostering a culture which encourages directors to contribute in an open and constructive manner. In line with accepted practice, the roles of the Chairman and the Managing Director & CEO are not exercised by the same individual. The Board annually reviews its composition, including the number of independent directors and the mix of skills, experience, expertise and diversity of directors and the Board. Caltex has a major shareholder (Chevron) which holds 50% of Caltex shares on issue. Despite this shareholding, Caltex operates independently of Chevron, and all decisions are made in Australia by the Caltex Board and management. All decisions to appoint new directors are made by the Caltex Board and Chevron does not have a right to appoint nominee directors to the Caltex Board. Further details of the governance arrangements relating to Caltex’s relationship with Chevron are provided at section 6.6 of this Corporate Governance Statement. To ensure the Board operates effectively and with appropriate consideration of the Chevron shareholding, the Board has determined that it will comprise at least four independent, non-executive directors and up to three directors who are Chevron executives. Details of the skills, experience and expertise and special responsibilities for each director are provided in the Directors’ Report at pages 17 to 61 of this Annual Report. 6 1.3 Independence Independence on the Caltex Board Under the Charter of Director Independence, the Board recognises that it is in the best interests of shareholders to have a strong representation of independent directors. Ms Bryan, Mr Bourne, Mr Gailey and Mr Morgan are independent non-executive directors. Mr Brown, Ms Burger and Mr Krogmeier are not independent as they are executives of Chevron (Caltex’s major shareholder). The Caltex Board appoints Chevron executives as non-executive directors to give the Board direct access to current senior executives of a leading global energy company who have many years of industry experience. Each of Mr Brown, Ms Burger and Mr Krogmeier bring important knowledge and experience to the Board’s consideration of operational, strategic and business matters relevant to the petroleum industry. This level and breadth of experience is generally not available from independent directors unless they are, or have been, involved in the petroleum industry. The pool of independent directors with petroleum industry experience who would be available to Caltex is relatively small because candidates may have current or recent associations with Caltex’s competitors. Caltex has adopted policies for addressing conflicts of interest which may arise from its shareholding structure, and the Board’s practice is that directors who are Chevron executives leave the Board meeting during discussions or decisions that relate to Chevron and do not participate in these matters. Julian Segal (Managing Director & CEO) is not independent because he is an executive director. Mr Segal does not have any former or current association with Chevron. The Caltex Board does not have a majority of independent directors. However, the Board believes that the mix of independent directors, directors affiliated with Caltex’s major shareholder and one executive director is appropriate for Caltex’s business and circumstances and is in the best interests of shareholders as a whole. Assessing director independence Directors are required to disclose relevant personal interests and conflicts of interest when appointed and on an ongoing basis. A new interest or conflict of interest may trigger a review of a director’s independence. Independence is initially assessed on each director’s appointment and is reviewed each year and non-executive directors are required to provide a certificate to the Board in which they confirm their independence status. Additionally, directors complete a questionnaire each year providing details of any transactions with Caltex. Caltex considers a director to be independent if they are free of any business or other relationship that could materially interfere with (or could reasonably be perceived to materially interfere with) the independent exercise of the director’s judgement. An assessment of independence takes the following relationships with Caltex into account: • service as an officer of a substantial shareholder • length of previous service as a director on the Board or previous service as a senior executive of Caltex within the past three years • service as a partner, principal or director of a professional adviser or consultant that has had a material business relationship with Caltex within the past three years • service as a director, officer or senior executive of, or employee significantly associated with the service provided by, a professional adviser or consultant that has had a material business relationship with Caltex within the past three years • significant direct or indirect involvement in the external audit of Caltex in the last five years or service as a partner, principal or director of the external auditor in that period • a relationship (substantial shareholder, director, officer or senior executive) with a supplier or customer that has had a material business relationship with Caltex, and • a contractual relationship (directly or indirectly), interest or other relationship with Caltex that could, or could reasonably be perceived to, materially interfere with the director’s ability to act in Caltex’s best interests. A professional adviser, consultant, supplier or customer will be considered to have a material business relationship with Caltex if: • from the perspective of the Caltex director, the business relationship is significant (directly or indirectly) to their own circumstances, or • from Caltex’s perspective, the business relationship generates revenue or expenses (to Caltex) of 5% or more of Caltex’s total revenues or expenses, as applicable. 1.4 Access to independent advice Caltex directors have access to independent professional advice at Caltex’s expense. A director can seek professional advice with prior approval by the Board Chairman. The Board Chairman can seek professional advice with prior approval by the Audit Committee Chairman. The Company Secretary is accountable directly to the Board, through the Chairman, on all matters to do with the proper functioning of the Board. Caltex / 2014 annual RePORtCorporate Governance Statementcontinued 7 1.5 Appointment terms and re-election of directors Process for appointment of new directors When the Board decides to appoint a new non-executive director, the Nomination Committee prepares a set of selection criteria which reflect the Board’s desired capabilities, Caltex’s business and circumstances, and whether the new director is being appointed to replace an outgoing director or as an addition to the Board. The Nomination Committee engages an independent search firm to conduct the search based on the selection criteria, and requests the firm to provide a list of candidates for consideration. Background checks are conducted as part of the process. When the Board appoints a non-executive director who is a Chevron executive, the Chairman (typically with assistance from existing directors from Chevron) contacts Chevron to discuss potential candidates who would best meet the selection criteria. In addition to the selection criteria determined by the Nomination Committee, consideration is also given to: • flexibility in the work schedule of a Chevron executive to meet the time commitments of being a Caltex director, and • the networks of an executive within Chevron and their access to senior Chevron executives. In all cases, the decision to appoint a new director is made by the Caltex Board. Further details about this process are contained in the Board Composition, Appointment, Induction & Election document which is available on the Corporate Governance page of the Caltex website (www.caltex.com.au). Election and re-election of directors A newly appointed non-executive director holds office until the end of the next Annual General Meeting and is eligible for election by shareholders at the meeting. The Managing Director & CEO is appointed by the Board and is not subject to election by shareholders. Following election by shareholders, a director holds office for three years or until the third Annual General Meeting following the director’s last election (whichever is longer). Before each Annual General Meeting, the Board decides whether to support a director standing for election or re-election. This is not automatic and is assessed with regard to advice provided by the Nomination Committee. The Nomination Committee considers various factors in forming its recommendations to the Board about the election or re-election of a director including: • the director’s performance having regard to Caltex’s Performance Evaluation Policy • the desired composition of the Board, including its size, capabilities and diversity, having regard to Caltex’s Charter of Director Independence and the Board Composition, Appointment, Induction & Election document • the length of time the director has served on the Board, having regard to Caltex’s Board Tenure Policy, and • the director’s external commitments. The Board’s recommendations are disclosed in the notice of meeting sent to shareholders, together with biographical information for each director standing for election or re-election at that meeting. 1.6 Induction and training All new directors take part in an induction program to familiarise them with Caltex’s business, strategy and operations, performance, risks, governance and external environment. The induction program is tailored to each director’s experience and circumstances and includes briefings with other Board members and senior executives, site visits and external training. New directors also receive an information pack containing key business documents, reference materials and internal policies. A letter is provided to each new director which sets out the terms of their appointment, their responsibilities and the expectations of them in their role, and the assistance and resources that we provide to them. The Nomination Committee periodically reviews the director induction program and the standard letter of appointment for new directors to ensure that they appropriately reflect directors’ evolving roles and changes to Caltex’s business and operations. 2. Board Committees 2.1 Overview of Committees The Board has established the following four standing Committees to assist it in performing its role: • Audit Committee, comprising three independent directors including an independent chairman • Human Resources Committee, comprising a majority of independent directors • OHS & Environmental Risk Committee, comprising a majority of independent directors • Nomination Committee, comprising a majority of independent directors. The Committees provide advice and recommendations to the Board in relation to their areas of expertise and make decisions on specific matters that have been delegated to them by the Board. The scope of the Committees’ advisory role and delegated authorities are set out in their respective charters. 8 The current members and role of each Committee are set out below. AUDIt CoMMIttee HUMAn ResoURCes CoMMIttee oHs & envIRonMentAL RIsk CoMMIttee noMInAtIon CoMMIttee Responsibilities Assists the Board to: • review the integrity of financial reporting, including accounting policies and significant areas of judgement • review dividend recommendations • monitor the adequacy, integrity and effectiveness of financial risk management and internal controls • review the findings, plans, independence and performance of the external auditors and Caltex’s internal audit function and approve the scope of their work Assists the Board to: • review the remuneration of non-executive directors • review the incentive frameworks and remuneration levels for the Managing Director & CEO and the CLT • review the remuneration frameworks for employees • review the performance of the Managing Director & CEO and the CLT • review the remuneration disclosures in the annual report to shareholders • review termination payments • review succession planning for the Managing Director & CEO and the CLT • review the diversity and inclusion policy and gender diversity objectives and disclosures across Caltex Assists the Board to: • monitor the adequacy, Assists the Board to: • review the composition of the Board • identify skills and desirable competencies for Board and Board committees • review policies and processes for the selection of an induction program for non-executive directors • make recommendations on the election and re-election of non-executive directors • review and oversee succession planning for non-executive directors • oversee the process for evaluating the performance of the Board, its committees and individual directors integrity and effectiveness of the critical systems, internal controls and processes and procedures used to manage occupational health and safety (OHS) and environmental risks • review the appropriateness of Caltex’s practices to manage material OHS and environmental risks • monitor compliance with legal obligations in relation to OHS and environmental matters • review investigations into significant OHS and/or environmental incidents • review OHS and environmental policies and internal audit plans and findings in relation to OHS and environmental matters Bruce Morgan (Chairman) Trevor Bourne Greig Gailey Greig Gailey (Chairman) Trevor Bourne Bruce Morgan Ryan Krogmeier Trevor Bourne (Chairman) Greig Gailey Bruce Morgan Barbara Burger Members1 Elizabeth Bryan (Chairman) Trevor Bourne Richard Brown Barbara Burger Greig Gailey Ryan Krogmeier Bruce Morgan 1. Elizabeth Bryan, as Chairman of the Board, is an ex-officio member of each of the Audit Committee, Human Resources Committee and OHS & Environmental Risk Committee. 2.2 Directors’ attendance at Board and Committee meetings The Board held eight scheduled meetings during 2014, with additional meetings called to consider specific or urgent matters, as appropriate. The Board held preliminary meetings in the absence of Caltex management at scheduled Board meetings throughout the year. Details of directors’ attendance at meetings are provided at page 56 of this Annual Report. Caltex / 2014 annual RePORtCorporate Governance Statementcontinued 9 3. Performance evaluation and remuneration 3.1 Performance evaluation Board A formal Board evaluation process is carried out every two to three years. The Nomination Committee engaged an independent specialist to facilitate a performance review of the Board, its standing committees and individual directors at the end of 2012. As part of the review, the independent specialist interviewed each director to explore a range of focused topics relating to the Board’s effectiveness. Senior executives were also interviewed to obtain further information, including on the relationship between the Board and management. The independent specialist prepared a report on the review which was discussed with the whole Board. The Board subsequently agreed on specific actions, together with expected timeframes and areas of responsibility, to further develop the Board’s effectiveness. The Chairman also discussed the report with individual directors and with the CLT. Managing Director & CEO and the CLT The Board sets annual performance objectives for the Managing Director & CEO based on Caltex’s business plan and advice provided by the Human Resources Committee. The Chairman met with the Managing Director & CEO in February 2015 to assess his performance for the previous year and discussed his performance review. The Human Resources Committee discussed the performance review with the Chairman and the Managing Director & CEO and made a recommendation to the Board for an annual performance assessment. In February 2015, the Board further discussed the Managing Director & CEO’s performance and approved an annual performance assessment for 2014. The Managing Director & CEO formally reviews the performance of his direct reports twice a year against agreed business objectives and their job descriptions. The 2014 full year performance reviews for the CLT were considered by the Human Resources Committee and the Board in February 2015. Further information on the performance review process for the CLT is provided at section 3c of the Remuneration Report. 3.2 Director and executive remuneration Remuneration levels are set at competitive levels to attract and retain appropriately qualified and experienced executives. The Board and the Human Resources Committee consider performance, duties and responsibilities, market comparison and seek independent advice as part of the remuneration review process. Remuneration for non-executive directors is fixed and is subject to a remuneration pool of $2 million, which was approved by shareholders at the 2010 Annual General Meeting. Non-executive directors receive statutory superannuation (and may salary sacrifice fees to superannuation) but do not participate in any incentive plans or receive any performance based remuneration. Superannuation is not paid for overseas directors. There is no retirement benefits scheme for non-executive directors. Details of Caltex’s remuneration arrangements for the Managing Director & CEO, the Board and the CLT are provided in the Remuneration Report at pages 31 to 55 of this Annual Report. 4. Risk management framework 4.1 Risk management framework The Board is ultimately responsible for monitoring the effectiveness of the critical systems and internal controls used to manage Caltex’s material business risks. It is also responsible for approving key financial and other risk management policies. The Board has delegated oversight of particular risks to its standing committees. The Managing Director & CEO and the CLT are responsible for the design, implementation and maintenance of risk management systems to manage Caltex’s material business risks. Caltex has adopted a risk management framework to proactively and systematically identify, assess and address events that could potentially impact our business objectives. This framework integrates the consideration of risk into our activities so that: • risks in relation to the effective delivery of our business strategy are identified • control measures are evaluated, and • where potential improvements in controls are identified, improvement plans are scheduled and implemented. Management assesses risks on a regular basis, and reports on material risks to the Board and its Committees. These reports include the status and effectiveness of control measures relating to each material risk. The Board, the Audit Committee, the OHS & Environmental Risk Committee and the Human Resources Committee each receive regular reports on material risks relevant to their responsibilities. The Board and the OHS & Environmental Risk Committee also receive quarterly risk updates throughout the year. Caltex’s policies for overseeing and managing material business risks are regularly reviewed and approved by the Board. The Risk Management Summary is available on the Caltex website (www.caltex.com.au) and outlines Caltex’s practices to oversee and manage risks, including the risk management framework and the roles and responsibilities of the Board, its Committees, senior executives and staff. 10 4.2 Internal controls framework Internal audit Caltex has a dedicated internal audit function which provides an independent and objective assessment to the Board and management regarding the adequacy, effectiveness and efficiency of our risk management, control and governance processes. Internal audit conducts audits in accordance with audit plans approved by the Audit Committee (for financial risks) and the OHS & Environmental Risk Committee (for occupational health, safety and environmental risks), and provides regular reports to those Committees and to senior management. The head of internal audit has a direct reporting line to the Chairmen of the Audit Committee and OHS & Environmental Risk Committee and meets with them regularly. The Audit Committee and OHS & Environmental Risk Committee also meet privately with the head of internal audit as part of each scheduled meeting. Integrity in financial reporting The Board has received assurance from the Managing Director & CEO and the Chief Financial Officer that the declaration provided under section 295A of the Corporations Act is founded on a sound system of risk management and internal control, and that the system is operating effectively in all material respects in relation to financial reporting risks. 4.3 External Auditor Policy The Board has approved an External Auditor Policy that addresses the provision of services by the external auditor, including non-audit services. The Audit Committee monitors services provided by KPMG during the year to confirm that KPMG continues to be independent and to confirm compliance with the policy. The Audit Committee also monitors the rotation requirements for the external auditor under the Corporations Act with KPMG each year. Caltex’s Relationship with the External Auditor document is available on the Caltex website (www.caltex.com.au) and provides a summary of this process. One of the Audit Committee’s key responsibilities is to assess the performance of the external auditor and, as appropriate, make recommendations to the Board on the appointment, reappointment or replacement of the external auditor. The Audit Committee reviewed KPMG’s performance as external auditor for 2013 before KPMG was engaged for the 2014 full year audit and half year review. The Audit Committee meets privately with the external auditor at each scheduled Committee meeting and the Committee Chairman also meets with the external auditor from time to time outside Committee meetings, as appropriate. Caltex’s external auditor attends its annual general meetings and is available to answer questions from security holders relevant to the audit. 5. Corporate social responsibility Caltex is focused on conducting our operations with care. We work to deliver sustainable growth and shareholder value, contribute to the communities in which we operate, minimise our impact on the environment and remain an employer of choice. Maintaining safe, reliable and sustainable operations is at the core of our business. A culture of operational excellence is formally supported through an enterprise-wide risk management framework and our operational excellence management system. Caltex has a health and safety policy, approved by the OHS & Environmental Risk Committee, which requires Caltex to provide a safe and healthy workplace for all our people, and to operate in a way that will not adversely affect the health and safety of our neighbours, customers or the public. The emphasis on health and safety is embedded in our business planning process and entrenched in the culture of our organisation. Caltex is committed to further improving the energy efficiency of our operations. In 2014, Caltex continued to report under the National Greenhouse and Energy Reporting Scheme and the Carbon Disclosure Project. Caltex is also committed to supporting the communities in which we work and live. Our refineries, service stations and terminals are proud supporters of a variety of organisations, events and programs in local communities. Further information on our social, ethical and environmental performance can be found in the Annual Review. 6. Governance policies 6.1 Code of Conduct Caltex’s Code of Conduct applies to Caltex directors, senior executives and staff and provides a framework for decision making and business behaviour, which builds and sustains our corporate integrity, reputation and success. This Code of Conduct identifies responsibilities for investigating breaches of the code and associated reporting of breaches to the Board or senior management as appropriate. The Board receives an annual report from the General Manager – Human Resources in relation to the administration of, and compliance with, the Code of Conduct. A copy of the Code of Conduct is available on Caltex’s website (www.caltex.com.au). Caltex / 2014 annual RePORtCorporate Governance Statementcontinued 11 6.2 Diversity and inclusion Caltex embraces a strong belief in the advantages of an inclusive workplace in which individuals of varied backgrounds and perspectives are welcomed, encouraged and given the opportunity to contribute to their full potential. At Caltex, diversity is defined as the prevalence of difference in our workplace, including women and men from different countries, cultures, ethnicities, generations and all the other unique differences in our backgrounds that make each of us who we are. Caltex believes diversity maximises opportunities to attract, retain and develop the best talent, seize opportunities for creative problem solving and grow our business through an informed understanding of the diverse markets in which Caltex operates. The Diversity and Inclusion Policy sets out Caltex’s vision for a diverse workplace and the responsibilities of the Board, its committees, Caltex leaders, employees and contractors. With assistance from the Human Resources Committee, the Board annually approves measurable objectives set in accordance with the Diversity and Inclusion Policy, assesses the progress against those objectives, and monitors the proportion of women and indigenous Australians at various levels across Caltex. The Board approved a set of measureable objectives, related to gender diversity, indigenous employee representation, and inclusion, for 2014. The 2014 objectives were disclosed in the Corporate Governance Statement contained in Caltex’s 2013 Annual Report. In August and December 2014, and again in February 2015, the Board assessed Caltex’s progress in achieving the 2014 diversity and inclusion objectives. The table below sets out the status of each 2014 objective. oBjeCtIve PRoGRess 2014 gender diversity objectives 1. 2. 3. 4. Increase the percentage of female senior leaders to 33% by 2017 Female representation in senior leadership has increased to 25% as at 31 December 2014, a 5% increase on the 2013 year-end figure of 20%. Increase the percentage of external female new hires in Corporate and Marketing (respectively) at experienced professional level Corporate and Marketing external female hires were 53% and 41% respectively. These results compare very favourably to 2013 (Corporate: 40% and Marketing: 32%). Increase percentage of female headcount in Supply Chain As at 31 December 2014, the female headcount in Supply Chain was 21%, a 3.8% decrease from 31 December 2013. Develop a retention plan for key female Kurnell refinery talent Leadership teams across Marketing and Supply Chain developed a plan for retaining key female Kurnell refinery talent. The closure of the Kurnell refinery had a significant impact on female headcount. 5. Manage female voluntary turnover, ensuring it remains below 7% 6. Maintain minimal gender based pay differentials 7. Maintain the percentage of females in the critical successor talent pool at the current level, ensuring no less than the percentage female headcount in the Grade 58 and above talent pool In 2014, 27% of females were redeployed into other areas of the company. Furthermore, following an “expression of interest” process undertaken in 2013 to understand preferred outcomes following the closure of Kurnell, 46% of females achieved their first preferred outcome and 75% of females achieved one of their top three preferred outcomes (out of nine in total). As at 31 December 2014, the voluntary turnover rate amongst graded female employees was 4.8%, a reduction of 0.4% compared to the 2013 outcome of 5.2%. The 2014 end of year gender pay differential is 2.3% in favour of males. While this level of pay differential is considered minimal, we are committed to further reducing this gap. Given the organisational restructure implemented in 2014, critical roles were last reviewed in September 2014. At this time, females represented 29% of the pipeline critical successors, which is above the 2013 representation (27%) and also above the female representation in Grade 58 and above. 12 oBjeCtIve PRoGRess 2014 indigenous diversity objectives 8. Increase indigenous employee headcount (those formally hired and retained via indigenous employment programs) Through the indigenous employment program, 21 indigenous employees were hired in 2014. Caltex has now met 83% of its commitment to the Australian Employment Covenant, a national industry-led initiative that aims to close the gap between indigenous and non-indigenous Australians in respect of employment. Despite our strong efforts in hiring indigenous employees, indigenous employee headcount reduced over 2014. As part of Caltex’s diversity and inclusion strategy for 2015, we will be focusing on both the attraction and retention of our indigenous employees. 2014 inclusion objectives 9. 10. Increase score for the Engagement Survey statement: “The work environment is very open and accepting of individual difference” 67% of respondents agreed or strongly agreed with this statement, a 4% improvement on the 2012 result of 63% (this question was not asked in 2013). At least maintain the number of graded employees who answer “yes” to “Do you feel comfortable talking to your manager about flexible work” 79% of respondents answered “yes” to this question, a 7% improvement on the 2013 result of 72%. In 2014, the Board approved the following diversity and inclusion objectives for 2015. 2015 gender diversity objectives oBjeCtIve 1. 2. 3. 4. 5. Increase women in senior leadership roles to 33% by 2017 Increase the percentage of external female new hires in Marketing, Supply, and Supply Chain, and maintain a strong percentage of external female new hires in Corporate, at experienced professional level and above Ensure the female promotion rate in Marketing, Supply, Supply Chain and Corporate is above the female representation at the experienced professional level and above Manage female voluntary turnover to 6% or less at the experienced professional level and above Maintain minimal gender-based pay differences 2015 indigenous diversity objectives 6. Increase indigenous employee representation 2015 inclusion objectives 7. 8. Increase the score for the number of employees who answer ‘yes’ to the Employee Survey question: “The work environment is very open and accepting of individual difference.” At least maintain the score for the number of employees who answer ‘yes’ to the Employee Survey question “Do you feel comfortable talking to your manager about flexible work” The table below contains details about the representation of females in the Caltex workforce, Caltex’s leadership and senior teams, and the Board. Level Board Senior executives (direct reports to the CEO) Senior managers (salary grades 58 and above) Middle managers (salary grades 56 and 57) Caltex 2014 25% 0% 25% 23% 36% 2013 25% 0% 20% 18% 34% 2012 25% 0% 21% 18% 34% Caltex / 2014 annual RePORtCorporate Governance Statementcontinued 13 6.3 Trading in securities Caltex’s Securities Trading Policy, which is available on our website, sets out clear requirements for the Board, senior executives and staff to comply with insider trading laws when dealing in the securities of Caltex and other companies. The policy also contains trading restrictions which apply during blackout periods prior to results releases. It also prohibits senior executives from hedging an exposure to unvested or vested Caltex securities held through any of our executive incentive plans. 6.4 Continuous disclosure Caltex is committed to promoting investor confidence by ensuring that trading in our securities takes place in an informed market. Caltex has mechanisms in place to ensure that we meet our continuous disclosure obligations under the ASX Listing Rules and the Corporations Act. Caltex’s Continuous Disclosure Policy, which is available on our website, sets out the key obligations of the Board, senior executives and staff to ensure that we comply with our continuous disclosure obligations so that investors have equal and timely access to material information concerning Caltex, and company announcements are factual and presented in a clear and balanced way. 6.5 Shareholder communications Caltex is committed to giving our investors timely, balanced and understandable information about our business and performance. The following practices support this goal. • In addition to statutory reporting, we publish an annual review and a half year review which provide an overview of our key business developments, operational highlights and financial performance. • We provide monthly updates to the market on the Caltex Refiner Margin, which is a contributor to our performance. • We have a robust and proactive investor relations program which includes regular engagement with institutional investors and analysts. Our investor presentations are released to the market before the briefings occur and we give prior notice of significant briefings, such as half yearly and annual reporting. • We provide ASX and media releases, corporate governance policies and charters and other relevant company information on our website (www.caltex.com.au). We encourage shareholders to submit questions for the company or our auditor in the lead-up to our annual general meeting. The Chairman discusses significant issues raised in shareholders’ questions in her address to the meeting. Shareholders who attend in person have the opportunity to ask further questions at the meeting. We also webcast the annual general meeting so that it can be viewed by people who are unable to attend. Caltex’s Shareholder Communications Policy sets out further details of our approach to providing fair and equal information to all investors. 6.6 Policy for transactions with Chevron As noted above, Chevron holds 50% of the ordinary shares in Caltex. During the course of a year, Caltex companies enter into a number of commercial arrangements with Chevron companies. Significantly, Caltex has an agreement with Chevron for the procurement and supply of transport fuels, with associated shipping services. The Caltex Board has adopted a Policy for Transactions with Chevron to ensure that all arrangements with Chevron are at arm’s length. Under that policy, all crude, product and shipping transactions or other significant dealings with Chevron must be approved by the Caltex Board. The Board’s practice is for the directors who are Chevron executives to leave the meeting and not participate in discussions or decisions on these matters. Details of the policy, and other information concerning the relationship with Chevron, are available on the Caltex website (www.caltex.com.au). 14 ASX CORPORATE GOVERNANCE COUNCIL’S PRINCIPLES AND RECOMMENDATIONS1 SECTION REFERENCE COMPLY Principle 1 Lay solid foundations for management and oversight Companies should establish the functions reserved to the board and those delegated to senior executives and disclose those functions. 1.1 Companies should disclose the process for evaluating the performance of senior executives. 3.1 and Remuneration Report 1.1 1.2 1.3 2.2 2.3 2.4 2.5 2.6 Companies should provide the information indicated in the Guide to reporting on Principle 1. Principle 2 Structure the board to add value 2.1 A majority of the board should be independent directors. The chair should be an independent director. The roles of chair and chief executive officer should not be exercised by the same individual. The board should establish a nomination committee. Companies should disclose the process for evaluating the performance of the board, its committees and individual directors. 1.1, 3.1 1.2, 1.3 1.3 1.2 2.1 3.1 Companies should provide the information indicated in the Guide to reporting on Principle 2. 1.2, 1.3, 2.1, 3.1 and website Principle 3 Promote ethical and responsible decision making 3.1 3.2 3.3 3.4 3.5 Companies should establish a code of conduct and disclose the code or a summary of the code as to: • the practices necessary to maintain confidence in the company’s integrity • the practices necessary to take into account their legal obligations and the reasonable expectations of their stakeholders • the responsibility and accountability of individuals for reporting and investigating reports of unethical practices. Companies should establish a policy concerning diversity and disclose the policy or a summary of that policy. The policy should include requirements for the board to establish measurable objectives for achieving gender diversity and for the board to assess annually both the objectives and progress in achieving them. Companies should disclose in each annual report the measurable objectives for achieving gender diversity set by the board in accordance with the diversity policy and progress towards achieving them. Companies should disclose in each annual report the proportion of women employees in the whole organisation, women in senior executive positions and women on the board. 6.1 6.2 6.2 6.2 Companies should provide the information indicated in the Guide to reporting on Principle 3. 6.1, 6.2 and website Principle 4 Safeguard integrity in financial reporting 4.1 4.2 4.3 4.4 The board should establish an audit committee. The audit committee should be structured so that it: • consists only of non-executive directors • consists of a majority of independent directors • is chaired by an independent chair, who is not chair of the board • has at least three members. The audit committee should have a formal charter. Companies should provide the information indicated in the Guide to reporting on Principle 4. 2.1 2.1 2.1 2.1, 4.2, 4.3 and website ✔ ✔ ✔ ✘ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Caltex / 2014 annual RePORtCorporate Governance Statementcontinued 15 AsX CoRPoRAte GoveRnAnCe CoUnCIL’s PRInCIPLes AnD ReCoMMenDAtIons1 seCtIon ReFeRenCe CoMPLY Principle 5 Make timely and balanced disclosure 5.1 Companies should establish written policies designed to ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at a senior executive level for that compliance and disclose those policies or a summary of those policies. 6.4 5.2 Companies should provide the information indicated in the Guide to reporting on Principle 5. 6.4 and website Principle 6 Respect the rights of shareholders 6.1 6.2 Companies should design a communications policy for promoting effective communication with shareholders and encouraging their participation at general meetings and disclose their policy or a summary of that policy. 6.5 Companies should provide the information indicated in the Guide to reporting on Principle 6. 6.5 and website Principle 7 Recognise and manage risk 7.1 7.2 7.3 Companies should establish policies for the oversight and management of material business risks and disclose a summary of those policies. 4.1 The board should require management to design and implement the risk management and internal control system to manage the company’s material business risks and report to it on whether those risks are being managed effectively. The board should disclose that management has reported to it as to the effectiveness of the company’s management of its material business risks. The board should disclose whether it has received assurance from the chief executive officer (or equivalent) and the chief financial officer (or equivalent) that the declaration provided in accordance with section 295A of the Corporations Act is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial reporting risks. 4.1, 4.2 4.2 7.4 Companies should provide the information indicated in the Guide to reporting on Principle 7. 4.1, 4.2, 4.3 and website Principle 8 Remunerate fairly and responsibly 8.1 8.2 8.3 8.4 1. The board should establish a remuneration committee. The remuneration committee should be structured so that it: • consists of a majority of independent directors • is chaired by an independent chair • has at least three members. 2.1 2.1 Companies should clearly distinguish the structure of non-executive directors’ remuneration from that of executive directors and senior executives. 3.2 and website Companies should provide the information indicated in the Guide to reporting on Principle 8. 2.1, 3.2, Remuneration Report and website The 2014 Corporate Governance Statement has been prepared in accordance with the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (2nd edition) with 2010 Amendments; however, where appropriate, Caltex has adopted and reported against certain recommendations contained in the 3rd edition. ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 16 2014 Financial Report for Caltex Australia Limited ACN 004 201 307 The 2014 Financial Report for Caltex Australia Limited includes: • Directors’ Report • Lead Auditor’s Independence Declaration • Directors’ Declaration • Independent Audit Report • Consolidated Income Statement • Consolidated Statement of Comprehensive Income • Consolidated Balance Sheet • Consolidated Statement of Changes in Equity • Consolidated Cash Flow Statement • Notes to the Financial Statements for the year ended 31 December 2014. Caltex Australia Group For the purposes of this report, the Caltex Group (the Group) refers to: • Caltex Australia Limited, which is the parent company of the Caltex Group and is listed on the Australian Securities Exchange (ASX) • our major operating companies, including Caltex Australia Petroleum Pty Ltd • a number of wholly owned entities and other companies that are controlled by the Caltex Group. Please note that “Caltex” has the same meaning in this report as the Caltex Group, unless the context requires otherwise. Caltex / 2014 annual RePORt Directors’ Report 17 Introduction The Board of Caltex Australia Limited presents the 2014 Directors’ Report (including the Remuneration Report) and the 2014 Financial Report for Caltex Australia Limited and its controlled entities (the Group) for the year ended 31 December 2014 to shareholders. An Independent Audit Report from KPMG, as external auditor, is also provided. Board of directors The Board of Caltex Australia Limited comprises Elizabeth Bryan (Chairman), Julian Segal (Managing Director & CEO), Trevor Bourne, Richard Brown, Barbara Burger, Greig Gailey, Ryan Krogmeier and Bruce Morgan. Mr Brown, Ms Burger and Mr Krogmeier each serve as alternate directors for each other. Board profiles Elizabeth Bryan AM Chairman (Non-executive/Independent) Date of appointment Director: 18 July 2002 Date of appointment Chairman: 1 October 2007 Board committees: Nomination Committee (Chairman) and attends meetings of the Audit Committee, the Human Resources Committee and the OHS & Environmental Risk Committee in an ex-officio capacity. Ms Bryan brings management, strategic and financial expertise to the Caltex Board. She has over 32 years of experience in the financial services industry, government policy and administration, and on the boards of companies and statutory organisations. Prior to becoming a professional director, she served for six years as Managing Director of Deutsche Asset Management and its predecessor organisation, NSW State Superannuation Investment and Management Corporation. Ms Bryan is a director of Insurance Australia Group Limited (appointed December 2014) and Westpac Banking Corporation (appointed November 2006). She is a member of the Australian Securities and Investments Commission’s Director Advisory Panel and the Takeovers Panel, and serves as a trustee of the Museum of Applied Arts and Sciences. Ms Bryan holds a Bachelor of Arts (Economics) from the Australian National University and a Master of Arts (Economics) from the University of Hawaii (US). Julian Segal Managing Director & CEO Date of appointment: 1 July 2009 Mr Segal joined Caltex from Incitec Pivot Limited, a leading global chemicals company, where he served as the Managing Director & CEO from June 2005 to May 2009. Prior to Incitec Pivot, Mr Segal spent six years at Orica in a number of senior management positions, including Manager of Strategic Market Planning, General Manager – Australia/Asia Mining Services, and Senior Vice President – Marketing for Orica Mining Services. Mr Segal is a director of the Australian Institute of Petroleum Limited (appointed 1 July 2009). Mr Segal holds a Bachelor of Science (Chemical Engineering) from the Israel Institute of Technology and a Master of Business Administration from the Macquarie Graduate School of Management. Trevor Bourne Director (Non-executive/Independent) Date of appointment: 2 March 2006 Board committees: OHS & Environmental Risk Committee (Chairman), Audit Committee, Human Resources Committee and Nomination Committee Mr Bourne brings to the Board broad management experience in industrial and capital intensive industries, and a background in engineering and supply chain. From 1999 to 2003, he served as CEO of Tenix Investments. Prior to Tenix, Mr Bourne spent 15 years at Brambles Industries, including six years as Managing Director of Brambles Australasia. He has also previously worked for Incitec Pivot and BHP. Mr Bourne is a director of Senex Energy Limited (appointed December 2014) and Sydney Water Corporation (appointed February 2014). He was previously a director of Origin Energy Limited (from February 2000 to November 2012) and formerly Chairman of Hastie Group Limited (where he served as a director from February 2005 until February 2012). Mr Bourne holds a Bachelor of Science (Mechanical Engineering) from the University of New South Wales and a Master of Business Administration from the University of Newcastle. 18 Board profiles continued Richard Brown Director (Non-executive) Date of appointment: 28 June 2012 Board committees: Nomination Committee Mr Brown brings to the Board over 30 years of oil industry experience with Chevron and substantial financial and management expertise. He is currently Chevron’s Regional Finance Officer – Asia Pacific, based in Singapore. He is responsible for financial and management reporting, credit approval, local cash management, tax matters and risk management for Chevron’s operations in the Asia Pacific region. Prior to this role, Mr Brown served as Chevron’s General Manager – Finance for Europe, Eurasia and Middle East Opco. Mr Brown holds a Bachelor of Arts (Economics) from the University of Warwick (UK). Barbara Burger Director (Non-executive) Date of appointment: 28 June 2012 Board committees: OHS & Environmental Risk Committee and Nomination Committee Ms Burger brings to the Board extensive experience in marketing, manufacturing and supply chain management. She has worked for Chevron for over 25 years and is currently the President of Chevron Technology Ventures (CTV), based in Houston, Texas. CTV champions innovation, commercialisation and integration of emerging technologies and related new business models within Chevron; its business units include advanced biofuels, emerging energy technology and venture capital. Prior to this role, Ms Burger was the Vice President – Lubricants Supply Chain and Base Oil for Chevron Lubricants. Ms Burger holds a Bachelor of Science (Chemistry) from the University of Rochester (US), a Doctor of Philosophy (Chemistry) from the California Institute of Technology (US) and a Master of Business Administration (Finance) from the University of California (US). Greig Gailey Director (Non-executive/Independent) Date of appointment: 11 December 2007 Board committees: Human Resources Committee (Chairman), Audit Committee, Nomination Committee and OHS & Environmental Risk Committee Mr Gailey brings to the Board extensive Australian and international oil industry experience, and broad management expertise from industrial and capital intensive industries. From 1964 to 1998, he worked at British Petroleum Company (BP), where he held various positions throughout Australia and offshore, including management of refining, supply and distribution in Australia and Europe. Mr Gailey was subsequently appointed CEO of Fletcher Challenge Energy (New Zealand), a position he held from 1998 to 2001. In August 2001, he joined Pasminco Limited as CEO. Pasminco relisted on the ASX as Zinifex Limited in April 2004, and Mr Gailey became Managing Director & CEO of Zinifex Limited from that date until standing down in June 2007. Mr Gailey is Chairman of ConnectEast, Deputy Chairman of the Victorian Opera Company and a director of the Australian Advisory Board of Canada Steamships. Mr Gailey was previously President of the Business Council of Australia (from 2007 to 2009). Mr Gailey holds a Bachelor of Economics from the University of Queensland. Ryan Krogmeier Director (Non-executive) Date of appointment: 30 March 2012 Board committees: Human Resources Committee and Nomination Committee Mr Krogmeier brings to the Board considerable experience in the oil and gas industry, particularly in the areas of crude and products supply and trading, risk management and financial operations. He is currently the Global Vice President of International Products, Joint Ventures and Affiliates for Chevron. Mr Krogmeier is based in Singapore and has over 20 years of experience working for Chevron. Previously, he was the Vice President – Americas East, Caribbean and Latin America for Chevron, a role in which he was responsible for strategy and profits for Chevron’s downstream fuels business in those regions. Mr Krogmeier is a director of GS Caltex Corporation (Korea), Star Petroleum Refining Co Ltd (Thailand) and Singapore Refining Company Pte Ltd (Singapore). Mr Krogmeier holds a Bachelor of Business Administration (Accounting) from the University of Iowa (US) and a Master of Business Administration from the University of California (US). Caltex / 2014 annual RePORtDirectors’ Reportcontinued Bruce Morgan Director (Non-executive/Independent) Date of appointment: 29 June 2013 Board committees: Audit Committee (Chairman), Human Resources Committee, Nomination Committee and OHS & Environmental Risk Committee Mr Morgan brings to the Board expertise in accounting, business advisory services, risk and general management. He was a partner with professional services firm PricewaterhouseCoopers (PwC) for over 25 years, where he practised as an audit partner with a focus on the energy and mining sectors. He was previously Chairman of the PwC Board and a member of the PwC Global Board. Prior to that, he was managing partner of PwC’s Sydney and Brisbane offices. Mr Morgan is the Chairman of Sydney Water Corporation and a director of Origin Energy Limited (appointed November 2012), the University of NSW Foundation, the European Australian Business Council and Redkite. He is a Fellow of the Australian Institute of Company Directors and Chartered Accountants Australia and New Zealand, and holds a Bachelor of Commerce (Accounting and Finance) from the University of NSW. 19 operating and financial review The purpose of the operating and financial review (OFR) is to enhance the periodic financial reporting and provide shareholders with additional information regarding the Group’s operations, financial position, business strategies and prospects. The review complements the financial report on pages 62 to 114. The OFR may contain forward looking statements. These statements are based solely on the information available at the time of this report, and there can be no certainty of outcome in relation to the matters to which the statements relate. Company overview Caltex, including predecessor companies, has operated in Australia for more than 100 years, focusing on providing ongoing, reliable, safe and efficient fuel supply to our customers. Caltex is one of Australia’s leading transport fuel suppliers and convenience retailers and is listed on the Australian Securities Exchange. Caltex has a major shareholder, Chevron, which holds 50% of the company’s ordinary shares. Caltex operates independently of Chevron, and all decisions are made in Australia by the Caltex Board and management. The head office is based in Sydney, and Caltex has over 3,000 employees working across the country. Caltex operates its business as one integrated value chain and incorporates operational excellence principles throughout supply, refining, logistics and marketing. The principal activities of Caltex during the year were the purchase, refining, distribution and marketing of petroleum products and the operation of convenience stores throughout Australia. Aside from those discussed below, there were no significant changes in the nature of Caltex’s principal activities or in the state of affairs during the financial year. During 2014, Caltex operated two oil refineries – Kurnell refinery in Sydney and Lytton refinery in Brisbane – producing petrol, diesel and jet fuel, along with small amounts of fuel oil and specialty products, liquid petroleum gas (LPG) and other gases. As announced in July 2012, after extensive evaluation of its business, Caltex outlined plans to rebalance its supply chain, including the closure of the Kurnell refinery in Sydney, New South Wales. October 2014 saw the successful shutdown of the last of the Kurnell refinery’s process units and the commencement of operations of the new Kurnell terminal, which is Australia’s largest fuel import terminal. The purpose of the project was to enable continued and reliable supply of transport fuels to Caltex customers, while stemming Kurnell refinery operating losses and reducing our exposure to volatile refining margins. Caltex also buys refined products on the open market both overseas and locally, and along with the products that Caltex refines, Caltex markets these products across retail and commercial channels. These products are supplied to customers via a network of pipelines, terminals, depots and company-owned and contracted transport fleets. 20 operating and financial review continued Group strategy Caltex’s vision is to continue to be the outright leader in transport fuels in Australia. To achieve this objective, Caltex’s strategy consists of four key pillars: 1. Superior supply chain 2. Comprehensive targeted offer to customers 3. Organisational competitiveness 4. Corporate growth CALTEX’S VISION MEASURE OF SUCCESS KEY STRATEGY PILLARS Superior supply chain Outright leader in transport fuels across Australia Safely and reliably deliver top quartile total shareholder returns Comprehensive targeted offer to customers across products, channels and geographies Organisational competitiveness Enhance competitive product sourcing Enhance competitive infrastructure Grow retail sales Grow commercial and wholesale sales Seed future growth options Cost efficient and effective Capital efficient and effective Value Chain Optimisation Corporate growth Long term growth options Highly capable people Understanding and management of risk; relentless pursuit of operational excellence Competitive and reliable supply of product into each key geography Large scale, cost competitive terminal, pipeline, depot and fleet infrastructure in each geography Scale across the value chain, anchored by key customer portfolio Comprehensive network of outlets, profitable franchise network, leading fuel card offer and brand Cost and capital efficient In 2011, the articulation of Caltex’s vision – to be the outright leader in transport fuels across Australia – became a catalyst for change. Since then, this vision as measured by top quartile total shareholder returns, has driven rapid and significant change at Caltex. It was this clear vision and an effective culture that have enabled Caltex to confidently embark on its transformation path, including the supply chain restructure announced in 2012. The major components of the supply chain restructuring include: • the continued investment in the development of Caltex’s supply chain and marketing operations to position Caltex as the outright leader in transport fuels across Australia • the closure of the Kurnell refinery in Sydney, New South Wales and its conversion to a major import terminal to enable the continued reliable supply of transport fuels to Caltex customers; this project was completed in the second half of 2014 with the successful conversion of the Kurnell refinery into Australia’s largest fuel terminal • continued operation of the company’s Lytton refinery in Brisbane, Queensland with a focus on necessary operational and financial performance improvements, and • Caltex establishing an office in Singapore in 2013 to strengthen the fuel product supply chain following the closure of Kurnell refinery. The primary role of Ampol Singapore, a wholly owned subsidiary of Caltex Australia, is to source petroleum product imports and related shipping to Australia. Ampol has entered into a long term arrangement with Chevron to assist with the procurement and supply of transport fuels (petrol, diesel and jet) including associated shipping services. Caltex’s strategy reflects historical and current demand in Australia for diesel, jet fuel and petrol and is focused on ensuring that Caltex is well positioned to benefit from those markets that are growing. Underpinning Caltex’s offer to customers is a national distribution network of terminals, pipelines and depots. During 2014, Caltex has undertaken a company-wide cost and efficiency review to give it the financial strength to maintain its marketing leadership position and to enable Caltex to capture future growth opportunities. Caltex intends to accelerate the pursuit of strategic growth initiatives in order to deliver on its target of delivering top quartile total shareholder returns, whilst ensuring a capital structure that is consistent with a stable investment grade credit rating. Caltex will continue to take a disciplined approach to capital management, and our target balance sheet settings will ensure that the company retains financial flexibility to take advantage of opportunities as they arise. Caltex’s measure of success continues to be to safely and reliably deliver top quartile total shareholder returns. Caltex / 2014 annual RePORtDirectors’ Reportcontinued 21 Caltex Group results 31 December 2014 On an historic cost profit basis, Caltex recorded an after tax profit of $20 million for the 2014 full year, including a loss relating to significant items of $112 million after tax. This compares with the 2013 full year profit of $530 million, which included a significant gain of $26 million after tax, dominated by profit on the sale of the Sydney bitumen business. The 2014 result includes a product and crude oil inventory loss of $361 million after tax. The 2014 total inventory loss of $361 million compares with an inventory gain of $172 million after tax in 2013. On an RCOP1 basis, Caltex recorded an after tax profit for the 2014 full year of $493 million, excluding significant items. This compares with an RCOP after tax profit of $332 million for the 2013 full year, excluding significant items. The overall result reflects another record Marketing profit and the impact of favourable externalities, which have benefited the Supply Chain result. An excellent operational performance enabled the Lytton refinery to take advantage of the strong external environment, with record production of transport fuels. Caltex RCOP NPAT $m 500 400 261 320 300 155 161 151 113 163 200 100 0 197 171 173 ■ RCOP NPAT 1H ■ RCOP NPAT 2H 2010 2011 2012 2013 2014 A reconciliation of the underlying result to statutory result is set out in the following table: Reconciliation of the underlying result to statutory result Net profit attributable to equity holders of the parent entity Deduct/add: Significant items loss/(gain) Deduct/add: Inventory loss/(inventory gain) RCoP nPAt (excluding significant items) 2014 $m (after tax) 2013 $m (after tax) 20 112 361 493 530 (26) (172) 332 Dividend The Board has declared a final fully franked dividend of 50 cents per share (fully franked) for the second half of 2014. Combined with the interim dividend of 20 cents per share for the first half, paid in October 2014, this equates to a total dividend of 70 cents per share for 2014, fully franked. This compares with a total dividend payout of 34 cents per share (fully franked) for 2013. Following the successful closure of the Kurnell refinery, the Board has announced the reinstatement of a target dividend payout ratio of 40-60% of RCOP NPAT. 1. Replacement cost of sales operating profit (RCOP) excluding significant items (on a pre- and post-tax basis) is a non-International Financial Reporting Standards (IFRS) measure. It is derived from the statutory profit adjusted for inventory gains/(losses), as management believes this presents a clearer picture of the company’s underlying business performance, as it is consistent with the basis of reporting commonly used within the global refineries industry. This is unaudited. RCOP excludes the impact of the fall or rise in oil prices (a key external factor) and presents a clearer picture of the company’s underlying business performance. It is calculated by restating the cost of sales using the replacement cost of goods sold rather than the historical cost, including the effect of contract based revenue lags. 22 operating and financial review continued Income statement For the year ended 31 December 2014 2014 $m 2013 $m 1. 2. Total revenue1 Total expenses2 Replacement cost earnings before interest and tax Finance income Finance expenses3 3. net finance costs 4. 5. Income tax expense4 Replacement cost of sales operating profit (RCoP) Significant items (loss)/gain after tax Inventory (loss)/gain after tax Historical cost net profit after tax Interim dividend per share Final dividend per share Basic earnings per share • Replacement cost (excluding significant items) • Historical cost (including significant items) 24,232 (23,437) 795 8 (99) (91) (211) 493 (112) (361) 20 20c 50c 183c 7c 24,682 (24,131) 551 9 (98) (89) (130) 332 26 172 530 17c 17c 123c 196c 1. 2. 3. 4. Includes other income of $1 million (2013: $45 million) and excludes significant item gain of nil (2013: $39 million). Excludes significant item loss of $140 million (2013: $11 million). Excludes significant item loss of $20 million (2013: nil). Excludes tax benefit on inventory loss of $155 million (2013: $74 million tax expense) and excludes tax expense on significant items of $48 million (2013: $2 million tax benefit). DIsCUssIon AnD AnALYsIs – InCoMe stAteMent 1. total revenue ▼ 2% Total revenue decreased primarily due to: • lower fuel sales volumes than in the prior period (2014: 20.4 billion litres vs. 2013: 21.2 billion litres), and • the decline in crude prices, which resulted in lower sales revenue. 2. total expenses – replacement cost basis Total expenses decreased primarily as a result of lower replacement costs of goods sold resulting from lower sales volumes and crude prices. ▼ 3% Caltex / 2014 annual RePORtDirectors’ Reportcontinued 23 RCoP eBIt BReAkDoWn1 Caltex Refiner Margin (CRM) $876m CRM represents the difference between the cost of importing a standard Caltex basket of products to eastern Australia and the cost of importing the crude oil required to make that product basket. The CRM calculation basically represents: average Singapore refiner margin + product quality premium + crude discount/(premium) + product freight – crude freight – yield loss. US dollar CRM was higher in 2014 at US$12.42/bbl, compared with US$9.34/bbl for 2013. In AUD terms, the CRM was 8.70 Australian cents per litre in 2014, compared with 6.01 Australian cents per litre in 2013. Total refinery production in 2014 of all products was 10.2 billion litres compared with 11.4 billion litres in 2013, reflecting the closure of the Kurnell refinery and its conversion to terminal operations in October 2014. Transport fuels comprise petrol, diesel and jet. The transport fuels marketing margin is based on the average net margin over Import Parity Price in Australia. Transport fuel sales have increased, with volume growth across both commercial and retail segments. Falling product prices in late 2014 supported transport fuels margins. Premium fuel sales were 4.3 billion litres in 2014, compared with 3.4 billion litres in 2013. Caltex’s overall transport fuel sales volumes grew 3% compared to the prior year. Retail diesel margins have continued to grow strongly, driven by the premium diesel product, Vortex Diesel, and as a result of growth in the diesel vehicle market. Diesel fuel volumes increased approximately 6%, driven by premium fuels growth which increased approximately 49%. Overall petrol volumes decreased approximately 1%, in line with the market. However, premium petrol sales volumes continue to grow, with Vortex Premium Unleaded sales volumes increasing 4%. Jet fuel volumes increased approximately 3%. Lubricants and specialties products include finished lubricants, base oils, liquefied petroleum gas, petrochemicals, wax and marine fuels. Specialty products fell in 2014, mainly driven by the sale of the bitumen business in 2H13. Lubricants volumes and margins also declined in a competitive market. transport fuels marketing margin $839m Lubricants and specialties margin $95m non-fuel income $185m Non-fuel income includes convenience store income, franchise income, royalties, property, plant and equipment rentals, StarCard income and share of profits from distributor businesses. Non-fuel income has increased 6% due to increased card merchant service fees, supply chain benefits and retail network improvements. operating expenses ($1,145m) Operating expenses in this caption include Supply Chain, Marketing and Corporate operating expenditure. The major drivers of the operating expenses increase of $92 million are: • higher salary and wages due to bonuses earned in 2014 • operating expenses for the full year of Queensland Fuel Group, and the newly acquired Scott’s Fuel Divisions, including acquisition costs • higher depreciation expense • increased advertising and brand expenditure, and • higher operating expense due to higher underlying support costs as the network and infrastructure continue to expand. Other includes a number of miscellaneous items that typically include: foreign exchange impacts, other refining gross margin impacts, gain/loss on disposal of assets and subsidiary earnings. The most significant component was the net foreign exchange loss of approximately $22 million (after hedging). other ($55m) RCoP eBIt excluding significant items $795m 1. The breakdown of RCOP shown here represents a management reporting view of the breakdown and, therefore, individual components may not reconcile to statutory accounts. 24 operating and financial review continued DIsCUssIon AnD AnALYsIs – InCoMe stAteMent ContInUeD 3. net finance costs ▲ 2% Net finance costs increased by $2 million compared with 2013. Increased net finance costs reflect: • higher unwinding of discount on long term provisions due to changes in the predicted spending pattern and a decrease in the government bond rate. This is partly offset by: • higher capitalised finance costs relating to the Kurnell terminal conversion capital project, and • lower interest expenses after the maturity and subsequent repayment of the US private placement facility in 2014, which resulted in the use of alternative sources of funding at a lower interest rate, together with lower average net debt during 2014. 4. significant items after tax ▲ $138m During 2014, the Group incurred significant item losses of $112 million after tax in relation to the Group’s previously announced cost and efficiency review. These significant items related to redundancy expenses, contract cancellation costs, consulting fees and asset rationalisation costs. 5. Inventory losses after tax ▲ $533m During 2013, the Group incurred significant item gains of $26 million after tax due to profit of $34 million on the sale of the bitumen business, net of costs relating to acquisitions and disposals. This was offset by an $8 million expense due to adjustments to provisions relating to the closure of the Kurnell refinery. Inventory losses in 2014 were driven by the significant decline in crude oil prices in the second half of 2014, falling from US$112/bbl in June 2014 to US$63/bbl in December 2014. This decrease resulted in a net inventory loss of $361 million after tax, compared to inventory gains of $172 million after tax in 2013. Included in the inventory loss is a write-down of inventory on hand at year end of $82 million after tax to its net realisable value, due to the continued decline in crude oil prices in January 2015. There was no net realisable value write-down of inventory in 2013. By comparison, the inventory gains in 2013 were driven by the significant decline in the Australian dollar exchange rate throughout the year. Crude inventory holdings are denominated in US dollars and as the AUD exchange rate weakens compared to the US dollar, the result is that Caltex’s inventory values increase from an Australian dollar perspective. While crude prices were relatively stable in 2013, the Australian dollar decreased in December 2013 to an average of 89.8 US cents, down from 104.6 US cents at December 2012. Business unit performance RCOP EBIT* ($m) 1,000 800 600 578 736 764 697 812 756 795 501 442 551 400 200 0 (200) (400) 88 64 4 Marketing (208) (171) Supply Chain Corporate Total 2010 2011 2012 2013 2014 (81) (47) (68) (42) (81) * RCOP EBIT excluding significant items. Caltex / 2014 annual RePORtDirectors’ Reportcontinued 25 Marketing Marketing delivered an EBIT of $812 million, up approximately 6% on a record 2013 result ($764 million). This strong result was achieved despite the loss of earnings from the Sydney bitumen business which was divested in December 2013. Marketing continues to focus on its core strategy of driving sales of premium fuels (including Vortex Diesel). Higher sales of premium grades of petrol and diesel, and jet fuel, continue to offset the long term decline in demand for unleaded petrol, including E10. The increased penetration of premium Vortex products has been underpinned by continued investment in new retail service stations and diesel stops, and the refurbishment of existing service stations. Recent acquisitions, such as the Queensland Fuel Group in 2013 and the Scott’s Fuel Divisions, which was completed in June 2014, have also contributed to the strong Marketing result. Supply Chain Supply Chain generated an EBIT contribution of $64 million for the 2014 full year. This compares with an EBIT loss of $171 million for 2013, and a 2014 first half loss of $65 million. The 2014 result has benefited from the impact of favourable externalities, particularly in the fourth quarter of the year. A strong operating performance by the Lytton refinery enabled the refinery to take advantage of these favourable conditions. As previously announced, the Kurnell refinery was successfully shut down and terminal operations commenced in October, a significant milestone in the $270 million project to convert the historic refinery site to Australia’s largest fuel import terminal. The project remains on-time and on-budget with modest capex (around $50 million) remaining to be spent in 2015. The Kurnell refinery generated a 2014 operating EBIT loss of $69 million in the period prior to closure. Externalities The realised Caltex Refiner Margin (CRM) averaged approximately US$12.42/bbl for the 2014 full year. The strong July to December 2014 average CRM of US$16.38/bbl compares favourably with the 2014 first half (US$9.20/bbl) and the 2013 full year (US$9.34/bbl). The sharp decline in Brent crude oil prices towards year end was a major contributor to the stronger refiner margin in the second half as product prices have not fallen as quickly as the crude price (increasing the seven day lag, whilst reducing the refining yield loss). The recent strength in refiner margins is not expected to persist given new supply additions in the region and the expectation is that product prices will adjust downwards. On 1 August 2014, the company changed its policy of hedging outstanding US dollar payables from 50% to 80%. This has mitigated the impact of the falling Australian dollar on US dollar payables, with a resulting net loss in 2014 on US dollar payables of approximately $26 million (before tax). Conversely, a lower Australian dollar has a favourable impact on the Australian dollar denominated refiner margin. Company-wide cost and efficiency review As previously announced in August 2014, Caltex has undertaken a company-wide cost and efficiency review to give it the financial strength to maintain its market leadership position and to enable Caltex to capture future growth opportunities. The review has resulted in restructuring costs of $112 million after tax (including redundancy costs, other cash and non-cash costs), being recognised in the second half of 2014. The restructuring is expected to deliver associated benefits of approximately $80 million to $100 million (before tax) per annum, with the full annual run rate expected to be achieved in 2016. Benefits totalling approximately $15 million (before tax) have already been delivered in 2014. Balance sheet remains strong Net debt at 31 December 2014 was $639 million, compared with $827 million at 30 June 2014 and $742 million at 31 December 2013. The lower debt reflects lower working capital levels following the closure of the Kurnell refinery, as well as the favourable impact of the lower crude price. 26 operating and financial review continued Balance sheet As at 31 December 2014 1. 2. 3. 4. 5. Working capital Property, plant and equipment (PP&E) Intangibles Net debt Other non-current assets and liabilities Total equity DIsCUssIon AnD AnALYsIs – BALAnCe sHeet 2014 $m 2013 $m Change 542 2,364 188 (639) 78 2,533 1,051 2,126 144 (742) 18 2,597 (509) 238 44 103 60 (64) 1. Working capital ▼ $509m The decrease in working capital is primarily due to: • lower payables, partially offset by lower receivables, due to the fall in crude oil prices in 2014 • lower inventory balances due to the fall in crude oil prices and lower crude on hand following 2. Property, plant and equipment ▲ $238m 3. Intangibles ▲ $44m 4. net debt ▼ $103m the closure of Kurnell refinery, and • an income tax asset due to the lower historic cost operating profit in 2014. This has been partly offset by higher current redundancy and environmental provisions raised in 2014 in relation to the Group’s cost and efficiency review. The increase in property, plant and equipment is due to capital expenditure and accruals, including major cyclical maintenance, of $449 million. This is partly offset by depreciation of $185 million and disposals of $26 million. The increase in intangibles is largely due to the acquisition of assets of the Scott’s Fuels Divisions in June 2014, resulting in goodwill of $30 million and intangible assets of $8 million relating to customer relationships and trade restraint (totalling $38 million). Net debt decreased by $103 million to $639 million at 31 December 2014. Caltex’s gearing at 31 December 2014 (net debt to net debt plus equity) was 20.2%, decreasing from 22.2% at 31 December 2013. On a lease-adjusted basis, gearing at 31 December 2014 was 30.9% compared with 31.0% at 31 December 2013. CURRent soURCes oF FUnDInG DeBt MAtURItY PRoFILe US$ notes A$ notes Bank loans Inventory finance Hybrid A$m 0 150 600 250 550 source US institutional Australian and Asian institutional Australian and global banks Australian bank Australian and Asian retail and institutional investors $1,550m 550 250 150 200 200 100 0 100 2015 2016 2017 2018 2019 Beyond 2020 USD Notes Inventory Finance Bank Loans AUD Notes Hybrid 5. other non-current assets and liabilities ▲ $60m Other net non-current assets have increased due to the reclassification of the liability for the next 12 month spend in relation to the Kurnell conversion provisions, resulting in these provisions moving to current liabilities. Caltex / 2014 annual RePORtDirectors’ Reportcontinued 27 Cash flows For the year ended 31 December 2014 2014 $m 2013 $m Change 1. 2. 3. Net operating cash inflows Net investing cash outflows Net financing cash outflows Net decrease in cash held DIsCUssIon AnD AnALYsIs – CAsH FLoWs 662 (476) (333) (147) 608 (507) (111) (10) 54 31 (222) (137) 1. net operating cash inflows ▲ $54m 2. net investing cash outflows ▼ $31m 3. net financing cash outflows ▲ $222m The increase in net cash inflows from operating activities is primarily due to higher fuel margins and sales volumes in the period. The decrease in cash outflows is due to the acquisition of assets of Scott’s Fuel Divisions in 2014, offset by lower payments for property, plant and equipment and lower proceeds from the sale of assets. 2013 also included proceeds from the sale of the bitumen business. The net financing outflow in 2014 arose from the repayment of US private placement facilities. The net financing outflow in 2013 arose from the dividend payment. Net proceeds/repayment of borrowing was nil, as there were no drawdowns or repayment of fixed borrowings in the period. Capital expenditure Capital expenditure in 2014 totalled $503 million. Excluding major turnaround and inspection (T&I) spend of $19 million, total capital expenditure was $484 million. Capital expenditure in 2015 is expected to range between $455 million and $510 million. Caltex capital expenditure $m 600 500 400 300 200 100 0 568 503 420 403 361 2010 2011 2012 2013 2014 ■ Capital expenditure (incl. T&I) Business outlook and likely developments This section includes information on Caltex’s prospects for future financial years. As Caltex’s financial prospects are dependent to a significant extent on external factors, such as the exchange rate and refiner margins, it is difficult to provide an outlook on Caltex’s financial prospects. Therefore, this section includes a general discussion of the key business drivers. To the extent that there are statements which contain forward-looking elements, they are based on Caltex’s current expectations, estimates and projections. Such statements are not statements of fact, and there can be no certainty of outcome in relation to the matters to which the statements relate. Accordingly, Caltex does not make any representation, assurance or guarantee as to the accuracy or likelihood of fulfilment of any forward-looking statement. Overview Caltex’s focus for the short term is to remain the outright leader in transport fuels in Australia. In support of this, short term priorities include the optimisation of the entire value chain from product sourcing to customer, underpinned by the growth of our product sourcing requirements via Ampol Singapore. Lytton refinery will continue to focus on capturing further operational and margin improvements, and will undertake a major Turnaround & Inspection (T&I) in the second quarter of 2015. This major maintenance program will require the refinery to shut down totally for approximately seven weeks. The company will continue the implementation of an organisation-wide cost and efficiency value program (“Tabula Rasa”). 28 operating and financial review continued Business outlook and likely developments continued Marketing The industry landscape remains highly competitive. This is expected to continue with new industry players competing in the market. Caltex remains committed to building a focused strategy for growth by targeting high growth products, geographies and channels, including continuing to build and leverage its supply chain across its national network. This will involve the continuation of its retail network expansion and refurbishment and the increased emphasis on inorganic growth, leveraging core capabilities of retailing, supply chain management and infrastructure services. Supply Chain The Supply chain incorporates Caltex’s comprehensive national infrastructure network. This involves the company’s Lytton refinery, port terminals, inland terminals, airport terminals and pipelines. This infrastructure enables Caltex to supply product to customers safely and reliably. It is this sustained investment in infrastructure that has enabled Caltex to attain the outright leadership in transport fuels across Australia. Caltex remains committed to ongoing investment to broaden and enhance its supply chain. The closure of the Kurnell refinery (in the fourth quarter of 2014) has seen the amount of crude oil imported for Caltex refining reduce, while imports of refined fuel products are increasing. In adapting and evolving to the changing market conditions, Caltex established an office in Singapore to grow and strengthen its product sourcing supply via Ampol Singapore (a wholly owned subsidiary of Caltex Australia). Ampol Singapore’s primary role is to manage the sourcing of transport fuels product supplies and related shipping to Australia. • risks in relation to the effective delivery of our business strategy are identified • control measures are evaluated, and • where potential improvements in controls are identified, improvement plans are scheduled and implemented. These risks are assessed on a regular basis by management, and material risks are regularly reported to the Board and its committees. These reports include the status and effectiveness of control measures relating to each material risk. The Board, the Audit Committee, the OHS & Environmental Risk Committee and the Human Resources Committee each receive reports on material risks relevant to their responsibilities. The Board and the OHS & Environmental Risk Committee also receive quarterly risk updates throughout the year. Caltex Refiner Margin The Caltex Refiner Margin (CRM) is a key metric which drives the profitability of Caltex’s refinery. The CRM represents the difference between the cost of importing a standard Caltex basket of products to eastern Australia and the cost of importing the crude oil required to make that product basket. A low CRM will adversely impact Caltex’s refining earnings and cash flows. CRM is impacted by a range of factors: • a decline in global and regional economic activity, leading to a surplus in refining capacity • increased regional refinery capacity ahead of demand growth • a decrease in product freight rates relative to crude freight rates • an increase in the premium paid for light/sweet (e.g. Brent) crudes used by Caltex compared with the heavy/sour crudes used by major refineries in the region (the light/heavy spread), and • the A$ strengthening versus the US$ (as the CRM Ampol Singapore’s activities will be complemented by the establishment of a Caltex wide Value Chain Optimisation function to optimise the entire value chain from product sourcing through to the end customer. components are US$ based, strengthening of the A$ relative to the US$ reduces the A$ revenue earned by Caltex). Closure of the Kurnell refinery will reduce Caltex’s exposure to movements in the CRM. Lytton refinery is now Caltex’s sole refinery. Caltex will continue to maintain an ongoing focus on capturing further operational and margin improvements at Lytton. This includes completing an investment upgrade to increase production of premium fuels. Additionally, a major T&I maintenance program is scheduled for the second quarter of 2015. This is expected to take approximately seven weeks. Caltex considers itself operationally well placed to ensure that the company remains the outright leader in providing transport fuels to Australia. Business risks and management The key business risks that could have an impact on Caltex achieving its financial goals and business strategy are discussed below. In addition to the risk management procedures discussed below, Caltex has adopted a risk management framework to proactively and systematically identify, assess and address events that could potentially impact its business objectives. This framework integrates the consideration of risk into our activities so that: Commodity price risk Caltex is exposed to the risk of both crude and finished product price movements, as these impact Caltex’s earnings and cash flows. Caltex seeks, through policy, to neutralise adverse basis and timing risk brought about by purchase and sales transactions that are materially outside the normal operating conditions of Caltex. Caltex does not attempt to hedge refiner margins as a matter of policy. Caltex utilises both crude and finished product swap contracts from time to time, on specific cargoes, to manage the risk of price movements (basis and timing). Foreign exchange Caltex is exposed to the effect of changes in exchange rates on crude and product payables, refiner margin, capital expenditure and foreign borrowings. As Caltex purchases crude and products in US dollars, a decrease in the A$:US$ exchange rate between the time Caltex assumes liability for the crude and the time it subsequently pays for that crude will negatively impact Caltex’s payables, earnings and cash flows. Caltex / 2014 annual RePORtDirectors’ Reportcontinued 29 Additionally, the CRM is determined principally with reference to the US dollar Singapore spot product price relative to the US dollar Brent crude price. An increase in the A$:US$ exchange rate will adversely impact Caltex’s Australian dollar refiner margin and therefore refining earnings. In June 2010, Caltex implemented a foreign exchange hedging policy of 50% of Caltex’s US dollar denominated crude and product payables exposure (after applying natural hedges). The hedging policy was updated in August 2014 to allow for hedging of 80% of Caltex’s US dollar denominated crude and product payables exposure (after applying natural hedges). The instruments used to manage foreign exchange risk expose Caltex to fair value foreign exchange rate risk and counterparty risks. Exposure limits are set on each counterparty to ensure that Caltex is not exposed to excess risks. Liquidity risk Due to the nature of the underlying business, Caltex must maintain sufficient cash and adequate committed credit facilities to meet the forecast requirements of the business. From time to time, Caltex will be required to refinance its debt facilities. There is no certainty as to the availability of debt facilities or the terms on which such facilities may be provided to Caltex in the future. Caltex seeks to prudently manage liquidity risk by maintaining adequate banking facilities and reserve borrowing facilities, with an extended facility maturity profile. Operational risk The nature of many of Caltex’s operations is inherently risky. Major hazards may cause injury or damage to people and/or property. Major incidents may cause a suspension of certain operations and/or financial loss. Caltex’s operations are heavily reliant on information technology. While these systems are subject to regular review and maintenance, and business continuity plans are in place, if these systems are disrupted due to external threat or system error, this may have an adverse effect on Caltex’s operations and profitability. Competitive risk Caltex operates in a highly competitive market space, and could be adversely impacted by new entrants to the market or increased competition from existing competitors, changes in contractual terms and conditions with existing customers, and/or the loss of a major customer. Environmental risks Caltex imports, refines, stores, transports and sells petroleum products. Therefore, it is exposed to the risk of environmental spills and incidents. It is also responsible for contaminated sites which it operates or has previously operated. Demand for Caltex’s products Caltex’s operating and financial performance is influenced by a variety of general economic and business conditions, including economic growth and development, the level of inflation and government fiscal, monetary and regulatory policies. In a global or a local economic downturn, demand for Caltex’s products and services may be reduced, which may negatively impact Caltex’s financial performance. Labour shortages and industrial disputes There is a risk that Caltex may not be able to acquire or retain the necessary labour for operations and development projects. This may disrupt operations or lead to financial loss. Credit risk Credit risk represents the loss that would be recognised if counterparties failed to perform as contracted. Primary credit exposure relates to trade receivables. Regulatory risk Caltex operates in an extensively regulated industry and operates its facilities under various permits, licences, approvals and authorities from regulatory bodies. If those permits, licences, approvals and authorities are revoked or if Caltex breaches its permitted operating conditions, it may lose its right to operate those facilities, whether temporarily or permanently. This would adversely impact Caltex’s operations and profitability. Changes in laws and government policy in Australia or elsewhere, including regulations, licence conditions and fuel quality standards, could materially impact Caltex’s operations, assets, contracts, profitability and prospects. events subsequent to the end of the year On 10 February 2015, Mr Adam Ritchie was appointed as the new General Manager – Supply, effective from 1 April 2015. There were no other items, transactions or events of a material or unusual nature, that, in the opinion of the Board, are likely to significantly affect the operations of Caltex, the results of those operations or the state of affairs of the Group subsequent to 31 December 2014. Clean energy Future (CeF) legislation As part of the Australian Government’s Clean Energy legislative package, the Carbon Price Mechanism (CPM) commenced on 1 July 2012, establishing a price on carbon in Australia for facilities which emit at least 25,000 tonnes of carbon dioxide equivalent annually and via changes to fuel tax credit and excise for specific fuel use. Through the 2013-2014 financial year Caltex continued to manage compliance reporting requirements under the CPM, accounting for greenhouse gas emissions from both the Kurnell and the Lytton refineries, and those greenhouse gas emissions associated with the sale of non-transport related gaseous fuels. Caltex also administered carbon pricing for domestic jet fuel through increased excise for the compliance period. Due to the emissions intensive trade exposed nature of petroleum refining Caltex again received freely granted permits under the Jobs and Competitiveness Program, with 2,311,280 permits received. Carbon permit surrender requirements also included Australian Carbon Credit Units (ACCUs) from verified Carbon Farming Initiative projects as permitted under Clean Energy Future legislation, and final compliance surrender requirements were managed through early 2015. In 2014, the election of the Coalition Government resulted in the CPM being repealed retrospectively, with an effective date of 1 July 2014. Caltex acted to remove carbon pricing from impacted products following Royal Assent of the repeal legislation and refunded non-transport gaseous fuel carbon price costs and domestic jet excise carbon costs applicable from 1 July to 18 July 2014 to the relevant customers promptly. 30 Clean energy Future (CeF) legislation continued The Coalition’s Direct Action policy areas that will be of potential interest or impact to Caltex are the Emissions Reduction Fund (ERF) and the Safeguarding Mechanism respectively. Caltex will continue to monitor the legislative rules associated with the ERF and determine interest in participating in the Reverse Auction Process through 2015. With the Safeguarding Mechanism legislated to commence on 1 July 2016, details on how this legislative requirement will impact Lytton refinery are at this point unclear. Caltex continues to support greenhouse gas reduction policies which maintain the international competitiveness of Australian industries such as petroleum refining. environmental regulations Caltex is committed to compliance with Australian laws, regulations and standards, as well as to minimising the impact of our operations on the environment. The Board’s OHS & Environmental Risk Committee addresses the appropriateness of Caltex’s OHS and environmental practices to manage material health, safety and environmental risks, so that these risks are managed in the best interests of Caltex and its stakeholders. Caltex sets key performance indicators to measure environmental, health and safety performance and drive improvements against targets. In addition to review by the Board, progress against these performance measures is monitored regularly by the Managing Director & CEO and the General Managers. Risks are examined and communicated through the Caltex Risk Management Framework, an enterprise-wide risk management system which provides a consistent approach to identifying and assessing all risks, including environmental risks. Under the framework, risks and controls are assessed, improvements identified, and regular reports are made to management and the Board. The Caltex Operational Excellence Management System is designed to ensure that operations are carried out in an environmentally sound, safe, secure, reliable and efficient manner. Its operating standards and procedures support the Caltex Environment Policy, and the Caltex Health and Safety Policy. In 2014, Caltex made its sixth submission under the National Greenhouse and Energy Reporting Scheme, reporting energy consumption and production as well as greenhouse gas emissions from Group operations. Caltex also published its second public report under the third and final round of the Federal Energy Efficiency Opportunities program, communicating energy savings achieved, and also continued to disclose information on emissions under the National Pollutant Inventory. Caltex is a signatory to the Australian Packaging Covenant with 100% compliance among Caltex product suppliers and 40% of current packing reviewed using the Sustainable Packaging Guidelines. Compliance with environmental regulations A total of 19 environmental protection licences were held by companies in the Caltex Australia Group in 2014 in respect of two refinery sites, 11 terminals, three marketing facilities and three aviation refuelling facilities. Any instances of non-compliance against these licences were reported to the environmental regulator. All significant spills and environmental incidents were recorded and reported as required to government authorities. In 2014, Caltex’s Kurnell refinery received one penalty infringement notice of $15,000 from the NSW Environment Protection Authority (NSW EPA) relating to an incident where a release of oily water from the Waste Water Treatment Plant entered a redundant cooling water outlet during a heavy rainfall event and was observed in Botany Bay. The NSW EPA also commenced one Tier 1 and Tier 2 prosecution in the Land and Environment Court against Caltex in relation to a loss of primary containment into a tank bund incident at Banksmeadow Terminal which occurred in July 2013. In addition, the Queensland Department of Environment and Heritage Protection commenced proceedings against Caltex for alleged breaches of Caltex’s licence conditions and failing to carry out certain activities with respect to a trackable waste. Waste in this instance refers to ethyl mercaptan, which is an odourant for LPG. Caltex’s specialist waste contractor has also been prosecuted with respect to the circumstances surrounding this incident. Regular internal audits are carried out to assess the efficacy of management systems to prevent environmental incidents, as well as control other operational risks. Improvement actions determined through the audit process are reviewed by the Board’s OHS & Environmental Risk Committee and senior management. Caltex is committed to achieving 100% compliance with environmental regulations and to ensuring that all breaches have been investigated thoroughly, and corrective actions are taken to prevent recurrence. Lead auditor’s independence declaration The lead auditor’s independence declaration is set out on page 59 and forms part of the Directors’ Report for the financial year ended 31 December 2014. Caltex / 2014 annual RePORtDirectors’ Reportcontinued 31 Remuneration Report The directors of Caltex Australia Limited present the Remuneration Report prepared in accordance with section 300A of the Corporations Act 2001 (Cth) (Corporations Act) for the Caltex Group for the year ended 31 December 2014. The information provided in this Remuneration Report has been audited as required by section 308(3C) of the Corporations Act, apart from where it is indicated that the information is unaudited. 1. Remuneration snapshot 1a. Key Management Personnel (KMP) This Remuneration Report is focused on the KMP of Caltex, being those persons with authority and responsibility for planning, directing and controlling the activities of Caltex. KMP includes the Non-executive Directors and Senior Executives (including the Managing Director (MD) & CEO). Senior Executives are also referred to as the Caltex Leadership Team (CLT) in this report. Unless otherwise indicated, the KMP were classified as KMP for the entire financial year. Current non-executive Directors Elizabeth Bryan Trevor Bourne Richard Brown Barbara Burger Greig Gailey Ryan Krogmeier Bruce Morgan Current senior executives Julian Segal Andrew Brewer Simon Hepworth Peter Lim Chairman Independent Non-executive Director Non-executive Director Non-executive Director Independent Non-executive Director Non-executive Director Independent Non-executive Director MD & CEO General Manager – Supply Chain Operations (appointed 31 March 2014) Chief Financial Officer General Manager – Legal & Corporate Affairs Mike McMenamin (i) General Manager – Strategy, Planning & Development (will cease employment on 31 May 2015) Bruce Rosengarten General Manager – Marketing Simon Willshire General Manager – Human Resources Former senior executive Gary Smith General Manager – Refining & Supply (ceased employment on 9 May 2014) Note: (i) Mr McMenamin ceased being a KMP on 31 December 2014. Mr Adam Ritchie will commence as General Manager – Supply on 1 April 2015. 32 Remuneration Report continued 1. Remuneration snapshot continued 1b. Summary of 2014 remuneration arrangements for Senior Executives vIsIon To remain the outright leader in transport fuels across Australia keY MeAsURe oF sUCCess To safely and reliably deliver top quartile shareholder returns Alignment with shareholders’ interests ReMUneRAtIon PRInCIPLes Performance focused and differentiated Market competitive Fixed remuneration • Consists of base salary, non-monetary benefits and superannuation. • Desired positioning is market median against a peer group of companies that are comparable in terms of both size and complexity. See section 3b for further detail. ReMUneRAtIon CoMPonents Short term incentive (STI) • Based on 12 month company, department and individual performance objectives which are linked to the achievement of the annual business plan. • Only payable if 80% of RCOP NPAT is achieved. • One third of the STI (as long as the incentive is greater than $105,000) is delivered in Caltex shares. These shares have a six month service related forfeiture condition, a two year dealing restriction and are subject to clawback provisions. See sections 3c, 3d and 3f for further detail. Long term incentive (LTI) • Performance rights are granted which vest subject to the achievement of service conditions and performance conditions over a three year period. • Performance measures are relative total shareholder return (TSR) against S&P/ASX 100 companies (60%), free cash flow (FCF) (20%) and strategic measures (20%). • For LTI grants made from 2013, all participants are required to hold 25% of vested shares for an additional four years. • Clawback applies to unvested LTI awards. See sections 3e and 3f for further detail. 1c. Senior Executive remuneration outcomes in 2014 ReMUneRAtIon CoMPonent oUtCoMe Fixed remuneration The 2014 fixed remuneration review for Senior Executives resulted in an average salary increase of 3.8%. STI LTI RCOP NPAT performance in 2014 was 125% of target and the average 2014 STI award for Senior Executives was 141% of target. This outcome demonstrates the strong alignment between STI awards and profit outcomes. Similar alignment was seen in 2013 when no bonuses were paid because RCOP NPAT was below 80% of target. One-third of the actual STI paid to Senior Executives will be deferred into shares with a six month forfeiture condition and a two year dealing restriction. The shares are also subject to clawback. No clawback occurred in respect of the STI in 2014. The 2012 LTI grant made under the Caltex Equity Incentive Plan (CEIP) was subject to a relative TSR measure. 75% of the grant was assessed against S&P/ASX 100 companies and 25% of the grant was assessed against a group of six international refining and marketing companies. This grant had a performance period that ended on 31 December 2014. Caltex’s TSR performance over the 2012-2014 period placed it at the 95.8th percentile against the S&P/ASX 100 companies and at the 66.7th percentile against the selected group of international refining and marketing companies. As a result, 88.9% of the 2012 grant will vest in April 2015 and the remaining 11.1% will lapse. No clawback occurred in respect of the LTI in 2014. Caltex / 2014 annual RePORtDirectors’ Reportcontinued 33 1d. Summary of 2014 Non-executive Director fees Non-executive Director fees are fixed and do not have any variable components. The Chairman receives a fee for chairing the Caltex Board and is not paid any other fees. Other Non-executive Directors receive a base fee and additional fees for each additional committee chairmanship and membership. For FY14, superannuation contributions were made at a rate of 9.25% from 1 January to 30 June, increasing to 9.5% from 1 July 2014. Superannuation is not paid for overseas directors and no additional retirement benefits are paid. Fees paid to Non-executive Directors are subject to a maximum annual Non-Executive Director fee pool of $2,000,000 (including superannuation). See sections 4a and 4b for further detail. 1e. Outlook for FY15 (unaudited) The FY15 executive remuneration structure will remain broadly consistent with 2014. The key changes are: • We are increasing the weighting on relative TSR against S&P/ASX 100 companies in our LTI plan from 60% to 75%. The remaining 25% will be based on a measure aligned to earnings growth from mergers and acquisitions (core and non-core) and step-out ventures. This is reflective of the importance of growth in achieving our key success measure of top quartile shareholder returns. • No STI deferral will apply in respect of 2015 STI awards as shareholder alignment will now be achieved through share retention arrangements. Under these arrangements, 25% of vested equity under the LTI plan must be held for an additional four years. These arrangements have been implemented to require executives to build up and maintain more sizeable shareholdings in Caltex over a longer period of time. The share retention arrangements will first apply from April 2016. Senior Executive remuneration will increase on average by 10%. These increases were determined by the Board, upon the recommendation of the Human Resources Committee. The Human Resources Committee’s recommendation was determined having regard to the Senior Executive’s performance over the year and the remuneration recommendations provided by its independent remuneration adviser, Godfrey Remuneration Group (GRG). In order to be able to attract and retain key talent, our remuneration philosophy is to position fixed remuneration at the median of a peer group of companies. For 2015, this peer group consisted of 24 companies that are comparable in terms of size (market capitalisation) and complexity. The GRG market data indicated that Senior Executive fixed remuneration levels were below the median. These increases will shift Senior Executive fixed remuneration levels closer to our desired market positioning and compensate Senior Executives for prior years’ pay restraint. Given the transformation Caltex is going through, and that we have not reviewed our remuneration framework for several years, we believe it is timely to step back and to conduct a holistic review of our remuneration arrangements. We will be doing this over 2015 and it is envisaged that any changes will take effect from 2016. Having had regard to market data and remuneration recommendations received from the independent remuneration adviser, GRG, the Board approved an increase of 3% for Non-executive Director base fees (effective from 1 January 2015). The market data was based on the same peer group used for the Senior Executive remuneration review. This is the first general increase to Chairman and Non-Executive Director base fees since 2012 (excluding the alignment of fees for the Human Resources Committee and the OHS & Environmental Risk Committee in 2013). Caltex will seek shareholder approval at the 2015 Annual General Meeting to increase the Non-executive Director fee pool by 12.5%. An increase to the Non-executive Director fee pool was last approved by shareholders at the 2010 Annual General Meeting. Increasing the fee pool limit will enable Caltex to maintain an appropriate reserve to effect Board and Committee succession in an orderly fashion. 2. Oversight and external advice 2a. Board and Human Resources Committee The Board takes an active role in the governance and oversight of Caltex’s remuneration policies and practices. Approval of certain key human resources and remuneration matters is reserved to the Board, including setting remuneration for directors and Senior Executives and any discretion applied in relation to the targets or funding pool for Caltex’s incentive plans. The Human Resources Committee assists the Board by providing advice and recommendations in relation to Caltex’s remuneration framework. The Human Resources Committee seeks to put in place appropriate remuneration arrangements and practices that are clear and understandable, in the best interests of Caltex and support superior performance and long term growth in shareholder value. The Human Resources Committee has also been delegated specific functions by the Board, including approving Caltex’s annual remuneration program and aspects of its incentive plans. Further information about the role of the Board and the Human Resources Committee are set out in their charters, which are available from our website (www.caltex.com.au). 34 Remuneration Report continued 2. Oversight and external advice continued 2b. External advice The Human Resources Committee is independent of management and is authorised by the Board to obtain external professional advice as necessary. The use of external specialists to provide advice and recommendations in relation to the remuneration of Non-executive Directors, the MD & CEO and Senior Executives is either initiated directly or approved by the Human Resources Committee, and these specialists are directly engaged by the Human Resources Committee Chairman. During 2014, Caltex received “remuneration recommendations” (as defined in the Corporations Act) from GRG in relation to Non-executive Director fees and the remuneration for the MD & CEO and other Senior Executives. GRG has provided a formal declaration confirming that the recommendations provided were free from “undue influence” by the members of the KMP to whom the recommendations were related, and the Board is satisfied that the recommendations were made free from any undue influence. None of the KMP were involved in the selection and appointment of GRG or in the development of any advice or recommendations in relation to their own roles. The fee paid to GRG for the above remuneration advice and recommendations was $38,500. GRG did not provide any other services (as defined in the Corporations Act) to Caltex in 2014. 3. Senior Executive remuneration 3a. Remuneration philosophy and structure The overarching goal of the Caltex remuneration philosophy and structure is to support the delivery of superior shareholder returns. The guiding philosophy for how Caltex rewards Senior Executives and all other employees is outlined below: GUIDInG PHILosoPHY CoMMentARY Alignment with shareholders’ interests The payment of variable incentives is dependent upon achieving financial and non-financial performance measures that are aligned with shareholders’ interests. Share retention arrangements require all executives to build up and maintain shareholdings to encourage further alignment with Caltex shareholders. Performance focused and differentiated Our reward and performance planning and review systems are closely integrated to maintain a strong emphasis and accountability for performance at the company, department and individual levels. Rewards are differentiated to incentivise and reward superior performance. Market competitive All elements of remuneration are set at competitive levels for comparable roles in Australia and allow Caltex to attract and retain quality candidates in the talent market. Our Senior Executive remuneration structure consists of: 1. Fixed remuneration – comprising base salary, non-monetary benefits and superannuation. Superannuation is generally payable at a rate of 9.5% of base salary plus any cash incentive payments. Where an employee’s quarterly superannuation contributions are above the superannuation contributions limit, the employee may elect to receive the excess amount as cash in lieu of superannuation. 2. variable, at risk remuneration – comprising a mix of cash and equity based incentives awarded upon the achievement of financial and non-financial performance measures. We undertake regular monitoring and comparison of the market competitiveness of Senior Executive remuneration. Alignment with strategy Short term incentives reward the delivery of stretching but potentially attainable financial and non-financial performance measures aligned to the annual business plan. Long term equity based incentives are a combination of “output” and “input” measures. The LTI measures were chosen because they directly align to the Caltex strategic imperatives. See below for further detail. Caltex / 2014 annual RePORtDirectors’ Reportcontinued 35 2014 LtI MeAsURe AnD WeIGHtInG HoW tHe LtI MeAsURe ALIGns WItH tHe CALteX stRAteGY Relative TSR (60%) • Relative TSR provides direct alignment with shareholder outcomes and is a good indicator of profitable management of assets, operating efficiencies, progress in meeting Caltex’s strategic objectives and long term performance. • The measure provides a direct comparison of relative performance in a range of market conditions and only rewards executives when returns are at least at the median of peer companies against which Caltex competes for capital, customers or talent. FCF (20%) • FCF funds opportunities for growth and cash dividend payments, improves our competitiveness in a substantially more contestable market and supports the Caltex strategy which has the overarching objective of creating shareholder value. • As a key objective of Caltex’s strategy is to deliver a stronger balance sheet, with lower debt post the closure of the Kurnell refinery, the demonstrated ability to deliver stronger free cash flow generation capability is key to this strategy. Having free cash flow as a LTI measure assists in maintaining the focus of Senior Executives, and other senior managers at Caltex, on the importance of this key business metric. Strategic measures (20%) • Strategic measures focus the Senior Executives and other senior managers on the most important strategic initiatives that need to be executed over a three year period to create shareholder value. Further detail on the strategic measures is outlined in section 3e. At Caltex, incentives are not designed as “profit sharing arrangements” and as such performance measures may factor in externalities which management cannot control (such as global refining margins). There will be occasions when incentives are paid when externalities such as the refiner margins and exchange rate fluctuations may have reduced overall shareholder returns. Equally, incentives may not be paid when externalities are favourable to shareholders but the company’s relative performance is poor. 3b. Remuneration mix and market competitiveness Fixed remuneration is reviewed annually and set relative to the skills and accountabilities of the executive and our philosophy is to set fixed remuneration at the market median of a specific comparator group. Total remuneration can reach the upper quartile for outstanding performance. Performance based, at risk, remuneration targets are set annually as a proportion of base salary. Short term incentives (currently delivered through both cash payments and restricted shares) are managed via the Rewarding Results Plan and long term equity based incentives are managed via the CEIP. The “at target” remuneration mix for Senior Executives is outlined below. The remuneration mix is skewed towards variable pay to better align executive pay and performance. By way of comparison, Caltex has a larger than average LTI component than current market practice. Research undertaken by Caltex has also confirmed that Caltex has a more stretching relative TSR vesting schedule than most ASX 100 companies and that Caltex’s LTI vests more gradually as relative performance improves. 2014 Remuneration mix “at target” MD & CEO Other Senior Executives 40% 13% 7% 48% 16% 8% 40% 28% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% ■ Base Salary ■ At Risk – STI Cash ■ At Risk – STI Shares ■ At Risk – LTI Notes: 1. 2. 3. STI cash and STI shares comprise the incentive provided through the Rewarding Results Plan. For “at target” performance, two thirds is payable as cash and one third is deferred into shares assuming the incentive is greater than $105,000. “At target” performance in the remuneration mix for “Other Senior Executives” is representative of a STI target of 50% of base salary which applies to Mr Brewer, Mr Hepworth and Mr Rosengarten. Mr Lim, Mr McMenamin and Mr Willshire have a STI target of 46% of base salary. LTI comprises performance rights granted under the CEIP. It is the value of LTI at 75th percentile relative TSR performance, and the delivery of free cash flow and strategic measures at target. Grants of performance rights under the CEIP are made at the maximum stretch level of 150% of base salary for the MD & CEO and 90% of base salary for other Senior Executives. The proportion of the grant received depends on performance. For example, for the 2014 awards, executives will only receive the full value of the grant if relative TSR performance measure is at or above the 90th percentile against the S&P/ASX 100 peer group, free cash flow is at stretch levels, and performance against the strategic measures are exceeded. 36 Remuneration Report continued 3. Senior Executive remuneration continued 3b. Remuneration mix and market competitiveness continued The remuneration mix and remuneration level for Senior Executives is reviewed annually by the Human Resources Committee and approved by the Board. In doing so, the Human Resources Committee utilises remuneration information provided by independent consultants based on Australian roles with similar skills, accountabilities and performance expectations. In undertaking the 2014 review, the Board utilised a comparator group comprising 24 ASX listed companies with 10 larger and 14 smaller than Caltex’s market capitalisation. This group was chosen by the Board, with advice from GRG, as it comprises a mix of Energy, Industrials, Materials and Consumer Staples companies of similar market capitalisation and complexity to Caltex, and because these companies are also key competitors for executive talent. 3c. Setting and evaluating the performance of executives in 2014 Performance measures for 2014 were derived from the business plan in line with the company direction set by the Board. The Board approved the 2014 business plan and has regularly monitored and reviewed progress against plan milestones and targets. The approved Caltex business plan was then translated into department objectives. The company objectives were approved by the Human Resources Committee at the start of the performance year. Within each business unit, specific performance agreements were then developed for individual employees, thus completing the link between employees and the delivery of the business plan. Performance agreements must be agreed between the employee and his or her manager. Senior Executives set their performance agreements jointly with the MD & CEO, and the MD & CEO’s performance objectives are approved by the Board. Examples of the key Caltex success measures for 2014, as approved by the Committee, are set out below. These measures were selected because they were identified as important financial and operational drivers which would determine the success of Caltex in 2014. 2014 Caltex success measures Individual scorecards are set for each Senior Executive. At least 40% of the scorecard is weighted towards RCOP NPAT and at least 10% of the scorecard is weighted towards personal and process safety. The remaining 50% of measures are tailored to the Senior Executive’s role. An overview of common measures used in the STI plan is below: FInAnCIAL non-FInAnCIAL • RCOP NPAT – see definition and explanation below. • FCF – the generation of sufficient cash flow to pursue growth opportunities and pay dividends. • Earnings before interest and tax (EBIT) – the internal measure of financial performance at a department level for each of Marketing and Supply Chain. • Sales volumes. • High value product production – the production of high value transport fuels. • Operational Excellence – continuous improvement of our health, safety and environmental performance. In 2014, this was measured against a scorecard of both personal safety performance (zero harm to our employees) and process safety performance (the prevention and control of serious incidents). Minimising the frequency and the severity of personal safety incidents are core to our personal safety performance. Process safety is measured consistent with industry practice and is aligned to American Petroleum Institute recommended practice. • Delivery of Strategic Projects – examples of 2014 projects include: – implementing a company-wide cost and efficiency review to drive organisational competitiveness and opportunities for growth – implementing a transformation of the Caltex supply chain – including deliverables linked to the conversion of Kurnell refinery to a fuel import terminal; putting new product supply agreements into operation; and delivering performance improvements at the Lytton refinery – the delivery of a number of key initiatives to profitably grow the Marketing business. • Leadership – this was measured in 2014 via a company-wide Employee Engagement survey, with targets set in the context of 2012 engagement scores. Caltex / 2014 annual RePORtDirectors’ Reportcontinued 37 RCOP NPAT (explanation of the relevance of this measure to the Caltex business and treatment of significant items) The Board has selected replacement cost of sales operating profit (RCOP) NPAT as the primary STI measure because RCOP NPAT removes the impact of inventory gains and losses, giving a truer reflection of underlying financial performance. Gains and losses in the value of inventory due to fluctuations in the AUD price of crude (which is impacted by both the USD price of crude and the foreign exchange rate) constitute a major external influence on Caltex’s profits. RCOP NPAT restates profit to remove these impacts. The Caltex RCOP methodology is consistent with the methods used by other refining and marketing companies for restatement of their financial results. As a general rule, an increase in crude prices on an AUD basis will create an earnings gain for Caltex (but working capital requirements will also increase). Conversely, a fall in crude prices on an AUD basis will create an earnings loss. This is a direct consequence of the first in first out (FIFO) costing process used by Caltex in adherence with accounting standards to produce the financial result on a historical cost basis. With Caltex holding approximately 45 to 60 days of inventory, revenues reflect current prices in Singapore whereas FIFO costing reflects costs some 45 to 60 days earlier. The timing difference creates these inventory gains and losses. To remove the impact of this factor on earnings and to better reflect the underlying performance of the business, the RCOP NPAT methodology calculates the cost of goods sold on the basis of theoretical new purchases instead of actual costs from inventory. The cost of these theoretical new purchases is calculated as the average monthly cost of cargoes received during the month of those sales. Each year the Board reviews any significant items, positive and negative, and considers their relevance to the RCOP NPAT result. Generally, the Board will exclude any exceptional events from RCOP NPAT that management and the Board consider to be outside the scope of usual business. These are excluded to give a truer reflection of underlying financial performance from one period to the next. 3d. Performance based “at risk” remuneration – 2014 STI Plan Plan STI awards are made under the Rewarding Results Plan. Performance period Annual payment based on pre-agreed performance objectives over the 12 month period ended 31 December 2014. Payments are made in April 2015. 2014 target and maximum opportunity levels Plan rationale Performance measures and assessment MD & CEO – between 50% of base salary “at target” and 100% of base salary at maximum stretch. Other Senior Executives – between 46% and 50% of base salary “at target” and between 92% and 100% of base salary at maximum stretch depending upon role. The Board believes that the Rewarding Results Plan is in the best interests of shareholders because it rewards a combination of financial and non-financial performance measures that are aligned to the creation of shareholder value. Primary emphasis is placed on RCOP NPAT, and the non-financial measures focus our executives on executing the most critical business and strategic objectives. In 2014, RCOP NPAT performance, including the cost of incentives, had to be at least 80% of target before any short term incentives would be payable. Objectives that are relevant to each executive are set with a threshold, target and maximum stretch level of performance expected, with at least 40% of scorecard weighted towards RCOP NPAT and at least 10% of the scorecard weighted towards personal and process safety. 38 Remuneration Report continued 3. Senior Executive remuneration continued 3d. Performance based “at risk” remuneration – 2014 STI Plan continued Performance measures and assessment continued If business objectives are achieved at threshold level, 60% of the target opportunity would be payable. If 100% of the target is achieved, 100% of the target opportunity would be payable. If business objectives are achieved at the maximum stretch level, 200% of the target opportunity would be payable. Payments are pro-rated between threshold and target, and between target and maximum stretch. This payout schedule deliberately incentivises over-plan performance. Examples of performance measures used in 2014 are below, along with performance against those objectives. MeAsURe PeRFoRMAnCe RAnGe CoMMentARY t a r g e t t o s t r e t c h ✓ ✓ ✓ B e l o w t h r e s h o d l l t h r e s h o d t o t a r g e t t a r g e t ✓ RCOP NPAT Free Cash Flow before growth capital expenditure and dividends Marketing EBIT Marketing growth projects Personal safety Process safety ✓ ✓ Cost and Efficiency Review High Value Product production (HVP) Project delivery associated with the transformation of the Caltex supply chain Leadership ✓ s t r e t c h Growth compared to 2013 and significantly above target performance. Growth compared to 2013 and above target performance. Growth compared to 2013 with performance slightly above target despite a very competitive market. ✓ Above 90% of milestones associated with Marketing’s top three growth projects were achieved. TTIFR of 1.76 per million man hours and LTIFR of 0.77 per million man hours – including employees and contractors. These are disappointing figures, especially compared to 2013. 22 reportable (> 1bbl and marine) spills in 2014. Four of these spills were Tier 1 process safety incidents. These are disappointing figures, especially compared to 2013. ✓ Significant cost savings achieved with the company well set up to realise benefits in 2015 and beyond. Overall production of high value transport fuels was below 2013 (due to Kurnell refinery closure) but Lytton production was ahead of 2013 and above target. ✓ 99% of project milestones met compared to a target of 80%. Kurnell refinery was shut down on budget and on schedule. This was a positive result in a challenging year due to workforce reduction as part of the cost and efficiency review. Measured via a company-wide Employee Engagement survey. Caltex / 2014 annual RePORtDirectors’ Reportcontinued 39 Use of discretion Payment vehicle The Human Resources Committee, in its advisory role, reviews proposed adjustments to Rewarding Results outcomes where there are exceptional unforeseen and uncontrollable impacts on the agreed performance measures and makes recommendations for any changes to performance measures, which may only be approved by the Board. KPMG assisted the Human Resources Committee with the review of scorecard financial results by performing agreed upon procedures over the calculated metrics. During 2014, discretion was exercised by the Board to exclude the impact of these significant items from the RCOP NPAT result that were determined by the Board to be outside of the control of employees and not considered part of normal trading operations. The items excluded from the Caltex 2014 RCOP NPAT result for both statutory disclosure and incentive purposes were: • redundancy costs • other costs and fees associated with the Cost and Efficiency Review • contract penalties associated with the Cost and Efficiency Review • liabilities and write-offs associated with asset rationalisation projects • funding restructure costs • interest cost of early repayment of final US private placement tranche, net of 2014 benefits. For the Senior Executives, one third of the award is deferred into shares if the cash value of the award exceeds $105,000. These shares are subject to a six month service related forfeiture condition and a two year dealing restriction. Clawback Policy See section 3f for information on the Caltex Clawback Policy. 3e. Performance based “at risk” remuneration – LTI plan Plan LtI instrument LTI awards are granted under the CEIP. Performance rights are granted by the company for nil consideration. Each performance right is a right to receive a fully-paid ordinary share at no cost if service based and performance based vesting conditions are achieved. Performance rights do not carry voting or dividend rights. For the 2013 and 2014 awards, the Board may determine to pay executives the cash value of a share in satisfaction of a vested performance right, instead of providing a share or restricted share. It is expected such discretion will only be exercised in limited cases, typically where the executive is a ”good leaver” from Caltex, i.e. where the employee ceases employment due to redundancy or retirement. Allocation methodology Performance period The number of performance rights granted is determined by dividing the maximum opportunity level by the five day volume weighted average price up to and including the first day of the performance period, discounted by the value of the annual dividend to which the performance rights are not entitled. Performance periods under the CEIP are three years commencing on 1 January in the year the awards are made. For the 2014 awards this is the three year period commencing 1 January 2014 and ending 31 December 2016. 2014 target and maximum opportunity levels The MD & CEO received a grant of performance rights based on a maximum LTI value of 150% of base salary. Senior Executive grants were based on a maximum LTI value of 90% of base salary. 40 Remuneration Report continued 3. Senior Executive remuneration continued 3e. Performance based “at risk” remuneration – LTI plan continued Performance measures (2012 awards) For the 2012 awards, relative TSR is assessed against two comparator groups – S&P/ASX 100 companies (weighted at 75%) and a selection of six international refining and marketing companies (weighted at 25%). Performance measures (2013 and 2014 awards) The international refining and marketing companies comprised Motor Oil Hellas Corinth Refineries SA (Greece), Neste Oil OY J (Finland), S-Oil Corporation (Korea), Tesoro Corporation (USA), Valero Energy Corporation (USA) and Western Refining Incorporated (USA). The relative TSR vesting schedule for both (independent) peer groups is: Performance scale Below Threshold vesting % Zero Threshold: 50th percentile 33.3% of the rights will vest Between Threshold and Target Pro-rata vesting occurs between these relative performance levels Target: 75th percentile 66.6% of the rights will vest Between Target and Stretch Pro-rata vesting occurs between these relative performance levels Stretch: 90th percentile 100% of the rights will vest Relative tsR (weighted at 60%) For the 2013 and 2014 awards, relative TSR is assessed against S&P/ASX 100 companies in accordance with the 2012 vesting schedule outlined above. Relative TSR is no longer measured against the international refining and marketing company comparator group given the restructure of Caltex’s supply chain and the company’s reduced exposure to refining earnings volatility and asset concentration risk. FCF (weighted at 20%) FCF measures performance against the cumulative FCF threshold, target and stretch levels set by the Board for the three year periods ending 31 December 2015 (2013 award) and 31 December 2016 (2014 award), based on the respective three year business plan. The targets are achievable only if growth expectations in Marketing are achieved, a competitive supply chain is maintained, and key strategic projects are achieved. FCF performance is measured before dividends and growth investment capital to ensure management is not discouraged from considering growth opportunities. The Board may modify the performance outcome to take into account material changes to the external environment and potentially those controllable items that may change to reflect appropriate Board decisions over the three year period. At the end of the 2013-2015 and 2014-2016 performance periods, the Board will set out Caltex’s performance against the cumulative FCF target in the 2015 and 2016 Remuneration Reports, including how, if at all, the Board has modified the performance outcome noted above. Caltex / 2014 annual RePORtDirectors’ Reportcontinued 41 Performance measures (2013 and 2014 awards) continued strategic measures (weighted at 20%) 2013 award The 2013 strategic measure is based on performance against the Board approved project cost and schedule milestones for the Kurnell conversion project. The cost schedules and milestones are those that are to be delivered before 31 December 2015 and which were approved by the Board during 2013. Half of the Board’s assessment (10% weighting) will be measured based on the delivery of the Kurnell conversion project to budget. The remaining half (10% weighting) will be measured based on the Board’s qualitative assessment of performance during the three year period against a range of parameters including delivery of project milestones to time, safety and environment performance, and continuity of supply to customers. The Board intends to only reward performance that is consistent with shareholder expectations and has discretion to modify the proportion of performance rights that will vest based on actual performance. 2014 award The 2014 strategic measure is based on the Board’s qualitative assessment of the outcomes achieved through key strategic projects, each designed to support top quartile shareholder returns, through the transformation of the company into a competitively efficient organisation with innovation and growth capabilities. The expected outcomes of the projects will be: • a competitively efficient organisation • the development and demonstration of end to end value chain optimisation capability • the development and demonstration of competitive supply capability • the development and demonstration of innovation and growth capabilities. Disclosure of performance outcomes: At the end of the respective 2013-2015 and 2014-2016 performance periods, the Board will set out in the 2015 and 2016 Remuneration Reports how Caltex performed against these measures, including the Board’s rationale for the relevant vesting percentage. Shares to satisfy vested performance rights are purchased on market at the time of vesting if the vesting conditions are met and the performance rights vest. Shares allocated upon vesting of performance rights will carry the same rights as other ordinary shares (including dividends and voting rights). For the 2013 and 2014 CEIP awards, where performance rights vest, new share retention arrangements will apply to all participants. The share retention arrangements are designed to encourage all executives to build up and maintain more sizeable shareholdings in Caltex for a longer period of time and further align the interests of Caltex executives and shareholders. Under the share retention arrangements, 25% of the vested portion of performance rights will be converted into restricted shares, and dealing with the restricted shares will not be permitted for a period of seven years (until 1 April 2021 for the 2014 CEIP awards), effectively extending the life of the LTI over this period. Based on this policy, if it is assumed the CEIP awards vest at target levels over a period of four years, then the MD & CEO and Senior Executives would have theoretical shareholdings of 100% and 60% of their base salary respectively. Executives can also elect additional voluntary restrictions on dealing with the remaining 75% of vested performance rights, resulting in a greater percentage of vested performance rights becoming restricted shares. On ceasing employment, all dealing restrictions on the restricted shares cease to apply, subject to the application of the Clawback Policy. shares acquired upon vesting of the performance rights share retention arrangements Clawback Policy See section 3f for information on the Caltex Clawback Policy. termination provisions If a participant ceases to be an employee due to resignation, all unvested equity awards held by the participant will lapse, except in exceptional circumstances as approved by the Board. The Board has the discretion to determine the extent to which equity awards granted to a participant under the CEIP vest on a pro-rated basis where the participant ceases to be an employee of a Group company for reasons including retirement, death, total and permanent disablement, and bona fide redundancy. In these cases, the Board’s usual practice is to pro-rate the award to reflect the portion of the period from the date of grant to the date the participant ceased to be employed. In addition, the portion of the award that ultimately vests is determined by testing against the relevant performance hurdles. If no determination is made by the Board, all equity awards held by the participant will lapse. Change of control provisions Any unvested performance rights may vest at the Board’s discretion, having regard to pro-rated performance. 42 Remuneration Report continued 3. Senior Executive remuneration continued 3f. Clawback Policy Caltex has a Clawback Policy which allows the company to recoup incentives which may have been awarded and/or vested to Senior Executives in certain circumstances. The specific triggers which allow Caltex to recoup the incentives include Senior Executives acting fraudulently or dishonestly, acting in a manner which has brought a Group company into disrepute; where there has been a material misstatement or omission in the financial statements in relation to a Group company in any of the previous three financial years; or any other circumstances occur which the Board determines in good faith to have resulted in an “unfair benefit” to the Senior Executive. Upon the occurrence of any of the triggers, the Board may then take such actions it deems necessary or appropriate to address the events that gave rise to an “unfair benefit”. Such actions may include: 1. requiring the Senior Executive to repay some or all of any cash or equity incentive remuneration paid in any of the previous three financial years 2. requiring the Senior Executive to repay any gains realised in any of the previous three financial years through the CEIP or on the open-market sale of vested shares 3. cancelling or requiring the forfeiture of some or all of the Senior Executive’s unvested performance rights, restricted shares or shares 4. reissuing any number of performance rights or restricted shares to the participant subject to new vesting conditions in place of the forfeited performance rights, restricted shares or shares 5. adjusting the Senior Executive’s future incentive remuneration, and/or 6. initiating legal action against the Senior Executive. 3g. Hedging and margin lending policies The Caltex Securities Trading Policy prohibits Senior Executives from hedging an exposure to unvested or vested Caltex securities held through any of our incentive plans. The policy also requires directors and Senior Executives to give prior notice to the Company Secretary of any proposed margin loan arrangements. If a demand for payment is made under a margin loan arrangement, the director or Senior Executive must immediately advise the Company Secretary. The Securities Trading Policy is a core corporate governance policy and Caltex has implemented appropriate measures to ensure compliance. Each year, directors, Senior Executives and certain other personnel are required to provide a certificate to the Company Secretary confirming their compliance with the Securities Trading Policy. Any breach of the Securities Trading Policy must be immediately advised to the Company Secretary, who will report the breach to the Board. A breach of the Securities Trading Policy may lead to disciplinary action, which may include termination of employment in serious cases. 3h. MD & CEO remuneration and service agreement The MD & CEO’s remuneration is determined by the Board, upon the recommendation of the Committee. In making its 2014 remuneration recommendation, the Human Resources Committee considered the performance of the MD & CEO and advice provided by GRG which took into account remuneration levels provided by companies of a similar size and complexity. The split between the MD & CEO’s 2014 total target and maximum stretch remuneration is outlined below. Fixed remuneration including superannuation totAL tARGet AnD MAXIMUM ReMUneRAtIon “At risk” – performance based remuneration stI (ii) “At target” LtI(iii) “At target”– when TSR is at the 75th percentile of peer companies, the free cash flow target is met, and the targets associated with the strategic measure have been met. $2,089,270 (i) $994,635 (50% of base salary) $1,989,270 (100% of base salary) “Stretch” “Stretch” – when TSR is at the 90th percentile of peer companies, free cash flow performance is at stretch, and the targets associated with the strategic measures have been exceeded. $1,989,270 (100% of base salary) $2,983,905 (150% of base salary) Notes: (i) The MD & CEO’s remuneration increased by 3.5% during the 2014 remuneration review. (ii) Currently there is mandatory deferral into shares of 33.3% of the actual STI above $105,000. (iii) Share retention arrangements have been implemented to encourage share retention and promote alignment with shareholders over the longer term. For the 2013 and 2014 CEIP award, all CEIP participants, including the MD & CEO, are required to hold 25% of the shares awarded when the performance rights vest, for an additional four years. Caltex / 2014 annual RePORtDirectors’ Reportcontinued 43 Table 1. Summary of MD & CEO’s Service Agreement term Duration Conditions Ongoing until notice is given by either party Termination by MD & CEO Six months’ notice Termination by company for cause No notice requirement or termination benefits (other than accrued entitlements) Termination by company (other) 12 months’ notice Company may elect to make payment in lieu of notice Post-employment restraints Restraint applies for 12 months if employed in the same industry within Australia Termination payment of 12 months’ base salary (reduced by any payment in lieu of notice) Treatment of unvested STI and LTI in accordance with plan terms 3i. Other Senior Executive Service Agreements The remuneration and other terms of employment for the other Senior Executives are formalised in Service Agreements (contracts of employment). The material terms of the Service Agreements are set out below. The Senior Executives of Caltex are appointed as permanent Caltex employees. Their employment contracts require both Caltex and the executive to give a notice period within a range between one and six months as stipulated by their individual contracts should they resign or have their service terminated by Caltex. The terms and conditions of the executive contracts reflect market conditions at the time of the contract negotiation and appointment. It is Caltex’s intention going forward to reset the termination notice for all newly appointed Senior Executives to at least three months. The details of the contracts of the current Senior Executives of Caltex are set out below. The durations of the contracts are open ended (i.e. ongoing until notice is given by either party). Table 2. Summary of Service Agreements for other Senior Executives termination on notice (by the company) Resignation (by the senior executive) Current senior executives Andrew Brewer Simon Hepworth Peter Lim Mike McMenamin Bruce Rosengarten Simon Willshire Former senior executive Gary Smith 6 months 3 months 6 months 1 month 6 months 6 months 6 months 3 months 6 months 1 month 6 months 6 months 6 months 3 months If a Senior Executive was to resign, their entitlement to unvested shares payable through the CEIP would generally be forfeited and, if resignation was on or before 31 December of the year, generally their payment from the Rewarding Results Plan would also be forfeited, subject to the discretion of the Board. If a Senior Executive is made redundant, their redundancy payment is determined by the Caltex Redundancy Policy, with the payment calculated based on years of service and the applicable notice period. Other than prescribed notice periods, there is no special termination benefit payable under the contracts of employment. Statutory benefits (such as long service leave) are paid in accordance with the legislative requirements at the time the Senior Executive ceases employment. 44 Remuneration Report continued 3. Senior Executive remuneration continued 3i. Other Senior Executive Service Agreements continued Appointment of General Manager – Marketing Mr Bruce Rosengarten was appointed on 1 November 2013. Mr Rosengarten’s contract included relocation support to assist him to relocate from Melbourne, where he was previously employed. This relocation support was incurred in 2013. If Mr Rosengarten’s employment ceases due to resignation, serious and wilful misconduct or negligent behaviour within 36 months of commencement, a prorated portion of relocation assistance must be repaid. Mr Rosengarten also received a payment to compensate him for forgone STI and an award of restricted shares to compensate him for unvested LTI at his prior employer. The payment in relation to forgone STI is required to be repaid in full if Mr Rosengarten ceases employment within 24 months of his commencement date. Fifty percent (50%) of the restricted share grant vests on Mr Rosengarten’s second anniversary of commencement, with the remaining 50% vesting on his third anniversary. Each tranche lapses if Mr Rosengarten’s employment ceases due to resignation, serious and wilful misconduct, negligent behaviour or unsatisfactory performance prior to each respective date. The award of restricted shares is outlined in table 6b. General Manager – Strategy, Planning & Development In April 2014, the Board approved an application from Mr Mike McMenamin, for the release of his outstanding STI Deferred shares due to exceptional circumstances. These shares remain subject to clawback until 1 April 2015. In December 2014, as part of the corporate restructure under a major cost and efficiency review, a decision was taken that the position of General Manager – Strategy, Planning & Development is no longer required and that the role is to be made redundant. Mr McMenamin will remain employed with Caltex until 31 May 2015. Under these arrangements, Mr McMenamin will receive his 2014 STI payment, his 2012 LTI award, a redundancy package (including notice) and his statutory leave entitlements. The 2013 and 2014 CEIP LTI awards will be pro-rated to the date he ceases employment, with those performance rights remaining “on-foot” to be tested against the relevant performance measures at the end of the respective performance periods. Mr McMenamin will not receive a 2015 CEIP LTI award and will not be eligible for a 2015 STI payment. Resignation of the General Manager – Refining & Supply Mr Gary Smith resigned and ceased employment with Caltex on 9 May 2014. As Mr Smith resigned he forfeited all outstanding CEIP LTI awards on cessation of employment. However, as he had satisfied the six month service condition on his STI Deferred shares, these shares were released to Mr Smith, although these shares remain subject to clawback until 1 April 2015. As Mr Smith resigned prior to the completion of the supply chain realignment strategy, the remaining payments due under the retention plan were forfeited (worth approximately $563,160). Given Mr Smith’s long experience with the Kurnell refinery, the Board determined that it would still require his services to assist with the closure of the refinery and its subsequent conversion (the Project). Accordingly, a consultancy agreement was signed with Mr Smith for his services associated with the Project. Under this agreement, a payment was made to Mr Smith in February 2015 of $280,000 for his consultancy services associated with the successful closure of the Kurnell refinery. 3j. Link between company performance and executive remuneration The link between executive remuneration and company performance is outlined in various parts of this report. This includes section 1 where the 2014 remuneration outcomes are communicated, and section 3 where the short term and long term performance measures are explained, including why the measures have been chosen and how they relate to the performance of the business. Table 3 below outlines Caltex’s TSR, dividend, share price, earnings per share and RCOP NPAT performance each year from 2010 to 2014 together with the linkage to actual STI and LTI outcomes. Caltex / 2014 annual RePORtDirectors’ Reportcontinued 45 Table 3. Link between company performance and executive remuneration (unaudited) summary of performance over 2010-2014 12 month TSR % (i) Dividends (cents per share) Share price (ii) RCOP excluding significant items earnings per share RCOP NPAT excluding significant items (million) (iii) Caltex Safety – TTIFR (iv) Caltex Safety – LTIFR (v) Link to remuneration STI – percentage of business plan RCOP NPAT target achieved STI – funding of STI pool (relative to target) LTI – percentage vesting three years after grant date Year of grant Percentage of grant vesting 2014 74.1 70c $34.21 $1.83 $493 1.76 0.77 125% 127% 2012 88.9% 2013 6.1 34c $20.05 $1.23 $332 1.36 0.63 76% 0% 2011 42.3% 2012 66.6 40c $19.21 $1.70 $458 2.86 0.59 137% 144% 2010 77.8% 2011 (15.0) 45c $11.77 $0.98 $264 2.53 0.99 82.5% 94% 2009 82.2% 2010 61.0 60c $14.37 $1.18 $318 2.95 1.23 130% 147% 2008 50% Notes: (i) TSR is calculated as the change in share price for the year, plus dividends announced for the year, divided by the opening share price. TSR is a measure of the return to shareholders in respect to each financial year. The price quoted is the trading price for the last day of trading (31 December) in each calendar year. (ii) (iii) Measured using the RCOP method which excludes the impact of the rise or fall in oil prices (a key external factor) and excludes significant items as determined by the Board. (iv) TTIFR – Total Treatable Injury Frequency Rate. (v) LTIFR – Lost Time Injury Frequency Rate. The 2014 executive remuneration outcomes are outlined further below, both in terms of “actual remuneration earned” (table 4a) and statutory remuneration disclosures (table 4b). The two charts below provide a comparison of Caltex’s three year TSR compared to S&P/ASX 100 companies and to the six international marketing and refining companies. This reflects the 2012 LTI grant where performance is measured over the period from 1 January 2012 to 31 December 2014. As seen, Caltex’s three year TSR is well above the 90th percentile of the S&P/ASX 100 peer group, and above the median of the international marketing and refining company peer group. Three year TSR performance 1 January 2012 to 31 December 2014 Caltex Australia Limited and the Constituents of the S&P/ASX 100 Index Total Shareholders Return Performance 1 January 2012 – 31 December 2014 Caltex 90th Percentile 75th Percentile 50th Percentile ASX 100 e c n a m r o f r e P x e d n I l n o i t a u m u c c A 270 260 250 240 230 220 210 200 190 180 170 160 150 140 130 120 110 100 90 80 2 1 N A J 1 0 2 1 B E F 1 0 2 1 R A M 1 0 2 1 R P A 1 0 2 1 Y A M 1 0 2 1 N U J 1 0 2 1 L U J 1 0 2 1 G U A 1 0 2 1 P E S 1 0 2 1 T C O 1 0 2 1 V O N 1 0 2 1 C E D 1 0 3 1 N A J 1 0 3 1 B E F 1 0 3 1 R A M 1 0 3 1 R P A 1 0 3 1 Y A M 1 0 3 1 N U J 1 0 3 1 L U J 1 0 3 1 G U A 1 0 3 1 P E S 1 0 3 1 T C O 1 0 3 1 V O N 1 0 3 1 C E D 1 0 4 1 N A J 1 0 4 1 B E F 1 0 4 1 R A M 1 0 4 1 R P A 1 0 4 1 Y A M 1 0 4 1 N U J 1 0 4 1 L U J 1 0 4 1 G U A 1 0 4 1 P E S 1 0 4 1 T C O 1 0 4 1 V O N 1 0 4 1 C E D 1 0 2014 Copyright. All Rights Reserved. Egan Associates. Indices based on a value of 100 at 1 January 2012. Three month smoothing applied. 1. Constituents based on the S&P/ASX 100 Index as at grant date (i.e. 1 January 2012). Caltex is included in the S&P/ASX 100 Index. Source: S&P Capital IQ Date 46 Remuneration Report continued 3. Senior Executive remuneration continued 3j. Link between company performance and executive remuneration continued Three year TSR performance 1 January 2012 to 31 December 2014 Caltex Australia Limited and the Constituents of the Bespoke International Comparator Group Total Shareholders Return Performance 1 January 2012 – 31 December 2014 Caltex 90th Percentile 75th Percentile 50th Percentile e c n a m r o f r e P x e d n I l n o i t a u m u c c A 340 330 320 310 300 290 280 270 260 250 240 230 220 210 200 190 180 170 160 150 140 130 120 110 100 90 80 2 1 N A J 1 0 2 1 B E F 1 0 2 1 R A M 1 0 2 1 R P A 1 0 2 1 Y A M 1 0 2 1 N U J 1 0 2 1 L U J 1 0 2 1 G U A 1 0 2 1 P E S 1 0 2 1 T C O 1 0 2 1 V O N 1 0 2 1 C E D 1 0 3 1 N A J 1 0 3 1 B E F 1 0 3 1 R A M 1 0 3 1 R P A 1 0 3 1 Y A M 1 0 3 1 N U J 1 0 3 1 L U J 1 0 3 1 G U A 1 0 3 1 P E S 1 0 3 1 T C O 1 0 3 1 V O N 1 0 3 1 C E D 1 0 4 1 N A J 1 0 4 1 B E F 1 0 4 1 R A M 1 0 4 1 R P A 1 0 4 1 Y A M 1 0 4 1 N U J 1 0 4 1 L U J 1 0 4 1 G U A 1 0 4 1 P E S 1 0 4 1 T C O 1 0 4 1 V O N 1 0 4 1 C E D 1 0 2014 Copyright. All Rights Reserved. Egan Associates. Indices based on a value of 100 at 1 January 2012. Three month smoothing applied. 1. The International Comparator Group includes Caltex, Motor Oil, Neste, S-Oil, Tesoro, Valero and Western Refining. Source: S&P Capital IQ Date The chart below provides a comparison of Caltex’s one year TSR performance compared to S&P/ASX 100 companies over the period from 1 January 2014 to 31 December 2014. This reflects the current status of the 2014 LTI grant. As seen, the Caltex TSR was well above the 90th percentile over 2014. The 2014 LTI grant is not assessed against an international marketing and refining company peer group. One year TSR performance 1 January 2014 to 31 December 2014 Caltex Australia Limited and the Constituents of the S&P/ASX 100 Index Total Shareholders Return Performance 1 January 2014 – 31 December 2014 Caltex 90th Percentile 75th Percentile 50th Percentile ASX 100 e c n a m r o f r e P x e d n I l n o i t a u m u c c A 170 165 160 155 150 145 140 135 130 125 120 115 110 105 100 95 90 4 1 N A J 1 0 4 1 B E F 1 0 4 1 R A M 1 0 4 1 R P A 1 0 4 1 Y A M 1 0 4 1 N U J 1 0 4 1 L U J 1 0 Date 4 1 G U A 1 0 4 1 P E S 1 0 4 1 T C O 1 0 4 1 V O N 1 0 4 1 C E D 1 0 2014 Copyright. All Rights Reserved. Egan Associates. Indices based on a value of 100 at 1 January 2014. 60 trading days smoothing applied. 1. Constituents based on the S&P/ASX 100 Index as at grant date (i.e. 1 January 2014). Caltex is included in the S&P/ASX 100 Index. Source: S&P Capital IQ Caltex / 2014 annual RePORtDirectors’ Reportcontinued 47 3k. Remuneration tables Table 4a. Total remuneration earned for Senior Executives in 2014 (unaudited, non-statutory disclosures) The following table sets out the actual remuneration earned by Senior Executives in 2014, from an individual perspective. The value of remuneration includes the equity grants where the Senior Executive received control of the shares in 2014. The purpose of this table is to provide a summary of the “past” and “present” remuneration outcomes received in either cash or in the form of equity granted in prior years which has vested in 2014. As a result, the values in this table will not reconcile with those provided in the statutory disclosures in table 4b. For example, table 4b discloses the value of grants in the CEIP which may or may not vest in future years, whereas this table discloses the value of grants from previous years which vested in 2014. No deferred STI vested in 2014 as no bonuses were paid in 2013. Dollars salary and fees (i) Fixed other remuneration (iii) Bonus (stI) (iv) Deferred stI vested in the year LtI vested during the year (v) Remuneration “earned” for 2014 Current senior executives Julian Segal (MD & CEO) (ii) 2014 Andrew Brewer (General Manager – Supply Chain Operations) (ii) (vi) 2014 2,047,453 436,467 236,744 949,862 120,588 258,587 147,206 713,823 Simon Hepworth (Chief Financial Officer) 2014 Peter Lim (General Manager – Legal & Corporate Affairs) (ii) 2014 Mike McMenamin (General Manager – Strategy, Planning & Development) (ii) 2014 Bruce Rosengarten (General Manager – Marketing) (ii) 2014 Simon Willshire (General Manager – Human Resources) (ii) 2014 480,356 553,699 506,611 761,669 76,344 61,400 54,736 77,684 351,563 203,698 357,286 300,384 217,636 Former senior executive Gary Smith (General Manager – Refining & Supply) (ii) (vii) 2014 337,977 15,256 – – – – – – – – – 1,767,862 5,001,921 165,260 980,902 373,151 1,585,743 102,640 864,378 259,761 1,225,482 – 1,138,397 254,883 1,040,530 401,860 755,093 total remuneration: senior executives 2014 5,838,055 789,958 2,639,016 – 3,325,417 12,592,446 Notes: (i) (ii) (iii) Salary and fees comprises base salary, and cash payments in lieu of employer superannuation (on base salary and/or on STI payments made in respect of the 2014 performance year paid in 2015). These Senior Executives elect to receive an equivalent cash payment in lieu of employer superannuation that is in excess of the quarterly Superannuation Guarantee Maximum. Fixed other remuneration includes the cash value of non-monetary benefits, superannuation, annual leave and long service leave entitlements. It also includes any fringe benefits tax payable on non-monetary benefits. (iv) The bonus amounts are the cash component (66.6%) of the STI to be received for the 2014 year, which will be paid in April 2015. 33.3% (v) of the STI will be deferred and restricted for two years. The exception is Mr McMenamin who will receive 100% of his STI in cash, with 33.3% of the payment subject to clawback, due to his redundancy shortly after the Deferred STI shares would have been granted. Equity based plans from prior years that have vested in the current year. The value is calculated using the closing share price of Caltex shares on the vesting date. The 2014 figures reflect the TSR performance for the 2011 awards, which resulted in 42.3% of these performance rights vesting during 2014. (vi) Mr Brewer’s remuneration relates to the period from 31 March 2014 when he was appointed General Manager – Supply Chain Operations and became a KMP. (vii) Mr Smith’s remuneration relates to the period from 1 January 2014 up until his resignation took effect on 9 May 2014. 48 Remuneration Report continued 3. Senior Executive remuneration continued 3k. Remuneration tables continued Table 4b. Total remuneration for Senior Executives in 2014 (statutory disclosures) The following table sets out the audited total remuneration for Senior Executives in 2013 and 2014, calculated in accordance with statutory accounting requirements: Dollars salary and fees (i) PRIMARY Bonus (short term incentive) (iii) Post- eMPLoYMent otHeR LonG teRM eqUItY totAL non- monetary benefits (iv) super- annuation share benefits (short term incentive) Rights benefits (long term incentive) (vi) other (v) 8,345 – 12,756 13,657 27,000 24,001 68,851 95,097 25,000 25,000 20,700 – 740,351 704,067 485,218 488,889 351,563 – 949,862 – 203,698 – 258,587 – 468,463 – 2,188,995 2,012,184 Current senior executives Julian Segal (MD & CEO) (ii) 2014 2013 Andrew Brewer (General Manager – Supply Chain Operations) (ii) (vii) 2014 2013 Simon Hepworth (Chief Financial Officer) 2014 15,570 14,403 2013 Peter Lim (General Manager – Legal & Corporate Affairs) (ii) 17,213 2014 2013 15,396 Mike McMenamin (General Manager – Strategy, Planning & Development) (ii) 554,141 2014 2013 530,955 Bruce Rosengarten (General Manager – Marketing) (ii) (viii) 799,361 2014 2013 438,023 Simon Willshire (General Manager – Human Resources) (ii) 2014 2013 Former senior executives Gary Smith (General Manager – Refining & Supply) (ii) (ix) – 337,977 2014 2013 – 885,160 Andy Walz (General Manager – Marketing) (x) 2014 – 2013 208,051 total remuneration: senior executives 2014 2013 6,095,204 5,952,471 2,639,016 450,009 357,286 – – 425,595 217,636 – 300,384 241,958 – 397,716 520,698 495,477 212,396 241,678 101,737 515,473 – 34,001 25,400 5,100 18,279 24,235 18,279 17,122 13,252 5,128 15,059 15,154 6,369 13,428 13,173 12,712 8,887 17,122 57,445 91,130 259,053 196,723 2,198,465 1,853,110 5,691,576 4,191,804 59,546 – 70,524 – 216,732 – 1,102,897 – 36,257 17,615 28,609 13,469 20,956 12,478 95,881 74,595 55,554 44,683 – 53,184 485,512 399,720 1,793,985 1,305,497 293,916 202,670 1,111,208 789,108 344,375 283,395 1,310,096 919,401 – 1,438 349,496 31,522 131,094 – 1,618,987 723,169 15,862 11,605 59,355 48,986 319,382 268,111 1,164,385 854,013 – 266,727 – 122,853 21,606 428,893 374,839 1,734,183 – 313,258 – – – – – 1,378,621 218,675 727,720 889,863 572,546 4,011,082 3,435,899 14,167,973 11,895,796 Notes: (i) (ii) (iii) No STI was awarded to Senior Executives for the 2013 Performance Year due to the company failing to meet the required profit threshold under the Salary and fees include base salary, cash payments in lieu of employer superannuation on base salary, and annual leave accruals. These executives elect to receive an equivalent cash payment in lieu of employer superannuation that is in excess of the quarterly Superannuation Guarantee Maximum. (iv) Rewarding Results Plan. The non-monetary benefits received by Senior Executives include car parking benefits, employee StarCard benefits, the payment of the default premiums for death and total and permanent disability insurance cover and related FBT payments made by Caltex. (v) Other long term remuneration represents long service leave for all Senior Executives and the accrual of retention payments for Mr Smith (in 2013 only). (vi) These values have been calculated under Accounting Standards and as such the value may not represent the future value that may (or may not) be received by the Senior Executive as the vesting of the performance rights is subject to the achievement of service based and performance based vesting conditions. (vii) Mr Brewer’s 2014 remuneration relates to the period from 31 March 2014 when he was appointed General Manager – Supply Chain Operations and became a KMP. (viii) Mr Rosengarten’s 2013 remuneration relates to the period from 1 November 2013 when he was appointed General Manager – Marketing. The salary and fees amount paid to Mr Rosengarten in 2013 includes one off payments of relocation assistance totalling $248,357. The Bonus (short term incentive) amount relates to the pro-rated STI paid in lieu of the STI forgone with his prior employer. (ix) Mr Smith’s 2014 remuneration relates to the period from 1 January 2014 up until 9 May 2014 when his resignation took effect. His 2013 salary and fees include a retention payment. (x) Mr Walz’s 2013 remuneration relates to the period from 1 January 2013 to 31 May 2013 when his secondment with Caltex from Chevron concluded. Caltex / 2014 annual RePORtDirectors’ Reportcontinued 49 Table 5. Unvested shareholdings of Senior Executives during 2014 Current senior executives Julian Segal Andrew Brewer Simon Hepworth Peter Lim Mike McMenamin Bruce Rosengarten Simon Willshire Former senior executive Gary Smith Unvested shares at 31 Dec 2013 Restricted shares granted (ii) shares vested from prior performance years (iii) Forfeited Unvested shares at 31 Dec 2014 – – – – – 33,864 (i) – – 13,883 3,779 5,138 2,977 – 4,390 3,181 – – – – – – – – – – – – – – – – – 13,883 3,779 5,138 2,977 – 38,254 3,181 – Notes: (i) (ii) The restricted shares awarded to Mr Rosengarten represent the grant received on commencement with Caltex in lieu of the LTI forgone with his previous employer (refer to section 3i for further detail). If Mr Rosengarten meets the service conditions, the shares will vest in November 2015 (50%) and November 2016 (50%). Restricted shares granted represents the 2014 STI deferred into equity (33.3%). The shares will be purchased in 2015 and will vest in October 2015. The shares will be subject to a six month service related forfeiture condition and a two year dealing restriction from the date of grant. This disclosure represents the estimated number of shares to be acquired at that time. The exception is Mr McMenamin who will receive 100% of his STI in cash, with 33.3% of the payment subject to clawback, due to his redundancy shortly after the restricted shares would have been granted. (iii) No restricted shares vested in 2014 (as no STI Deferred shares were granted given that no STI was paid for the 2013 Performance Year). Table 6a. Restricted share grants to Senior Executives in 2014 – STI The following table provides an estimate of the future cost to Caltex of unvested restricted shares based on the progressive vesting of the STI deferred shares. Of the 2014 STI deferred shares, no shares have vested and the estimated future cost has been provided. senior executives Julian Segal Andrew Brewer Simon Hepworth Peter Lim Mike McMenamin Bruce Rosengarten Simon Willshire Deferred stI year vested (% of shares vested) Future years when shares will vest Future cost to Caltex of unvested shares ($) 2014 2014 2014 2014 2014 2014 2014 0% 0% 0% 0% – 0% 0% 2015 2015 2015 2015 – 2015 2015 215,878 58,770 79,901 46,295 – 68,269 49,463 Table 6b. Restricted share grants to Senior Executives – other awards The following table provides an estimate of the future cost to Caltex of unvested restricted shares based on the progressive vesting of the restricted shares, where the shares were not awarded under the STI Deferral plan. No new awards of restricted shares were made during 2014. One award was made to the General Manager – Marketing in 2013 on commencement of employment in lieu of the unvested LTI which lapsed on his resignation with his prior employer. As no shares have vested the estimated future cost has been provided. senior executive Bruce Rosengarten type of award Year of award vested (% of shares vested) Future years when shares will vest Future cost to Caltex of unvested shares ($) Sign-on 2013 0% 2015 (50%) 2016 (50%) 330,873 50 Remuneration Report continued 3. Senior Executive remuneration continued 3k. Remuneration tables continued Table 7. 2014 Senior Executive performance rights Long term incentives for Senior Executives are awarded as performance rights under the CEIP as explained in section 3e. The following table sets out details of movements in performance rights held by Senior Executives during the year, including details of the performance rights that vested. Current senior executives Julian Segal Andrew Brewer Simon Hepworth Peter Lim Mike McMenamin Bruce Rosengarten Simon Willshire Former senior executive Gary Smith Performance rights at 1 jan 2014 (i) Granted in 2014 (ii) vested in 2014 Lapsed in 2014 (iii) Balance at 31 Dec 2014 642,160 61,014 139,529 71,165 98,337 – 92,916 161,815 26,805 36,320 22,785 25,910 34,165 23,675 (81,900) (7,656) (17,287) (4,755) (12,034) – (111,764) (10,448) (23,593) (6,491) (16,424) – (11,808) (16,116) 610,311 69,715 134,969 82,704 95,789 34,165 88,667 148,711 – (18,617) (130,094) – Notes: (i) (ii) For 2012 and 2013 performance rights, if the service based and performance based vesting conditions are achieved, these performance rights will vest in 2015 and 2016 respectively. For the 2014 performance rights, if the service based and performance based vesting conditions are achieved, these performance rights will vest in 2017. (iii) Relates to 2011 performance rights of which 57.7% lapsed in the year and 42.3% vested. Table 8. Valuation assumptions of performance rights granted The fair value of performance rights granted under the CEIP is determined independently by Ernst & Young using an appropriate numerical pricing model. The model takes into account a range of assumptions and the fair values for each year of grant have been calculated incorporating the assumptions below. 2014 GRAnt 2013 GRAnt 2012 GRAnt s&P/ AsX 100 FCF and strategic measures s&P/ AsX 100 FCF and strategic measures International refining and marketing companies s&P/ AsX 100 7 April 2014 7 April 2014 22 April 2013 22 April 2013 2 April 2012 2 April 2012 1 April 2017 1 April 2017 1 April 2016 1 April 2016 1 April 2015 1 April 2015 Nil 35% 3.02% 2.7% 3.0 $21.85 $12.57 Nil 35% 3.02% 2.7% 3.0 $21.85 $20.16 Nil 40% 2.7% 2.0% 2.9 $20.60 $10.98 Nil 40% 2.7% 2.0% 2.9 $20.60 $19.42 Nil 45% 3.49% 4.7% 3.0 $14.03 $7.69 Nil 45% 3.49% 4.7% 3.0 $14.03 $7.52 Peer group Grant date Vesting date Exercise price Volatility Risk free interest rate Dividend yield Expected life (years) Share price at grant date Valuation per right Note: Market performance measures, such as relative TSR, must be incorporated into the option-pricing model valuation used for the CEIP performance rights, which is reflected in the valuation per performance right. Non-market vesting conditions such as free cash flow and strategic measures are not taken into account when determining the value of the performance right. This explains the higher valuation for these performance rights. However, the value of the free cash flow and strategic measures may be discounted during the performance period to reflect the Board’s assessment of the probability that the measure will be met and the associated performance rights vesting. These values will be reflected in the values set out in table 4b. Caltex / 2014 annual RePORtDirectors’ Reportcontinued 51 Table 9. Distribution of 2014 fixed and variable elements of remuneration The proportion of each Senior Executive’s remuneration for 2014 that was fixed, and the proportion that was subject to a performance condition, is outlined below. The percentages are based on the 2014 statutory remuneration disclosures and do not correspond to the target remuneration percentages outlined earlier in this report in section 3b. Current senior executives Julian Segal Andrew Brewer Simon Hepworth Peter Lim Mike McMenamin Bruce Rosengarten Simon Willshire Former senior executive Gary Smith Fixed variable (including short and long term incentive payments) 40% 51% 48% 50% 46% 52% 49% 51% 60% 49% 52% 50% 54% 48% 51% 49% Table 10. FY14 STI Plan payment results The following table sets out the FY14 STI awards, compared to FY13, as a percentage of the Senior Executive’s maximum STI opportunity. Current senior executives Julian Segal Andrew Brewer Simon Hepworth Peter Lim Mike McMenamin Bruce Rosengarten Simon Willshire Former senior executive Gary Smith (i) Average Note: (i) Mr Smith ceased employment on 9 May 2014 and was therefore not entitled to a 2014 STI award. 2014 2013 72% 71% 71% 71% 73% 64% 73% n/a 71% 0% 0% 0% 0% 0% n/a 0% 0% 0% 52 Remuneration Report continued 4. Non-executive Director fees 4a. Our approach to Non-executive Director fees Caltex’s business and corporate operations are managed under the direction of the Board on behalf of shareholders. The Board oversees the performance of Caltex management in seeking to deliver superior business and operational performance and long term growth in shareholder value. The Board recognises that providing strong leadership and strategic guidance to management is important to achieve our goals and objectives. Under the Caltex Constitution and the ASX Listing Rules, the total annual fee pool for Non-executive Directors is determined by shareholders. Within this aggregate amount, Non-executive Director fees are reviewed by the Human Resources Committee, taking into account recommendations from an independent remuneration consultant, and set by the Board. Fees for Non-executive Directors are set at a level to attract and retain directors with the necessary skills and experience to allow the Board to have a proper understanding of, and competence to deal with, current and emerging issues for Caltex’s business. The Board seeks to attract directors with different skills, experience and abilities to enable it to effectively oversee and challenge the performance of management. Additionally, when setting Non-executive Director fees, the Board takes into account factors such as external market data on fees and the size and complexity of Caltex’s operations. The Non-executive Directors’ fees are fixed. The Non-executive Directors do not participate in any Caltex incentive plan. Caltex does not have a retirement plan for Non-executive Directors. 4b. Board and committee fees for 2014 The current maximum annual fee pool for Non-executive Directors is $2 million, including statutory entitlements. This amount was approved by shareholders at the 2010 Annual General Meeting. Table 11. 2014 Non-executive Directors’ fees The following table contains the 2014 Non-executive Director fees. As disclosed in Caltex’s 2013 Remuneration Report, the fees for the Chairmen and members of the Human Resources Committee and the OHS & Environmental Risk Committee increased from 1 January 2014 to align with the fees paid to the Chairman and members of the Audit Committee. The increase in these fees reflects the equivalent complexity and workload requirements of the Human Resources Committee and the Audit Committee, and the critical importance of the OHS & Environmental Risk Committee given the industry in which Caltex operates. All other fees remained unchanged from 2013. Fee (ii) BoARD CoMMIttees(i) Chairman Member Chairman Member $465,000 $155,000 $36,000 $18,000 Notes: (i) Comprising the Audit Committee, Human Resources Committee, and OHS & Environmental Risk Committee. No fees are paid for the Nomination Committee. (ii) Caltex pays superannuation for Australian based Non-executive Directors in addition to the above fees. From 1 July 2014, the superannuation rate is 9.5%. Mr Brown, Ms Burger and Mr Krogmeier each act as alternate directors for each other, but they do not receive any additional Board or committee fees for acting as alternate directors. Caltex / 2014 annual RePORtDirectors’ Reportcontinued 53 4c. Remuneration table Table 12. Non-executive Director fees in 2014 (statutory disclosures) The following table sets out the audited Non-executive Director fees in 2013 and 2014 calculated in accordance with statutory accounting requirements. Non-executive Directors are not eligible to receive any cash based or equity based incentives. Dollars Current non-executive Directors Elizabeth Bryan (Chairman) 2014 2013 Trevor Bourne 2014 2013 Richard Brown 2014 2013 Barbara Burger 2014 2013 Greig Gailey 2014 2013 Ryan Krogmeier 2014 2013 Bruce Morgan 2014 2013 Former non-executive Director John Thorn 2014 2013 total: non-executive Directors 2014 2013 PRIMARY Post- eMPLoYMent otHeR LonG teRM totAL salary and fees non- monetary benefits super- annuation (i) other 490,315 490,309 227,000 215,125 155,000 155,000 173,000 168,000 227,000 217,000 173,000 170,500 227,000 111,855 – 86,310 389 384 962 1,276 – – – – 615 622 – – 781 195 – 479 1,672,315 1,614,099 2,747 2,956 18,279 17,122 21,281 19,629 – – – – 21,281 19,801 – – 21,281 10,344 – 6,808 82,122 73,704 – – – – – – – – – – – – – – – – – – 508,983 507,815 249,243 236,030 155,000 155,000 173,000 168,000 248,896 237,423 173,000 170,500 249,062 122,394 – 93,597 1,757,184 1,690,759 Note: (i) Superannuation contributions are made on behalf of Australian based Non-executive Directors to satisfy Caltex’s obligations under the Superannuation Guarantee legislation. Fees paid to Australian based Non-executive Directors may be subject to fee sacrifice arrangements for superannuation. Non-executive Directors may direct Caltex to pay superannuation contributions referable to fees in excess of the maximum earnings base as cash. 54 Remuneration Report continued 5. Shareholdings of Key Management Personnel The movement during the reporting period in the number of shares of Caltex Australia Limited held directly or indirectly by each KMP, including their personally related entities, is below: 31 December 2014 non-executive Directors Elizabeth Bryan Trevor Bourne Richard Brown Barbara Burger Greig Gailey Ryan Krogmeier Bruce Morgan senior executives Julian Segal Andrew Brewer Simon Hepworth Peter Lim Mike McMenamin Bruce Rosengarten Gary Smith Simon Willshire 31 December 2013 non-executive Directors Elizabeth Bryan Trevor Bourne Richard Brown Barbara Burger Greig Gailey Colleen Jones-Cervantes Ryan Krogmeier Bruce Morgan John Thorn senior executives Julian Segal Simon Hepworth Peter Lim Mike McMenamin Bruce Rosengarten Gary Smith Andy Walz Simon Willshire Held at 31 Dec 2013 Purchased vested sold Held at 31 Dec 2014 14,946 5,395 – – 5,000 – 10,500 120,583 27,825 21,352 10,669 10,622 – 16,516 10,143 – – – – – – – – – – – – – – – – – – – – – – 81,900 7,656 17,287 4,755 12,034 – 18,617 11,808 – – – – – – – (53,933) (10,469) (26,800) – (22,656) – (25,604) (16,794) 14,946 5,395 – – 5,000 – 10,500 148,550 25,012 11,839 15,424 – – 9,529 5,157 Held at 31 Dec 2012 Purchased vested sold Held at 31 Dec 2013 14,946 5,395 – – 5,000 – – – 1,510 166,563 65,358 7,272 12,827 – 21,123 – 13,055 – – – – – – – 10,500 – – – – – – – – – – – – – – – – – – 279,432 59,494 19,246 43,626 – 68,372 – 42,482 – – – – – – – – (1,510) (325,412) (103,500) (15,849) (45,831) – (72,979) – (45,394) 14,946 5,395 – – 5,000 – – 10,500 – 120,583 21,352 10,669 10,622 – 16,516 – 10,143 Caltex / 2014 annual RePORtDirectors’ Reportcontinued 55 6. Other Key Management Personnel transactions Apart from as disclosed in the indemnity section of the Directors’ Report, no KMP have entered into a material contract, loan or other transaction with any entity in the Caltex Group during the year ended 31 December 2014 (2013: nil). During 2014, Ms Bryan was a director of Westpac Banking Corporation. The business relationship between Caltex and Westpac Banking Corporation has been in place for many years and transactions undertaken during 2014 were on normal commercial terms. Also during 2014: • Ms Bryan was a director of Insurance Australia Group Limited in December 2014; transactions with this company and (where relevant) its subsidiaries during 2014 were on normal commercial terms. • Mr Bourne was a director of Senex Energy Limited and Sydney Water Corporation; transactions with these companies and (where relevant) their subsidiaries during 2014 were on normal commercial terms. • Mr Morgan was a director of Origin Energy Limited and Sydney Water Corporation; transactions with these companies and (where relevant) their subsidiaries during 2014 were on normal commercial terms. Directors’ interests The directors’ relevant interests in the shares of Caltex Australia Limited at 31 December 2014 are set out in the following table. Director Elizabeth Bryan Julian Segal Trevor Bourne Richard Brown Barbara Burger Greig Gailey Ryan Krogmeier Bruce Morgan shareholding nature of interest 14,946 148,550 5,395 Nil Nil 5,000 Nil 10,500 Direct interest Direct interest (127,911 shares); indirect interest (20,639 shares). Mr Segal also has a direct interest in 610,311 performance rights. Direct interest (2,395 shares); indirect interest (3,000 shares) n/a n/a Indirect interest n/a Indirect interest Note: No director has acquired or disposed of any relevant interests in the company’s shares in the period from 1 January 2015 to the date of this Annual Report. Board and committee meetings The Board of Caltex Australia Limited met nine times during the year ended 31 December 2014. In addition, directors attended Board strategy sessions and workshops, site visits and special purpose committee meetings during the year. In 2014, the Board convened the following standing committees: • Audit Committee • Human Resources Committee • Nomination Committee • OHS & Environmental Risk Committee. Special purpose committees were convened on two occasions in 2014. 56 Board and committee meetings continued The number of Board and committee meetings attended by each director during 2014 is set out in the following table. DIReCtoR BoARD1 AUDIt CoMMIttee HUMAn ResoURCes CoMMIttee noMInAtIon CoMMIttee oHs & envIRon- MentAL RIsk CoMMIttee otHeR3 Current directors A 2 Elizabeth Bryan Julian Segal Trevor Bourne Richard Brown Barbara Burger Greig Gailey Ryan Krogmeier Bruce Morgan 9 9 9 9 9 9 9 9 B 9 9 8 9 8 9 9 9 A – – 4 – – 4 – 4 B – – 4 – – 4 – 4 A – – 4 – – 4 4 4 B – – 4 – – 4 4 4 A 3 3 3 3 3 3 3 3 B 3 3 3 3 3 3 3 3 A – – 4 – 4 4 – 3 B – – 4 – 4 4 – 4 A 8 8 5 5 5 5 5 8 B 8 8 5 5 5 5 5 8 Notes: A: Number of meetings eligible to attend. B: Number of meetings attended. 1. 2. All directors are invited to and regularly attend committee meetings; this table lists attendance only where a director is a member Includes one unscheduled Board meeting. of the relevant committee. Includes Board strategy sessions, workshops, site visits and special purpose committee meetings. 3. shares and interests The total number of ordinary shares on issue at the date of this report and during 2014 is 270 million shares (2013: 270 million shares). The total number of performance rights on issue at the date of this report is 2,018,111 (2013: 2,437,647). 676,620 performance rights were issued during 2014 (2013: 667,640). 1,096,156 performance rights were distributed or lapsed during the year (2013: 1,137,307). On vesting, Caltex is required to allocate one ordinary share for each performance right. For each right that vests, Caltex will purchase a share on market following vesting. non-audit services KPMG is the external auditor of Caltex Australia Limited and the Caltex Australia Group. In 2014, KPMG performed non-audit services for the Caltex Australia Group in addition to its statutory audit and review engagements for the full year and half year. KPMG received or was due to receive the following amounts for services performed for the Caltex Australia Group during the year ended 31 December 2014: • for non-audit services – total fees of $78,500 (2013: $151,400); these services included taxation services ($43,700) and other assurance services ($34,800), and • for audit services – total fees of $995,900 (2013: $919,400). The Board has received a written advice from the Audit Committee in relation to the independence of KPMG, as external auditor, for 2014. The advice was made in accordance with a resolution of the Audit Committee. The directors are satisfied that: • the provision of non-audit services to the Caltex Australia Group during the year ended 31 December 2014 by KPMG is compatible with the general standard of independence for auditors imposed by the Corporations Act, and • the provision of non-audit services during the year ended 31 December 2014 by KPMG did not compromise the auditor independence requirements of the Corporations Act for the following reasons: – the provision of non-audit services in 2014 was consistent with the Board’s policy on the provision of services by the external auditor – the non-audit services provided in 2014 are not considered to be in conflict with the role of external auditor, and – the directors are not aware of any matter relating to the provision of the non-audit services in 2014 that would impair the impartial and objective judgement of KPMG as external auditor. Caltex / 2014 annual RePORtDirectors’ Reportcontinued 57 Company secretaries The following persons served as company secretaries of Caltex Australia Limited and the Caltex Group during 2014. Peter Lim Mr Lim is Caltex’s General Manager – Legal & Corporate Affairs. In this role, he serves as Company Secretary to the Board, as Committee Secretary for the Nomination Committee, and as a company secretary for various companies in the Caltex Group. Mr Lim was appointed to the Caltex Board as Company Secretary in April 2011. Mr Lim joined Caltex in 2006 after spending a number of years as a lawyer in private practice. He was appointed to the role of Assistant General Counsel in 2009 and was later appointed Company Secretary and General Counsel (January 2012). Mr Lim holds a Bachelor of Commerce and a Bachelor of Laws from the University of New South Wales. Katie King Ms King served as Assistant Company Secretary for part of 2014, having been appointed as a company secretary of Caltex Australia Limited from 27 October 2011. She also served as Committee Secretary for the Audit Committee, the Human Resources Committee and the OHS & Environmental Risk Committee, and was a company secretary of various companies in the Caltex Group. Ms King holds a Bachelor of Commerce from the University of New South Wales, and is a member of the Governance Institute of Australia and the Institute of Chartered Accountants in Australia. Ms King resigned as Company Secretary in December 2014. John Remedios Mr Remedios served as Assistant Company Secretary for part of 2014, having been appointed as a company secretary of Caltex Australia Limited from 28 March 2014. He also served as company secretary of various companies in the Caltex Group. Mr Remedios holds Bachelor of Economics and Bachelor of Law (Hons.) degrees from the University of Sydney and is a member of the Law Society of New South Wales. Mr Remedios resigned as Company Secretary in December 2014. Nawal Silfani Ms Silfani joined Caltex in 2014 and was appointed to the Caltex Board as Company Secretary in December 2014. She serves as Committee Secretary for the Audit Committee, the Human Resources Committee and the OHS & Environmental Risk Committee, and is a company secretary of various companies in the Caltex Group. Indemnity and insurance Constitution The Constitution of Caltex Australia Limited provides that, to the extent permitted by law and subject to the restrictions in sections 199A and 199B of the Corporations Act, Caltex Australia Limited indemnifies every person who is or has been a director or secretary of the company or of a subsidiary at the request of the Board of Caltex Australia Limited. The indemnities cover against: • any liability (other than a liability for legal costs) incurred by that person as a director or secretary of Caltex Australia Limited or a subsidiary, and • reasonable legal costs incurred in defending an action for a liability or alleged liability incurred by that person as a director or secretary of Caltex Australia Limited or a subsidiary. Deeds of indemnity and insurance During the year ended 31 December 2014, Caltex Australia Limited entered into a deed of access, insurance and indemnity with John Remedios on his appointment as a company secretary. Deeds of access, insurance and indemnity have previously been entered into by Caltex Australia Limited with current and former directors and secretaries. Under the deeds, Caltex Australia Limited has agreed, in broad terms, to indemnify its directors and company secretaries (to the extent permitted by law and subject to the prohibitions in section 199A of the Corporations Act and the terms of the deed) against any and all: • liabilities incurred as an officer of Caltex Australia Limited or a Group company (but not including liabilities for legal costs covered by the legal costs indemnity), and • legal costs reasonably incurred in defending an action for a liability incurred or allegedly incurred as an officer of Caltex Australia Limited or a Group company and preparing for, attending or appearing in administrative proceedings or an investigation or inquiry by any regulatory authority or external administrator in respect of or arising out of or connected with any act. Under the deeds entered into with directors and company secretaries, Caltex Australia Limited (either itself or through a Group company) is required to maintain and pay the premium on an insurance policy covering each director and company secretary (to the extent permitted by law and subject to the prohibitions in sections 199B and 199C of the Corporations Act). In each case, the obligation continues for a period of seven years after the director or secretary (as the case may be) ceases to be an officer or, if a proceeding or an inquiry has commenced or arises within this seven year period and this has been notified to the company, a further period up to the outcome of the proceedings or inquiry or when the company is satisfied that the proceedings or inquiry will not proceed. Ms Silfani previously held similar roles in high profile ASX 100 companies and has extensive experience at a top tier Australian law firm, where she focused on corporate law and governance. Ms Silfani holds various undergraduate and postgraduate qualifications in law, corporate governance and risk, including a Master of Laws from the University of Sydney, and she is a member of the Australian Institute of Company Directors, the Australian Corporate Lawyers Association and the Governance Institute of Australia. Contract of insurance Caltex Australia Limited has paid a premium in respect of a contract insuring the directors and officers of Caltex Australia Limited against liabilities. Details of the nature of the liabilities covered or the amount of the premium paid in respect of the directors’ and officers’ liability insurance has not been disclosed as such disclosure is prohibited under the terms of the contract. 58 Rounding of amounts Caltex Australia Limited is an entity to which ASIC Class Order 98/100 (CO98/100) applies. Amounts in the 2014 Directors’ Report and the 2014 Financial Report have been rounded off to the nearest thousand dollars (unless otherwise stated) in accordance with CO98/100. The Directors’ Report is made in accordance with a resolution of the Board of Caltex Australia Limited EB Bryan AM Chairman Sydney, 23 February 2015 J Segal Managing Director & CEO Caltex / 2014 annual RePORtDirectors’ Reportcontinued Lead Auditor’s Independence Declaration under section 307C of the Corporations Act 2001 59 To: The directors of Caltex Australia Limited I declare that, to the best of my knowledge and belief, in relation to the audit for the financial year ended 31 December 2014 there have been: (i) no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and (ii) no contraventions of any applicable code of professional conduct in relation to the audit. KPMG Sydney, 23 February 2015 Greg Boydell Partner KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. 60 Directors’ Declaration The Board of Caltex Australia Limited has declared that: (a) the directors have received the declarations required by section 295A of the Corporations Act from the Managing Director & CEO and the Chief Financial Officer for the year ended 31 December 2014 (b) in the directors’ opinion, the financial statements and notes for the year ended 31 December 2014, and the Remuneration Report, are in accordance with the Corporations Act, including: (i) section 296 (compliance with Accounting Standards), and (ii) section 297 (true and fair view) (c) in the directors’ opinion, there are reasonable grounds to believe that Caltex Australia Limited will be able to pay its debts as and when they become due and payable (d) a statement of compliance with International Financial Reporting Standards has been included in note 1(a) to the financial statements, and (e) at the date of this declaration, there are reasonable grounds to believe that the companies in the Caltex Australia Group that are parties to the Deed of Cross Guarantee dated 22 December 1992 with Caltex Australia Limited (including companies added by Assumption Deed), as identified in note 22 of the 2014 Financial Report, will be able to meet any obligations or liabilities to which they are, or may become, subject by virtue of the Deed of Cross Guarantee. The Directors’ Declaration is made in accordance with a resolution of the Board of Caltex Australia Limited. EB Bryan AM Chairman Sydney, 23 February 2015 J Segal Managing Director & CEO Caltex / 2014 annual RePORt Independent Auditor’s Report to the Members of Caltex Australia Limited 61 Report on the financial report We have audited the accompanying financial report of Caltex Australia Limited (the Company), which comprises the consolidated balance sheet as at 31 December 2014, and consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated cash flow statement for the year ended on that date, notes 1 to 32 comprising a summary of significant accounting policies and other explanatory information and the directors’ declaration of the Group comprising the Company and the entities it controlled at the year’s end or from time to time during the financial year. Directors’ responsibility for the financial report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement whether due to fraud or error. In note 1, the directors also state, in accordance with Australian Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements of the Group comply with International Financial Reporting Standards. Auditor’s responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of the financial report that gives a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We performed the procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001 and Australian Accounting Standards, a true and fair view which is consistent with our understanding of the Group’s financial position and of its performance. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. Auditor’s opinion In our opinion: (a) the financial report of the Group is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Group’s financial position as at 31 December 2014 and of its performance for the year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001. (b) the financial report also complies with International Financial Reporting Standards as disclosed in note 1. Report on the remuneration report We have audited the Remuneration Report included in pages 31 to 55 of the directors’ report for the year ended 31 December 2014. The directors of the Company are responsible for the preparation and presentation of the remuneration report in accordance with Section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with auditing standards. Auditor’s opinion In our opinion, the remuneration report of Caltex Australia Limited for the year ended 31 December 2014, complies with Section 300A of the Corporations Act 2001. KPMG Sydney, 23 February 2015 Greg Boydell Partner KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. 62 Consolidated income statement for the year ended 31 December 2014 thousands of dollars Revenue Replacement cost of goods sold (excluding product duties and taxes and inventory (losses)/gains) Product duties and taxes Inventory (losses)/gains Cost of goods sold – historical cost Gross profit Other income Net foreign exchange losses Supply chain expenses Marketing expenses Other expenses Results from operating activities Finance costs Finance income net finance costs Share of net profit of entities accounted for using the equity method Profit before income tax expense Income tax expense net profit Profit/(loss) attributable to: Equity holders of the parent entity Non-controlling interest net profit Basic and diluted earnings per share: Historical cost – cents per share note 2014 2013 2 24,231,200 24,676,383 (16,951,754) (5,262,166) (515,694) (17,912,406) (5,126,439) 246,445 (22,729,614) (22,792,400) 1,501,586 1,883,983 2 3 3 23(d) 4 726 (21,730) (328,265) (779,759) (231,771) 140,787 (119,604) 8,234 (111,370) 917 30,334 (7,664) 22,670 19,931 2,739 22,670 44,881 (77,876) (242,632) (731,302) (52,880) 824,174 (97,675) 8,884 (88,791) 158 735,541 (206,784) 528,757 530,028 (1,271) 528,757 6 7.4 196.3 The consolidated income statement for the year ended 31 December 2014 includes significant losses of $160,163,000 (2013: $27,763,000 gain). Details of these items are disclosed in note 3. The consolidated income statement is to be read in conjunction with the notes to the financial statements. Caltex / 2014 annual RePORt Consolidated statement of comprehensive income for the year ended 31 December 2014 63 thousands of dollars Profit for the period note 2014 2013 22,670 528,757 other comprehensive income Items that will not be reclassified to profit or loss: Actuarial gain on defined benefit plans Tax on items that will not be reclassified to profit or loss total items that will not be reclassified to profit or loss Items that may be reclassified subsequently to profit or loss: Foreign operations – foreign currency translation differences Effective portion of changes in fair value of cash flow hedges Net change in fair value of cash flow hedges reclassified to profit or loss Tax on items that may be reclassified subsequently to profit or loss total items that may be reclassified subsequently to profit or loss other comprehensive income for the period, net of income tax total comprehensive income for the period Attributable to: Equity holders of the parent entity Non-controlling interest total comprehensive income for the period 18(b) 8,608 (2,582) 6,026 1,446 18,640 (8,299) (3,103) 8,684 14,710 37,380 34,641 2,739 37,380 30,470 (9,141) 21,329 – 88,206 (73,549) (4,397) 10,260 31,589 560,346 561,617 (1,271) 560,346 The consolidated statement of comprehensive income is to be read in conjunction with the notes to the financial statements. 64 Consolidated balance sheet as at 31 December 2014 thousands of dollars Current assets Cash and cash equivalents Receivables Inventories Current tax assets Other total current assets non-current assets Receivables Investments accounted for using the equity method Other investments Intangibles Property, plant and equipment Deferred tax assets Employee benefits Other total non-current assets total assets Current liabilities Payables Interest bearing liabilities Current tax liabilities Employee benefits Provisions total current liabilities non-current liabilities Payables Interest bearing liabilities Employee benefits Provisions total non-current liabilities total liabilities net assets equity Issued capital Treasury stock Reserves Retained earnings Total parent entity interest Non-controlling interest total equity note 2014 2013 7 8 9 7 23 10 11 12 4 18 9 13 14 18 15 13 14 18 15 16 53,122 837,672 1,118,084 56,704 33,754 199,922 988,533 2,027,857 – 35,416 2,099,336 3,251,728 3,246 24,181 3 188,188 2,363,672 442,183 6,719 1,006 3,029,198 5,128,534 1,175,515 110 – 163,200 165,075 1,503,900 7,642 692,169 59,253 332,979 1,092,043 2,595,943 2,532,591 3,048 23,863 3 144,247 2,125,617 469,890 – 2,474 2,769,142 6,020,870 1,716,399 71,404 55,361 146,210 82,783 2,072,157 5,657 870,921 90,886 384,217 1,351,681 3,423,838 2,597,032 543,415 (607) (3,498) 1,981,319 2,520,629 11,962 2,532,591 543,415 (610) (10,258) 2,055,262 2,587,809 9,223 2,597,032 The consolidated balance sheet is to be read in conjunction with the notes to the financial statements. Caltex / 2014 annual RePORt Consolidated statement of changes in equity for the year ended 31 December 2014 65 thousands of dollars Issued capital treasury stock Foreign currency translation reserve equity compen- sation reserve Hedging reserve Retained earnings non- controlling interest total total equity Balance at 1 January 2013 543,415 20 – (19,525) 11,870 1,611,905 2,147,685 11,894 2,159,579 total comprehensive income for the year Profit/(loss) for the year Total other comprehensive income total comprehensive income/(expense) for the year Foreign currency translation differences for foreign operations Own shares acquired Shares vested to employees Expense on equity settled transactions Dividends to shareholders Balance at 31 December 2013 – – – – – – – – – – – – – – – 10,260 10,260 – – – 530,028 530,028 (1,271) 528,757 21,329 31,589 – 31,589 551,357 561,617 (1,271) 560,346 – (21,434) 20,804 – – (240) – – – – – – – – – – – (20,804) – – – (240) (21,434) – – – – (240) (21,434) – 8,181 – – 8,181 (108,000) (108,000) – (1,400) 8,181 (109,400) 543,415 (610) (240) (9,265) (753) 2,055,262 2,587,809 9,223 2,597,032 Balance at 1 January 2014 543,415 (610) (240) (9,265) (753) 2,055,262 2,587,809 9,223 2,597,032 total comprehensive income for the year Profit for the year Total other comprehensive income total comprehensive income for the year Own shares acquired Shares vested to employees Expense on equity settled transactions Dividends to shareholders Balance at 31 December 2014 – – – – – – – – – – – – 1,446 7,238 1,446 7,238 – – – 19,931 19,931 2,739 22,670 6,026 14,710 – 14,710 25,957 34,641 2,739 37,380 (8,971) 8,974 – – – – – – – – – – – (8,974) – – (8,971) – 7,050 – – (99,900) 7,050 (99,900) – – – – (8,971) – 7,050 (99,900) 543,415 (607) 1,206 (2,027) (2,677) 1,981,319 2,520,629 11,962 2,532,591 The consolidated statement of changes in equity is to be read in conjunction with the notes to the financial statements. 66 Consolidated cash flow statement for the year ended 31 December 2014 thousands of dollars note 2014 2013 Cash flows from operating activities Receipts from customers Payments to suppliers, employees and governments Dividends and disbursements received Interest received Interest and other finance costs paid Income taxes paid net operating cash inflows Cash flows from investing activities Purchase of assets and liabilities through business combination Purchases of property, plant and equipment Major cyclical maintenance Purchases of intangibles Net proceeds from sale of property, plant and equipment net investing cash outflows Cash flows from financing activities Proceeds from borrowings Repayments of borrowings Repayment of finance lease principal Dividends paid to non-controlling interest Dividends paid net financing cash outflows Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 27,789,449 (26,925,657) 600 9,470 (118,338) (93,955) 28,354,086 (27,552,535) 2,550 7,807 (87,391) (116,577) 25(b) 661,569 607,940 26 (86,466) (372,116) (19,120) (23,337) 25,290 (475,749) (42,967) (481,582) (36,173) (8,992) 62,545 (507,169) 6,811,500 (7,044,020) (200) – (99,900) 4,237,000 (4,237,000) (1,378) (1,400) (108,000) (332,620) (110,778) (146,800) 199,922 25(a) 53,122 (10,007) 209,929 199,922 The consolidated cash flow statement is to be read in conjunction with the notes to the financial statements. Caltex / 2014 annual RePORt 67 Notes to the financial statements for the year ended 31 December 2014 1. significant accounting policies Caltex Australia Limited (the company) is a company limited by shares, incorporated and domiciled in Australia. The shares of Caltex Australia Limited are publicly traded on the Australian Securities Exchange. The consolidated financial statements for the year ended 31 December 2014 comprise the company and its controlled entities (together referred to as the Group) and the Group’s interest in associates and jointly controlled entities. The Group is a for-profit entity and is primarily involved in the purchase, refining, distribution and marketing of petroleum products and the operation of convenience stores. The consolidated financial statements were approved by the Board and authorised for issue on 23 February 2015. (a) Statement of compliance and basis of preparation The financial report has been prepared as a general purpose financial report and complies with the requirements of the Corporations Act, and Australian Accounting Standards (AASBs). The consolidated financial report complies with International Financial Reporting Standards (IFRSs) adopted by the International Accounting Standards Board (IASB). The consolidated financial report is prepared on the historical cost basis except for the following material items in the consolidated balance sheet: • derivative financial instruments are measured at fair value, and • the defined benefit liability is recognised as the net total of the plan assets, plus unrecognised past service cost less the present value of the defined benefit obligation. The consolidated financial report is presented in Australian dollars, which is the Group’s functional currency. The company is of a kind referred to in ASIC Class Order 98/100 dated 10 July 1998 and in accordance with that Class Order, amounts in the consolidated financial report and Directors’ Report have been rounded to the nearest thousand dollars, unless otherwise stated. The preparation of a consolidated financial report in conformity with AASBs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. These accounting policies have been consistently applied by each entity in the Group. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and future periods if the revision affects both current and future periods. Judgements made by management in the application of AASBs that have a significant effect on the consolidated financial report and estimates with a significant risk of material adjustment in the next year are discussed in note 1(c). The accounting policies set out below have been applied consistently to all periods presented in the consolidated financial report by the Group, except where stated. Changes in accounting policies The Group has adopted all the mandatory amended Accounting Standards issued that are relevant to its operations and effective for the current reporting period. Of the Accounting Standards that were amended, the following had an impact upon Caltex’s financial statements: AASB 124 Related Party Disclosures – AASB 124 was amended to remove the individual key management personnel disclosure requirements for all disclosing entities in relation to equity holdings, loans and other related party transactions. This amendment has resulted in reduced disclosures in the Group’s financial statements. (b) Basis of consolidation Subsidiaries Subsidiaries are those entities controlled by the Group. Control exists when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns from its involvement with the entity and through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Interests in associates and jointly controlled entities Associates are those entities over whose financial and operating policies the Group has significant influence, but not control. The consolidated financial statements include the Group’s share of the total recognised gains and losses of associates on an equity accounted basis, from the date that significant influence commences until the date that significant influence ceases. When the Group’s share of losses exceeds the carrying amount of the associate, the carrying amount is reduced to nil and recognition of future losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate. In the consolidated financial statements, investments in joint ventures are accounted for using equity accounting principles. Investments in joint ventures are carried at the lower of the equity accounted amount and recoverable amount. The Group’s share of the joint venture’s net profit or loss is recognised in the consolidated income statement from the date joint control commences until the date joint control ceases. Other movements in reserves are recognised directly in the consolidated reserves. Joint operations The interests of the Group in unincorporated joint operations are brought to account by recognising in its financial statements the assets it controls and the liabilities that it incurs, and the expenses it incurs and its share of income that it earns from the sale of goods or services by the joint operation. 68 1. significant accounting policies continued (b) Basis of consolidation continued Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with associates and jointly controlled entities are eliminated to the extent of the Group’s interest in the entity. Unrealised losses arising from transactions with associates and jointly controlled entities are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. Other income Profit on disposal of property assets The profit on disposal of property assets is brought to account at the date a contract of sale is settled, because it is at this time that: • the costs incurred or to be incurred in respect of the sale can be measured reliably, and • the significant risks and rewards of ownership of the property have been transferred to the buyer. Assets that are held for sale are carried at the lower of the net book value and fair value less cost to sell. (c) Accounting estimates and judgements Significant areas of estimation, uncertainty and critical judgements in applying accounting policies include: • note 1(n) contains information about the assumptions and the risk factors relating to impairment • in assessing the carrying value of property, plant and equipment, management considers long-term assumptions relating to key external factors including crude oil prices, foreign exchange rates and Singapore refiner margins. Any changes in these assumptions can have a material impact on the carrying value • in note 1(j), explanation is given of the foreign exchange, interest rate and commodity price exposures of the Group and the risk in relation to foreign exchange, interest rate and commodity price movements. Refer to note 17 for further detail • note 1(w) provides key sources of estimation, uncertainty and assumptions used in regard to estimation of provisions. Refer to note 15 for further detail, and • note 18(b) contains information about the principal actuarial assumptions used in determining pension obligations for the Group’s defined benefit plan. (d) Revenue Sale of goods Revenue from the sale of goods in the ordinary course of activities is measured at the fair value of consideration received or receivable, net of rebates, discounts and allowances. Gross sales revenue excludes amounts collected on behalf of third parties such as goods and services tax (GST). Sales revenue is recognised when the significant risks and rewards of ownership have been transferred to the customer, which is the date products are delivered to the customer. Other revenue Dividend income is recognised at the date the right to receive payment is established. Rental income from leased sites is recognised in the consolidated income statement on a straight-line basis over the term of the lease. Franchise fee income is recognised in accordance with the substance of the agreement. Royalties are recognised as they accrue in accordance with the substance of the agreement. (e) Cost of goods sold measured on a replacement cost basis Cost of goods sold measured on a replacement cost basis excludes the effect of inventory gains and losses, including the impact of exchange rate movements. Inventory gains or losses arise due to movements in the landed price of crude oil, and represent the difference between the actual historic cost of sales and the current replacement value of that inventory. The net inventory gain or loss is adjusted to reflect the impact of contractual revenue lags. (f) Product duties and taxes Product duties and taxes are included in cost of goods sold. Product duties and taxes include fuel excise, which is a cents per litre impost on products used as fuels, and the product stewardship levy, which is a cents per litre impost on all lubricant products sold. (g) Goods and services tax Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Australian Taxation Office (ATO). In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of the item of expense. Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or liability in the consolidated balance sheet. Cash flows are included in the consolidated cash flow statement on a gross basis. The GST components of cash flows arising from investing activities which are recoverable from, or payable to, the ATO are classified as operating cash flows. (h) Net finance costs Net finance costs include: • interest income that is recognised on a time proportionate basis taking into account the effective yield on the financial asset • interest payable on borrowings calculated using the effective interest rate method • finance charges in respect of finance leases • losses on hedging instruments that are recognised in profit or loss • exchange differences arising from foreign currency borrowing to the extent that they are regarded as an adjustment to interest costs, and • differences relating to the unwinding of the discount of assets and liabilities measured at amortised cost. Caltex / 2014 annual RePORtNotes to the financial statementscontinuedfor the year ended 31 December 2014 69 Finance costs are recognised as incurred unless they relate to qualifying assets. Qualifying assets are assets which take more than 12 months to get ready for their intended use or sale. In these circumstances, finance costs are capitalised to the cost of the assets. Where funds are borrowed specifically for the acquisition, construction or production of a qualifying asset, the amounts of finance costs capitalised are those incurred in relation to that borrowing, net of any interest earned on those borrowings. Where funds are borrowed generally, finance costs are capitalised using a weighted average capitalisation rate. (i) Foreign currencies Foreign currency transactions Foreign currency transactions are recorded, on initial recognition, in Australian dollars by applying the exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to Australian dollars at the foreign exchange rate applicable for that date. Foreign exchange differences arising on translation are recognised in the consolidated income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to Australian dollars at foreign exchange rates ruling at the dates the fair value was determined. Foreign operations The assets and liabilities of foreign operations are translated to Australian dollars at the foreign exchange rates applicable at the balance sheet date. The revenues and expenses of foreign operations are translated to Australian dollars at a rate that approximates the exchange rates at the dates of the transactions. Equity items are translated at historical rates. Foreign currency differences arising on translation are recognised directly in the foreign currency translation reserve (FCTR), a separate component of equity. Foreign exchange gains and losses arising from a monetary item receivable from or payable to, a foreign operation, the settlement of which is neither planned nor likely in the foreseeable future, are considered to form part of the net investment in a foreign operation and are recognised directly in equity in the FCTR. When a foreign operation is disposed of such that control, significant influence or joint control is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to profit or loss as part of the gain or loss on disposal. When the Group disposes of only part of its interest in a subsidiary that includes a foreign operation while retaining control, the relevant proportion of the cumulative amount is reattributed to non-controlling interests. When the Group disposes of only part of its investment in an associate or joint venture that includes a foreign operation while retaining significant influence or joint control, the relevant proportion of the cumulative amount is reclassified to profit or loss. (j) Derivative financial instruments The Group is subject to interest rate, foreign currency and commodity price risks. The Group may use interest rate instruments, foreign exchange instruments, cross currency swaps, crude swap contracts and finished product swap contracts to hedge these risks. The Group does not enter into derivative financial instrument transactions for trading or speculative purposes. However, financial instruments entered into to hedge an underlying exposure which does not qualify for hedge accounting are accounted for as trading instruments. Derivative financial instruments are recognised at fair value. The gain or loss on subsequent remeasurement is recognised immediately in the consolidated income statement. However, where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the item being hedged. Interest rate instruments The fair value of interest rate swap contracts is the estimated amount that the Group would receive or pay to terminate the swap at balance date taking into account current interest rates and credit adjustments. Foreign exchange contracts The fair value of forward exchange contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles as at reporting date. The fair value of foreign currency option contracts is determined using standard valuation techniques. Spot foreign exchange contracts are recorded at fair value, being the quoted market price at balance date. Crude and finished product swap contracts The fair value of crude and product swap contracts is calculated by reference to market prices for contracts with similar maturity profiles at reporting date. Hedging Cash flow hedges Interest rate instruments, forward exchange contracts, foreign currency options and crude and finished product swap contracts are cash flow hedges. Cross currency swaps may be cash flow hedges. Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or a highly probable forecast transaction, the effective part of any gain or loss on the derivative financial instrument is recognised directly in equity. When the anticipated transaction results in the recognition of a non-financial asset or non-financial liability, the cumulative gain or loss is removed from equity and included in the initial measurement of the non-financial asset or non-financial liability. If a hedge of a forecast transaction subsequently results in the recognition of a financial asset or a financial liability, the associated gains and losses that were recognised directly in equity are reclassified into profit or loss in the same period or periods during which the asset acquired or liability assumed affects profit or loss (i.e. when interest income or expense is recognised). 70 1. significant accounting policies continued (j) Derivative financial instruments continued For cash flow hedges, other than those covered by the preceding two policy statements, the associated cumulative gain or loss is removed from equity and recognised in the consolidated income statement in the same period or periods during which the hedged forecast transaction affects profit or loss. The ineffective part of any gain or loss in the carrying amount of a cash flow hedge is recognised in the consolidated income statement immediately. When a hedging instrument or hedge relationship is terminated, but the hedged transaction is still expected to occur, the cumulative gain or loss at that point remains in equity and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to take place, the cumulative unrealised gain or loss recognised in equity is recognised in the consolidated income statement immediately. Fair value hedges A change in the carrying amount of a fair value hedge is recognised in the consolidated income statement, together with the change to the carrying amount of the hedged item. The Group formally documents all relationships between hedging instruments and hedged items, as well as risk management objectives and strategies for undertaking various hedge transactions. When effectiveness ceases, hedge accounting is discontinued. Cross currency swaps The Group has entered into cross currency swaps with matched terms to the underlying US notes. These matched terms include principal, margin and payment terms. These contracts are initially designated as fair value hedges for the swap of the benchmark US and Australian interest rates (a cross currency swap excluding margins) and cash flow hedges for the swap of the fixed US and Australian margin. Initial designation documents also provide scope for interest rate swaps to be entered into over the life of the cross currency swap. On entering into the interest rate swap, the initial fair value hedge is redesignated as a combined cross currency swap and interest rate swap and accounted for as a cash flow hedge. Fair value measurement AASB 13 Fair Value Measurement requires inclusion of a measure for credit risk in the calculations of assets and liabilities recorded at fair value. This has not had a significant impact on the fair value of the Group’s assets and liabilities for the current or comparative financial year. (k) Income tax Income tax expense comprises current and deferred tax. Income tax is recognised in the consolidated income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustments to tax payable in respect of previous years. Deferred tax is recognised using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill, the initial recognition of assets or liabilities in a transaction that is not a business combination and that affect neither accounting nor taxable profit, and differences relating to investments in subsidiaries, associates and jointly controlled entities to the extent that the Group is able to control the timing of the reversal of the temporary differences and it is probable that they will not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. Tax consolidation Caltex Australia Limited, as the head company, recognises all current tax balances relating to its wholly owned Australian resident entities included in the tax-consolidated group (TCG). Current tax expense/income, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the TCG are recognised in the separate financial statements of the members of the TCG using the “group allocation” approach. Current tax expense/income is allocated based on the net profit/loss before tax of each separate member of the TCG adjusted for permanent differences and intra-group dividends, tax-effected using tax rates enacted or substantially enacted at the balance sheet date. Any current tax liabilities and deferred tax assets arising from unused tax losses of the subsidiaries are assumed by the head company in the TCG and are recognised as amounts payable to/receivable from other entities in the TCG in conjunction with any tax funding arrangement amounts. The Group recognises deferred tax assets arising from unused tax losses of the TCG to the extent that it is probable that future taxable profits of the TCG will be available against which the asset can be utilised. Caltex / 2014 annual RePORtNotes to the financial statementscontinuedfor the year ended 31 December 2014 71 Nature of tax funding arrangements and tax sharing arrangements The head entity, in conjunction with the other members of the TCG, has entered into a tax funding arrangement which sets out the funding obligations of members of the TCG in respect of tax amounts. The tax funding arrangements require payments to/from the head entity equal to the current tax liability/(asset) assumed by the head entity and any tax loss deferred tax asset assumed by the head entity, resulting in the head entity recognising an inter-entity payable/(receivable) equal in amount to the tax liability/(asset) assumed. The inter-entity payables/(receivables) are at call. Contributions to fund the current tax liabilities are payable as per the tax funding arrangement and reflect the timing of the head entity’s obligation to make payments for tax liabilities to the relevant tax authorities. The head entity, in conjunction with the other members of the TCG, has also entered into a tax sharing agreement. The tax sharing agreement provides for the determination of the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. No amounts have been recognised in the financial statements in respect of this agreement as payment of any amounts under the tax sharing agreement is considered remote. (l) Receivables Receivables are initially recognised at fair value plus any directly attributable transaction costs and subsequently measured at amortised cost less impairment losses. Impairment testing is performed at reporting date. A provision for impairment losses is raised if there is a specific indicator that an impairment loss on receivables has been incurred. An impairment loss is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised. (m) Inventories Inventories are measured at the lower of cost and net realisable value. Cost is based on the first in first out (FIFO) principle and includes direct materials, direct labour and an appropriate proportion of variable and fixed overhead expenditure incurred in acquiring the inventories and bringing them into the existing location and condition. The amount of any write-down or loss of inventory is recognised as an expense in the period it is incurred. Inventory write-downs may be reversed when net realisable value increases subsequent to initial write-down. The reversal is limited to the original write-down amount. (n) Impairment The carrying amounts of the Group’s assets, other than inventories and deferred tax assets, are reviewed at each balance sheet date to determine whether there is an indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the consolidated income statement, unless an asset has previously been revalued, in which case the impairment loss is recognised as a reversal to the extent of that previous revaluation with any excess recognised through the consolidated income statement. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to cash-generating units (group of units) and then, to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. Calculation of recoverable amount The recoverable amount of the Group’s investments in held to maturity securities and receivables carried at amortised cost is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate (i.e. the effective interest rate computed at initial recognition of these financial assets). The recoverable amount of other assets is the greater of their fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Reversals of impairment An impairment loss in respect of a held to maturity security or receivable carried at amortised cost is reversed if the subsequent increase in the recoverable amount can be related objectively to an event occurring after the impairment loss was recognised. An impairment loss in respect of goodwill is not reversed. In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. (o) Property, plant and equipment Owned assets Items of property, plant and equipment are measured at cost less accumulated depreciation and impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials, direct labour and an appropriate proportion of production overheads. The cost of property, plant and equipment includes the cost of decommissioning and restoration costs at the end of their economic lives if a present legal or constructive obligation exists. More details of how this cost is estimated and recognised is contained in note 1(w). Assessment of impairment is made in accordance with the impairment policy in note 1(n). 72 1. significant accounting policies continued (o) Property, plant and equipment continued Leased assets Leases of property, plant and equipment under which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Other leases are classified as operating leases. Finance leases Assets of the Group acquired under finance leases are capitalised and included in property, plant and equipment at the lesser of fair value or present value of the minimum lease payments with a corresponding finance lease liability. Contingent rentals are written off as an expense of the period in which they are incurred. Capitalised lease assets are depreciated over the shorter of the lease term and its useful life. Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The interest components of lease payments are charged to the consolidated income statement to reflect a constant rate of interest on the remaining balance of the liability for each accounting period. Operating leases Payments made under operating leases are charged against net profit or loss in equal instalments over the accounting period covered by the lease term, except where an alternative basis is more representative of the benefits to be derived from the leased property. Contingent rentals are recognised as an expense in the period in which they are incurred. Lease incentives received are recognised in the consolidated income statement as an integral part of the total lease expense on a straight-line basis over the lease term. Subsequent expenditure Expenditure incurred to replace a component of an item of property, plant and equipment that is accounted for separately, including cyclical maintenance, is capitalised. Other subsequent expenditure is capitalised only when it is probable that the future economic benefits embodied within the item will flow to the Group and the cost of the item can be reliably measured. All other expenditure is recognised in the consolidated income statement as an expense as incurred. Major cyclical maintenance Major cyclical maintenance expenditure is separately capitalised as an asset component to the extent that it is probable that future economic benefits, in excess of the originally assessed standard of performance, will eventuate. All other such costs are expensed as incurred. Capitalised cyclical maintenance expenditure is depreciated over the lesser of the additional useful life of the asset or the period until the next major cyclical maintenance is scheduled to occur. Depreciation Items of property, plant and equipment, including buildings and leasehold property but excluding freehold land, are depreciated using the straight-line method over their expected useful lives. Leasehold improvements are amortised over the shorter of the lease term or useful life. The depreciation rates used, in the current and prior year, for each class of asset are as follows: Freehold buildings Leasehold property Plant and equipment Leased plant and equipment 2% 2 – 10% 3 – 25% 3 – 25% Assets are depreciated from the date of acquisition or, in respect of internally constructed assets, from the time an asset is completed and held ready for use. (p) Intangible assets Goodwill Goodwill arising on the acquisition of subsidiaries is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is tested annually for impairment (see note 1(n)). In respect of equity accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment in the associate. Negative goodwill arising on an acquisition is recognised directly in the consolidated income statement. Research and development Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognised in the consolidated income statement as an expense as incurred. Expenditure on development activities, whereby research findings are applied to a plan or design for the production of new or substantially improved products and processes, is capitalised if the product or process is technically and commercially feasible, future economic benefits are probable and the Group has sufficient resources to complete development. The expenditure capitalised includes the cost of materials, direct labour and an appropriate proportion of overheads. Other development expenditure is recognised in the consolidated income statement as an expense as incurred. Capitalised development expenditure is stated at cost less accumulated amortisation and impairment losses (see note 1(n)). Other intangible assets Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and impairment losses (see note 1(n)). Subsequent expenditure Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it related. All other expenditure is expensed as incurred. Amortisation Amortisation is charged to the consolidated income statement on a straight-line basis over the estimated useful lives of intangible assets unless such lives are indefinite. Goodwill and intangible assets with an indefinite useful life are systematically tested for impairment at each balance sheet date. Other intangible assets are amortised from the date they are available for use. The estimated useful lives in the current and comparative periods are reflected by the following amortisation percentages: Caltex / 2014 annual RePORtNotes to the financial statementscontinuedfor the year ended 31 December 2014 73 Software development Software not integrated with hardware Rights and licences 5 – 20% 17 – 20% 6 – 10% (q) Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits with an original maturity of three months or less. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the consolidated cash flow statement. (r) Payables Payables are recognised for amounts to be paid in the future for goods and services received, whether or not billed to the Group. Trade accounts payable are normally settled within 30 days. Payables are initially recognised at fair value less any directly attributable transaction costs and subsequently measured at amortised cost. (s) Interest bearing liabilities Interest bearing bank loans Interest bearing bank loans are recognised when issued at fair value, less transaction costs, using the amortised cost method. Any difference between the amortised cost and the principal value is recognised in the consolidated income statement over the period of the interest bearing liability on an effective interest basis. Domestic medium term and subordinated notes These notes are recognised when issued at fair value, less transaction costs, using the amortised cost method. Any difference between the amortised cost and the principal value is recognised in the consolidated income statement over the period of the interest bearing liability on an effective interest basis. US notes US notes hedged by cross currency swaps are initially recognised at fair value less attributable transaction costs. Subsequent to initial recognition, these US notes are accounted for using fair value hedge accounting to the extent that an effective hedge exists (see note 1(j)). Where cross currency swaps are redesignated as cash flow hedges, the hedged US notes are no longer subject to a fair value adjustment. Any accumulated gain/loss capitalised prior to the redesignation will be amortised over the remaining life of the US notes on an effective interest basis. US notes issued in Australian dollars are recognised when issued at fair value, less transaction costs, using the amortised cost method. Any difference between the amortised cost and the principal value is recognised in the consolidated income statement over the period of the interest bearing liability on an effective interest basis. (t) Employee benefits Wages and salaries The provision for employee benefits to wages and salaries represents the amount which the Group has a present obligation to pay resulting from employees’ services provided up to the balance date. Annual leave, long service leave and retirement benefits The provisions for employee benefits to annual leave, long service leave and retirement benefits which are expected to be settled within 12 months represent the undiscounted amount of the estimated future cash outflows to be made by the employer resulting from employees’ services provided up to the balance date. Provisions for employee benefits which are not expected to be settled within 12 months are calculated using expected future increases in wage and salary rates, including related oncosts, and expected settlement dates based on turnover history and are discounted using the rates attaching to national government securities at balance date, which most closely match the terms of maturity of the related liabilities. Termination benefits Termination benefits are recognised as an expense when the Group is demonstrably committed to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognised as an expense if the Group has made an offer of voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. If benefits are payable more than 12 months after the reporting period, then they are discounted to their present value. Superannuation The Group contributes to several defined contribution and defined benefit superannuation plans. Defined contribution plans Obligations for contributions to defined contribution plans are recognised as an expense in the consolidated income statement as incurred. Defined benefit plans The Group’s net obligation in respect of defined benefit plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine the present value, and the fair value of any plan assets is deducted. The discount rate is the yield at the beginning of the annual reporting period on government bonds that have maturity dates approximating the terms of the Group’s obligations. The calculation is performed by a qualified actuary using the projected unit credit method. Changes in the net defined benefit liability, including all actuarial gains and losses that arise in calculating the Group’s obligation in respect of the plan, are recognised in other comprehensive income when they occur. All other expenses relating to the defined benefit plans are recognised as an expense in the consolidated income statement. The Group recognises gains and losses on the curtailment or settlement of a defined benefit plan when the curtailment or settlement occurs. When the calculation results in plan assets exceeding liabilities to the Group, the recognised asset is limited to the present value of any future refunds from the plan or reductions in future contributions to the plan. 74 1. significant accounting policies continued (u) Share based payments The Group provides benefits to senior executives in the form of share based payment transactions, whereby senior executives render services in exchange for shares or rights over shares (equity settled transactions). The cost of the equity settled transactions with employees is measured by reference to the fair value at the date at which they are granted. The cost of equity settled transactions is recognised as an expense over the specified service period and ending on the date on which the relevant employees become fully entitled to the award (vesting date) with a corresponding increase in equity. The cumulative expense recognised for equity settled transactions at each reporting date until vesting date reflects the extent to which the vesting period has expired. In the Group’s financial statements the transactions of the company sponsored employee share plan trust are treated as being executed directly by the Group (an external third party acts as the Group’s agent). Accordingly, shares held by the third party are recognised as treasury stock and deducted from equity. The grant date fair value of share based payment awards granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period that the employees become unconditionally entitled to the awards. The amount recognised as an expense is adjusted to reflect the number of awards for which the related service and non- market performance conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that meet the related service and non-market performance conditions at the vesting date. For share based payment awards with non-vesting conditions, the grant date fair value of the share based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes. (v) Environmental costs Environmental costs related to known environmental obligations under existing law are accrued when they can be reasonably estimated. Accruals are based on best available information and are adjusted as further information develops or circumstances change. Environmental provisions are accounted for in accordance with the provisions accounting policy. Costs of compliance with environmental regulations and ongoing maintenance and monitoring are expensed as incurred. Recoveries from third parties are recorded as assets when their realisation is virtually certain. (w) Provisions A provision is recognised when there is a present legal or constructive obligation as a result of a past event that can be measured reliably and it is probable that a future sacrifice of economic benefits will be required to settle the obligation, the timing or amount of which is uncertain. If the effect is material, a provision is determined by discounting the expected future cash flows (adjusted for expected future risks) required to settle the obligation at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. Subsequent accretion to the amount of a provision due to unwinding of the discount is recognised as a finance cost. Estimates of the amount of an obligation are based on current legal and constructive obligations, technology and price levels. Actual outflows can differ from estimates due to changes in laws, regulations, public expectations, technology, prices and conditions and can take place many years in the future. The carrying amounts of provisions and liabilities are regularly reviewed and adjusted to take account of such change. In general, the further in the future that a cash outflow for a liability is expected to occur, the greater the degree of uncertainty around the amount and timing of that cash outflow. Examples of cash outflows that are expected to occur a number of years in the future and, as a result, about which there is uncertainty of the amounts involved, include asset decommissioning and restoration obligations and employee pension obligations. A change in the estimate of a recognised provision or liability would impact the consolidated income statement, with the exception of decommissioning and certain restoration costs that relate to the initial construction of an asset, which would be accounted for on a prospective basis. Restoration and remediation Provisions relating to current and future restoration and remediation activities are recognised as liabilities when a legal or constructive obligation arises. The provision is the best estimate of the present value of the expenditure to settle the obligation at the reporting date. These costs are reviewed annually and any changes are reflected in the provision at the end of the reporting period through the consolidated income statement. The ultimate cost of restoration and remediation is uncertain and cost estimates can vary in response to many factors including changes to the relevant legal and environmental requirements, the emergence of new techniques or experience at other sites and uncertainty as to the remaining life of existing sites. Asset retirements Costs for the future dismantling and removal of assets, and restoration of the site on which the assets are located, are provided for and capitalised upon initial construction of the asset, where an obligation to incur such costs arises. The present value of the expected future cash flows required to settle these obligations is capitalised and depreciated over the useful life of the asset. Subsequent accretion to the amount of a provision due to unwinding of the discount is recognised as a finance cost. A change in estimate of the provision is added to or deducted from the cost of the related asset in the period of the change, to the extent that any amount of deduction does not exceed the carrying amount of the asset. Any deduction in excess of the carrying amount is recognised in the consolidated income statement immediately. If an adjustment results in an addition to the cost of the related asset, consideration will be given to whether an indication of impairment exists and the impairment policy will be applied. Caltex / 2014 annual RePORtNotes to the financial statementscontinuedfor the year ended 31 December 2014 75 (y) Carbon policy The Group accounts for free carbon permits received under the Clean Energy Act 2011 at nominal value, i.e. nil value. These permits are surrendered to satisfy the Group’s emissions liability each period. If the Group’s carbon emissions are under/(over) the carbon permits received, other revenue/ (other expenses) is recognised at fair value. (z) New standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after 1 January 2015, and have not been applied in preparing these consolidated financial statements. None of these are expected to have a significant effect on the consolidated financial statements of the Group, except for: • AASB 9 Financial Instruments, which becomes mandatory for the Group’s 2018 consolidated financial statements and could change the classification and measurement of financial assets and liabilities. The Group does not plan to adopt this standard early and the extent of the impact has not been determined, and • AASB 15 Revenue from Contracts with Customers, which becomes mandatory for the Group’s 2017 consolidated financial statements and could change the basis for the recognition of revenue. The Group does not plan to adopt this standard early and the extent of the impact has not been determined. Dividends A provision for dividends payable is recognised in the reporting period in which the dividends are declared, for the entire undistributed amount. Restructuring and employee termination benefits Provisions for restructuring or termination benefits are only recognised when a detailed plan has been approved and the restructuring or termination benefits have either commenced or been publicly announced, or when firm contracts related to the restructuring or termination benefits have been entered into. The liabilities for termination benefits have been included in the provision for employee and director benefits. (x) Segment reporting The Group determines and presents operating segments based on the information that internally is provided to the Group’s chief operating decision maker. An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components. All operating segments’ operating results are regularly reviewed by the Group’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance and for which discrete financial information is available. Segment results that are reported to the chief operating decision maker include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Inter-entity sales are recognised based on an internally set transfer price. Sales between segments are based on arm’s length principles appropriate to reflect prevailing market pricing structures at that time. Where possible, relevant Import Parity Pricing is used to determine arm’s length pricing between the two segments. Revenue from external parties reported to the chief operating decision maker is measured in a manner consistent with that in the consolidated income statement. For the purposes of reporting to the chief operating decision maker, non-fuel income is included on a net basis and is not presented in gross revenue. Income taxes and net financial income are dealt with at a Group level and not within the reportable segments. The performance of each reportable segment is measured based on segment replacement cost of sales operating profit before interest and income tax excluding significant items. These measurement bases exclude the impact of the rise or fall in oil prices (a key external factor) and present a clearer picture of the reportable segments’ underlying business performance. Segment replacement cost of sales operating profit before interest and income tax excluding significant items is measured as management believes that such information is most useful in evaluating the performance of the differing internal business units relative to each other, and other like business units in the industry. Segment replacement cost operating profit excluding significant items is also used to assess the performance of each business unit against internal performance measures. 76 2. Revenue and other income thousands of dollars Revenue Sale of goods Other revenue Rental income Royalties and franchise income Transaction and merchant fees Other Total other revenue total revenue other income Net gain on sale of property, plant and equipment 3. Costs and expenses thousands of dollars Interest expense Finance charges on capitalised leases Unwinding of discount Less: capitalised finance costs Finance costs Finance income Net finance costs Depreciation and amortisation Depreciation of: Buildings Plant and equipment Amortisation of: Leasehold property Leased plant and equipment Intangibles Total depreciation and amortisation selected expenses Total personnel expenses 2014 2013 23,878,180 24,352,188 71,671 106,617 99,403 75,329 353,020 64,232 108,000 86,351 65,612 324,195 24,231,200 24,676,383 726 44,881 2014 2013 108,793 29 25,475 (14,693) 119,604 (8,234) 111,370 12,993 162,179 175,172 9,704 243 17,866 27,813 96,924 43 7,946 (7,238) 97,675 (8,884) 88,791 10,200 136,437 146,637 8,052 390 10,538 18,980 202,985 165,617 396,745 425,148 Significant items During 2014, the Group incurred significant items before tax totalling a loss of $160,163,000 that have been recognised in the income statement. These items relate to the Group cost and efficiency review project and include consulting fees ($25,065,000), redundancy costs ($53,814,000), contract cancellation costs ($12,000,000), interest expense ($20,311,000), foreign exchange gains ($4,755,000) and accelerated depreciation ($22,773,000) and environmental liabilities ($30,955,000). During 2013, the Group incurred significant items totalling a gain of $27,763,000, that have been recognised in the income statement. These items relate to a gain on the sale of the bitumen business, net of costs relating to acquisitions and disposals ($38,766,000) and the net adjustment to provisions ($11,003,000) relating to the closure of the Kurnell refinery. Of this total $160,163,000 significant items (2013: $27,763,000), $144,607,000 is included in Other expenses (2013: $3,845,000), $20,311,000 is included in Finance costs (2013: nil) and $4,755,000 is included in Foreign exchange gains (2013: nil). In addition to the above, 2013 significant items of $42,611,000 were included in Other income (2014: nil) and $11,003,000 in Supply Chain expenses (2014: nil). Caltex / 2014 annual RePORtNotes to the financial statementscontinuedfor the year ended 31 December 2014 4. Income tax expense (a) Recognised in the income statement thousands of dollars Current tax expense: Current year Adjustments for prior years Deferred tax benefit: Origination and reversal of temporary differences Benefit of tax losses recognised total income tax expense in the income statement (b) Reconciliation between income tax expense and profit before income tax expense Profit before income tax expense Income tax using the domestic corporate tax rate of 30% (2013: 30%) Effect of tax rates in foreign jurisdictions Increase/(decrease) in income tax expense due to: Imputation gross-up on dividends received Share of net profit of associated entities Capital gains tax Capital tax losses utilised for which no deferred tax asset was recognised Research and development allowances Franking credits on dividends received Share based payments Other Income tax over provided in prior years Total income tax expense in the income statement (c) Deferred tax recognised directly in equity Related to actuarial gains Related to cash flow hedges Related to interest rate swaps 77 2014 2013 (17,492) (618) (18,110) 102,212 (76,438) 25,774 7,664 164,726 (2,650) 162,076 44,708 – 44,708 206,784 30,334 735,541 9,100 220,662 (885) (319) – (275) – (2,305) (333) – (39) 3,019 (618) 7,664 (2,582) (2,641) (462) (5,685) 193 (47) 355 (8,286) (500) (193) (4,041) 1,610 (2,650) 206,784 (9,141) (3,208) (1,189) (13,538) 78 4. Income tax expense continued (d) Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: Assets LIABILItIes net thousands of dollars 2014 2013 2014 2013 2014 2013 Receivables Inventories Property, plant and equipment and intangibles Payables Interest bearing liabilities Provisions Tax value of recognised tax losses Other 1,853 – 124,882 13,539 8,257 221,032 76,438 – 1,558 – 252,025 9,660 3,973 211,229 – – net tax assets/(liabilities) 446,001 478,445 – (1,507) – – – – – (2,311) (3,818) – (4,818) – – – – – (3,737) 1,853 (1,507) 124,882 13,539 8,257 221,032 76,438 (2,311) 1,558 (4,818) 252,025 9,660 3,973 211,229 – (3,737) (8,555) 442,183 469,890 (e) Unrecognised deferred tax assets Deferred tax assets have not been recognised in respect of the following items: thousands of dollars Capital tax losses 2014 2013 148,958 150,203 Deferred tax assets have not been recognised in respect of these items because it is not probable that future taxable profit will be available against which these benefits can be utilised by the Group. (f) Movement in temporary differences during the year thousands of dollars Receivables Inventories Property, plant and equipment and intangibles Payables Interest bearing liabilities Provisions Tax value of recognised tax losses Other thousands of dollars Receivables Inventories Property, plant and equipment and intangibles Payables Interest bearing liabilities Provisions Other Balance at 1 jan 14 Recognised in income Recognised in equity Acquired in business combination Balance at 31 Dec 14 1,558 (4,818) 252,025 9,660 3,973 211,229 – (3,737) 469,890 295 3,311 (128,371) 3,879 7,387 9,861 76,438 1,426 (25,774) – – – – (3,103) (2,582) – – (5,685) – – 1,228 – – 2,524 – – 3,752 1,853 (1,507) 124,882 13,539 8,257 221,032 76,438 (2,311) 442,183 Balance at 1 jan 13 Recognised in income Recognised in equity Balance at 31 Dec 13 1,584 (1,814) 286,192 3,821 8,746 231,156 (1,549) 528,136 (26) (3,004) (34,167) 5,839 (376) (10,786) (2,188) (44,708) – – – – (4,397) (9,141) – (13,538) 1,558 (4,818) 252,025 9,660 3,973 211,229 (3,737) 469,890 Caltex / 2014 annual RePORtNotes to the financial statementscontinuedfor the year ended 31 December 2014 79 5. Dividends (a) Dividends declared or paid Dividends recognised in the current year by the company are: 2014 Interim 2014 Final 2013 Total amount 2013 Interim 2013 Final 2012 Total amount Date of payment Franked/ unfranked Cents per share 1 october 2014 3 April 2014 Franked Franked 2 October 2013 4 April 2013 Franked Franked 20 17 37 17 23 40 total amount $’000 54,000 45,900 99,900 45,900 62,100 108,000 The dividends paid during 2014 were fully franked at the rate of 30%. Subsequent events Since 31 December 2014, the directors declared the following dividend. The dividend has not been provided for and there are no income tax consequences for the Group in relation to 2014. Final 2014 2 April 2015 Franked 50 135,000 The financial effect of this final dividend has not been reflected in the financial statements for the year ended 31 December 2014 and will be recognised in subsequent financial reports. thousands of dollars 2014 2013 (b) Dividend franking account 30% franking credits available to shareholders of Caltex Australia Limited for subsequent financial years 1,125,403 1,187,013 The ability to utilise the franking credits is dependent upon there being sufficient available profits to declare dividends. The impact on the dividend franking account of dividends proposed after the balance sheet date but not recognised as a liability, is to reduce the balance by $57,857,143 (2013: $19,671,429). In accordance with the tax consolidation legislation, Caltex Australia Limited as the head entity in the tax-consolidated group has also assumed the benefit of $1,125,403,000 (2013: $1,187,013,000) in franking credits. 6. Basic and diluted earnings per share Historical cost – cents per share Replacement cost of sales operating profit (RCOP) excluding significant items – cents per share 2014 7.4 182.6 2013 196.3 122.8 The calculation of historical cost basic earnings per share for the year ended 31 December 2014 was based on the net profit attributable to ordinary shareholders of the parent entity of $19,931,000 (2013: $530,028,000) and a weighted average number of ordinary shares outstanding during the year ended 31 December 2014 of 270 million shares (2013: 270 million shares). The calculation of RCOP excluding significant items basic earnings per share for the year ended 31 December 2014 was based on the net RCOP profit attributable to ordinary shareholders of the parent entity and a weighted average number of ordinary shares outstanding as disclosed during the year ended 31 December 2014 of 270 million shares (2013: 270 million shares). RCOP is calculated by adjusting the statutory profit for significant items and inventory gains and losses as follows: 80 6. Basic and diluted earnings per share continued thousands of dollars Net profit after tax attributable to equity holders of the parent entity Adjust: Significant items losses/(gains) after tax Adjust: Inventory losses/(gains) after tax Replacement cost of sales operating profit (RCOP) excluding significant items after tax 2014 2013 19,931 112,114 360,986 493,031 530,028 (25,904) (172,512) 331,612 There are no dilutive potential ordinary shares, and therefore diluted earnings per share equals basic earnings per share. 7. Receivables thousands of dollars Current Trade debtors Allowance for impairment Associated entities Other related entities Other debtors non-current Other loans 2014 2013 758,165 (5,951) 752,214 29,903 1,415 54,140 837,672 901,494 (4,809) 896,685 35,217 1,966 54,665 988,533 3,246 3,048 (a) Impaired receivables As at 31 December 2014, current trade receivables of the Group with a nominal value of $5,951,000 (2013: $4,809,000) were impaired. The individually impaired receivables relate to a variety of customers who are in financial difficulties. No collateral is held over these impaired receivables. As at 31 December 2014, trade receivables of $68,795,000 (2013: $35,776,000) were past due but not impaired. These relate to a number of customers for whom there is no recent history of default. The ageing analysis of receivables past due but not impaired is as follows: thousands of dollars Past due 0 – 30 days Past due 31 – 60 days Past due greater than 60 days 2014 2013 62,276 3,404 3,115 68,795 29,871 2,849 3,056 35,776 Caltex / 2014 annual RePORtNotes to the financial statementscontinuedfor the year ended 31 December 2014 81 Movements in the allowance for impairment of receivables are as follows: thousands of dollars At 1 January Provision for impairment recognised during the year Receivables written off during the year as uncollectible At 31 December 2014 2013 4,809 3,323 (2,181) 5,951 4,736 2,216 (2,143) 4,809 The creation and release of the provision for impaired receivables has been included in Other expenses in the income statement. Amounts charged to the allowance account are generally written off when there is no expectation of recovering additional cash. The other classes within trade and other receivables do not contain impaired assets and are not past due. Based on the credit history of these other classes, it is expected that these amounts will be received when due. There are no receivables that have had renegotiated terms that would otherwise, without that renegotiation, have been past due or impaired. (b) Foreign exchange and interest rate risk Refer to note 17 for exposures to foreign exchange and interest rate risk relating to trade and other receivables. (c) Fair value and credit risk Due to the short term nature of these receivables, their carrying value is assumed to approximate their fair value. Maximum exposure to credit risk at the reporting date is the fair value of each class of receivables mentioned above. Refer to note 17 for further details. 8. Inventories thousands of dollars Crude oil and raw materials Inventory in process Finished goods Materials and supplies 2014 2013 170,715 114,959 816,374 16,036 1,118,084 882,270 128,496 1,000,990 16,101 2,027,857 Inventories held at 31 December 2014 were written down to their net realisable value. The amount of the write-down was $117,000,000 (2013: nil) and is included in inventory losses in the income statement. 9. other assets thousands of dollars Current Prepayments non-current Other 10. other investments thousands of dollars Investment in other entities 2014 2013 33,754 35,416 1,006 2,474 2014 2013 3 3 82 11. Intangibles thousands of dollars Cost At 1 January 2014 Acquisitions through business combinations Additions Disposals Balance at 31 December 2014 Cost At 1 January 2013 Acquisitions through business combinations Additions Disposals Balance at 31 December 2013 Amortisation At 1 January 2014 Amortisation for the year Disposals Balance at 31 December 2014 Amortisation At 1 January 2013 Amortisation for the year Balance at 31 December 2013 Carrying amount At 1 January 2014 At 31 December 2014 Carrying amount At 1 January 2013 At 31 December 2013 note Goodwill Rights and licences software total 26 26 113,553 29,573 – – 143,126 84,615 28,938 – – 113,553 (16,391) – – (16,391) (16,391) – (16,391) 97,162 126,735 68,224 97,162 25,844 8,101 – (2,624) 31,321 16,791 8,797 262 (6) 25,844 (8,327) (3,859) 2,000 (10,186) (6,098) (2,229) (8,327) 17,517 21,135 10,693 17,517 87,471 – 23,337 (10,883) 99,925 78,741 – 8,730 – 87,471 (57,903) (14,007) 12,303 (59,607) (49,594) (8,309) (57,903) 29,568 40,318 29,147 29,568 226,868 37,674 23,337 (13,507) 274,372 180,147 37,735 8,992 (6) 226,868 (82,621) (17,866) 14,303 (86,184) (72,083) (10,538) (82,621) 144,247 188,188 108,064 144,247 Amortisation The amortisation charge of $17,866,000 (2013: $10,538,000) is recognised in Supply chain expenses, Marketing expenses and Other expenses in the income statement. Impairment tests for cash-generating units containing goodwill Goodwill acquired through business combinations has been tested for impairment as follows: thousands of dollars Distributor businesses 2014 2013 126,735 97,162 Distributor businesses The recoverable amount of goodwill with distributor businesses has been determined based on a value in use calculation. This calculation uses pre-tax cash flow projections based on an extrapolation of the year end cash flows and available budget information. The cash flows have been discounted using a pre-tax discount rate of 14.6% p.a. The cash flows have been extrapolated using a constant growth rate of 2.5%. The growth rates used do not exceed the long term growth rate for the industry. There were no impairment losses recognised in relation to the distributor businesses during the year ended 31 December 2014 (2013: nil). Caltex / 2014 annual RePORtNotes to the financial statementscontinuedfor the year ended 31 December 2014 83 Key assumptions used in value in use calculations key assumption Cash flow Basis for determining value in use assigned to key assumption Earnings before interest, tax, depreciation and amortisation (EBITDA) Estimated long term average growth rate Discount period Discount rate 2.5%, as considered appropriate for each distributor business based on past experience Represents the longest remaining life of assets acquired The risk specific to the asset The values assigned to the key assumptions represent management’s assessment of future trends in the petroleum industry and are based on both external sources and internal sources (historic data). Management believes that any reasonably possible change in the key assumptions on which the recoverable amount is based would not cause the carrying amount of goodwill recorded to exceed its recoverable amount. 12. Property, plant and equipment thousands of dollars Freehold land At cost Accumulated impairment losses net carrying amount Buildings At cost Accumulated depreciation and impairment losses net carrying amount Leasehold property At cost Accumulated amortisation net carrying amount Plant and equipment At cost Accumulated depreciation and impairment losses net carrying amount Leased plant and equipment At capitalised cost Accumulated amortisation net carrying amount Capital projects in progress At cost Accumulated impairment losses net carrying amount total net carrying amount 2014 2013 384,276 (37,284) 346,992 365,664 (37,284) 328,380 558,200 (231,720) 326,480 478,768 (227,086) 251,682 158,895 (84,133) 74,762 140,408 (77,953) 62,455 4,724,400 (3,663,930) 4,588,469 (3,606,357) 1,060,470 982,112 – – – 571,088 (16,120) 554,968 25,012 (24,769) 243 539,210 (38,465) 500,745 2,363,672 2,125,617 84 12. Property, plant and equipment continued Reconciliations Reconciliations of the carrying amounts for each class of property, plant and equipment are set out below: thousands of dollars 2014 2013 Freehold land Carrying amount at the beginning of the year Additions Acquisition through business combination Disposals Carrying amount at the end of the year Buildings Carrying amount at the beginning of the year Additions Acquisition through business combination Disposals Transfers from capital projects in progress Depreciation Carrying amount at the end of the year Leasehold property Carrying amount at the beginning of the year Additions Disposals Transfers from capital projects in progress Amortisation Carrying amount at the end of the year Plant and equipment Carrying amount at the beginning of the year Additions Acquisition through business combination Disposals Transfers to leased plant and equipment Transfers from capital projects in progress Depreciation Carrying amount at the end of the year Leased plant and equipment Carrying amount at the beginning of the year Transfers from plant and equipment Amortisation Carrying amount at the end of the year Capital projects in progress Carrying amount at the beginning of the year Additions Borrowing costs capitalised Transfers to buildings, leased property, plant and equipment Carrying amount at the end of the year 328,380 12,187 11,830 (5,405) 346,992 251,682 1,529 13,824 (1,664) 74,102 (12,993) 326,480 62,455 304 (38) 21,745 (9,704) 74,762 982,112 17,965 16,548 (18,253) – 224,277 (162,179) 1,060,470 243 – (243) – 328,185 3,085 – (2,890) 328,380 213,674 247 – (1,102) 49,063 (10,200) 251,682 51,514 52 (156) 19,097 (8,052) 62,455 848,320 40,248 2,265 (13,516) (311) 241,543 (136,437) 982,112 322 311 (390) 243 500,745 359,654 14,693 (320,124) 554,968 327,900 475,310 7,238 (309,703) 500,745 Caltex / 2014 annual RePORtNotes to the financial statementscontinuedfor the year ended 31 December 2014 13. Payables thousands of dollars Current Trade creditors – unsecured* – Related entities – Other corporations and persons Other creditors and accrued expenses non-current Other creditors and accrued expenses * Trade creditors are non-interest bearing and are normally settled on between 30 and 60 day terms. 14. Interest bearing liabilities thousands of dollars Current – unsecured US notes (i) (ii) Hedge payable (ii) Lease liabilities (iii) non-current – unsecured Domestic medium term notes (i) Subordinated note (i) US notes (i) (ii) Hedge payable (i) (ii) Lease liabilities (iii) 85 2014 2013 126,271 484,128 565,116 524,831 670,660 520,908 1,175,515 1,716,399 7,642 5,657 2014 2013 – – 110 110 149,667 541,470 – – 1,032 692,169 56,216 15,041 147 71,404 149,583 538,345 147,341 35,652 – 870,921 This note provides information about the contractual terms of Caltex’s interest bearing loans and other liabilities. For more information about Caltex’s exposure to interest rate and foreign currency risk, see note 17. (i) (ii) The domestic medium term notes, subordinated notes and the US notes are provided by a number of capital markets. The domestic medium term notes and subordinated notes are denominated in Australian dollars, and US notes are denominated in US dollars. Under the note agreements, the Caltex Australia Group is required to comply with certain financial covenants. There is no security or demand placed on the notes. The domestic medium term notes will mature in November 2018, totalling $149,667,000. The subordinated note has a maturity date of September 2037, with the option for redemption in September 2017, totalling $541,470,000. The US notes and hedge payable matured in April 2014 (2013: $71,257,000). On 1 October 2014, the April 2016 US Notes were repurchased and the associated hedge payable was closed out (2013: $182,993,000). (iii) Refer to note 19 for details on the timing and amount of future lease payments. 86 15. Provisions thousands of dollars Balance at 1 January 2014 Assumed in a business combination Provisions made during the year Provisions used during the year Discounting movement Balance at 31 December 2014 Current Non-current site remediation & dismantling other total 448,969 1,270 49,302 (41,813) 23,853 481,581 151,923 329,658 481,581 18,031 – 2,569 (4,127) – 16,473 13,152 3,321 16,473 467,000 1,270 51,871 (45,940) 23,853 498,054 165,075 332,979 498,054 Site remediation & dismantling Provision is made for the remediation of oil refining, distribution and marketing sites, and in relation to the Kurnell conversion project. Significant judgements and estimates are involved in forming expectations of future activities and the amount and timing of expenditure associated with the environment remediation process. Those expectations are formed based on existing environment and regulatory requirements or, if more stringent, Caltex’s environmental policies which give rise to a constructive obligation. The restoration and remediation provision, whilst representing Caltex’s best estimate, remains subject to a level of uncertainty in relation to the timing and amount of each component of expenditure in future periods. Adjustments to the estimated amount and timing of future expenditures are a normal occurrence in light of significant judgements and estimates involved. Factors influencing those potential changes include revisions to lives of operations, developments in technology, regulatory requirements and environmental management strategies, and changes in the estimated extent and costs of anticipated activities. Other Other includes legal, insurance and other provisions. 16. Issued capital thousands of dollars ordinary shares Issued capital 270 million ordinary shares, fully paid 2014 2013 543,415 543,415 Holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at shareholders’ meetings. In the event of the winding up of Caltex Australia Limited, ordinary shareholders rank after all creditors and are fully entitled to any proceeds of liquidation. Caltex grants performance rights to senior executives (refer to the Directors’ Report on pages 17 to 61 for further detail). For each right that vests, Caltex will purchase a share on market following vesting. Caltex / 2014 annual RePORtNotes to the financial statementscontinuedfor the year ended 31 December 2014 87 17. Financial instruments The Group’s activities expose it to a variety of financial risks: market risk (including foreign exchange, interest rate and commodity price), as well as credit and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance. The Group uses a range of derivative financial instruments to hedge market exposures. The Group uses sensitivity analysis in the case of foreign exchange, interest rate and commodity price risk. The Group enters into derivative transactions, principally interest rate swaps, foreign currency exchange contracts (forwards, swaps or options), and commodity price swaps. The purpose is to manage the market risks arising from the Group’s operations and its sources of finance. It is the Group’s policy that no discretionary trading in financial instruments shall be undertaken. The Group’s accounting policies in relation to derivatives are set out in note 1. Risk management is carried out by Group Treasury for market risk, liquidity risk, financial institutional credit risk and capital management. Risk management activities in respect to customer credit risk are carried out by the Group’s Credit Risk department. Both Group Treasury and Credit Risk operate under policies approved by the Board of directors. Group Treasury and Credit Risk identify, evaluate and monitor the financial risks in close co-operation with the Group’s operating units. The Group finances its operations through a variety of financial instruments including bank loans, domestic medium term notes, subordinated notes, US notes, and finance leases. Surplus funds are invested in cash and short term deposits. The Group has various other financial instruments such as trade debtors and trade creditors, which arise directly from its operations. The magnitude of each type of financial risk that has arisen over the year is discussed below. (a) Interest rate risk Interest rate instruments The Group enters into fixed interest rate instruments to manage cash flow risks associated with the interest rates on borrowings that are floating. Interest rate instruments allow the Group to swap floating rate borrowings into fixed rates. Maturities of swap contracts are principally between one and five years. Each contract involves periodic payment or receipt of the net amount of interest. At 31 December 2014, the fixed rates varied from 3.4% p.a. to 5.3% p.a. (2013: 3.4% p.a. to 5.3% p.a.), a weighted average rate of 4.3% p.a. (2013: 4.3% p.a.). The floating rates were at bank bill rates. The Group had combined cross currency swap and interest rate swap contracts classified as cash flow hedges and cross currency swap contracts (excluding margins) classified as fair value hedges and US and Australian margins classified as cash flow hedges due on 30 April 2014 and 30 April 2016. These contracts were to manage interest rate and currency risks on US dollar denominated borrowings. As US denominated borrowings either matured or were repurchased on 1 October 2014, all interest rate swaps and cross currency swaps associated with these borrowings have either matured or been repurchased. The net fair value of interest rate swap contracts at 31 December 2014 was $5,124,000 loss (2013: $6,595,000 loss). The Group classifies qualifying interest rate swap contracts as cash flow hedges. Interest rate sensitivity analysis At 31 December 2014, if interest rates had changed by -/+1% from the year end rates, with all other variables held constant, net profit for the year for the Group and equity would have changed by: Dollars Interest rates decrease 1% Interest rates increase 1% 2014 2013 net profit equity net profit equity 3,500,000 (3,500,000) (1,900,000) 1,800,000 2,000,000 (2,000,000) (4,100,000) 3,900,000 88 17. Financial instruments continued (a) Interest rate risk continued Interest rate risk exposure The Group’s exposure to interest rate risk and the effective weighted average interest rate for classes of financial assets and liabilities are set out as follows: tHoUsAnDs oF DoLLARs FIXeD InteRest MAtURInG In: 31 December 2014 Financial assets Cash at bank and on hand Financial liabilities Domestic medium term notes Subordinated note Lease liabilities Floating interest rate Less than one year Between one and five years Greater than five years non- interest bearing effective interest rate p.a. total note 53,122 53,122 14 14 14 – 541,470 – 541,470 – – – – 110 110 – – 149,667 – 1,032 150,699 – – – – – – – – – – – – 53,122 53,122 2.2% 149,667 541,470 1,142 692,279 7.3% 6.9% 10.0% tHoUsAnDs oF DoLLARs FIXeD InteRest MAtURInG In: 31 December 2013 Financial assets Cash at bank and on hand Financial liabilities US notes Domestic medium term notes Subordinated note Hedge payable Lease liabilities Floating interest rate Less than one year Between one and five years Greater than five years non- interest bearing effective interest rate p.a. total note 199,922 199,922 147,341 – 538,345 35,652 – 14 14 14 14 14 – – – – 56,216 – – 15,041 147 – 149,583 – – – 721,338 71,404 149,583 – – – – – – – – – – – – – – – – 199,922 199,922 203,557 149,583 538,345 50,693 147 942,325 3.1% 9.9% 7.3% 7.1% 9.9% 14.0% Interest on financial instruments classified as fixed rate is fixed until maturity of the instrument. (b) Foreign exchange risk The Group is exposed to the effect of changes in exchange rates on its operations. Forward foreign exchange contracts and foreign currency options are used to hedge foreign currency payables in accordance with Group Policy. The Group implemented a foreign exchange policy in June 2010 of hedging 50% of the Group’s US dollar denominated crude and products payable. From 1 August 2014, the amended foreign exchange policy increased to 80% of the Group’s US dollar denominated crude and products payable. The Group also enters into forward foreign exchange contracts to cover major capital expenditure items. As at 31 December 2014, the total fair value of all outstanding forward contracts amounted to $2,851,000 gain (2013: $3,350,000 gain). US dollar denominated borrowings were swapped into Australian dollars; as a result, there were no net foreign currency gains or losses arising from translation of these borrowings. Caltex / 2014 annual RePORtNotes to the financial statementscontinuedfor the year ended 31 December 2014 89 Foreign exchange rate sensitivity analysis At 31 December 2014, had the Australian dollar strengthened/weakened by 10% against the US dollar with all other variables held constant, post-tax profit for the year for the Group and equity would change by: Dollars net profit equity net profit equity AUD strengthens against USD 10% AUD weakens against USD 10% 12,300,000 3,000,000 (50,000) 60,000 29,100,000 (30,300,000) (2,700,000) 3,300,000 2014 2013 Exposure to foreign exchange risk The carrying amounts of the Group’s financial instruments are exposed to the following currencies (Australian dollar equivalent amounts): 2014 2013 thousands of dollars (Australian dollar equivalent amounts) Us dollar Australian dollar total Us dollar Australian dollar total Cash and cash equivalents Trade receivables Trade payables Forward exchange contracts Foreign currency option contracts US notes Hedge payable 6,115 106,980 (598,722) 448 2,403 – – 53,122 47,007 733,938 840,918 (587,286) (1,186,008) 448 2,403 – – – – – – 11,871 86,283 (1,107,933) 3,350 – (203,557) (50,693) 188,051 905,298 (617,473) – – – – 199,922 991,581 (1,725,406) 3,350 – (203,557) (50,693) (c) Commodity price risk The Group is exposed to the effect of changes in commodity price on its operations. The Group utilises both crude and finished product swap contracts to manage the risk of price timing movements. The Board approved commodity hedging policy precludes the use of refiner margin hedging. The commodity hedging policy seeks to neutralise adverse price timing risks brought about by purchase and sales transactions that are outside the normal operating conditions of the Group. During the year, the Group employed hedge instruments to correct timing exposures. (d) Customer credit risk Credit risk represents the loss that would be recognised if counterparties failed to perform as contracted. The credit risk on financial assets of the Group which have been recognised on the consolidated balance sheet is the carrying amount of trade debtors, net of allowances for impairment. See note 7. Caltex has a Board approved Credit Policy and manual which provide the guidelines for the management and diversification of the credit risk to Caltex. The guidelines provide for the manner in which the credit risk of customers is assessed and the use of credit rating and other information in order to set appropriate limits of trade with customers. The credit quality of customers is consistently monitored in order to identify any potential adverse changes in the credit risk of the customers. Where sales to retail customers are settled in cash or using major credit cards, the credit risk is mitigated. Caltex also minimises concentrations of credit risk by undertaking transactions with a large number of customers across a variety of industries and networks. Accordingly, there are not any significant concentrations of credit risk. Security is required to be supplied by certain groups of Caltex customers to minimise risk. The security is predominantly in the form of general security interests over the customer’s business and mortgages over the business property. However, mortgages are also held over directors’ property such as residential houses or rural properties. Bank guarantees or insurance bonds are also provided in some cases. The estimated realisable value of the security takes into consideration that the sale of the assets under the security may be in a distressed situation. 90 17. Financial instruments continued (d) Customer credit risk continued Financial institution credit risk Credit risk on cash, short term deposits and derivative contracts is minimised by transacting with relationship banks which have acceptable credit ratings determined by a recognised ratings agency. Swap and foreign exchange contracts are subject to credit risk in relation to the relevant counterparties, which are principally large relationship banks. Credit risk on crude and finished product swap contracts is minimised as counterparties are principally Chevron or large relationship banks. The maximum credit risk exposure on foreign currency contracts is the full amount of the foreign currency that Caltex pays when settlement occurs, should the counterparty fail to pay the amount which it is committed to pay the Group. The full amount of the exposure is disclosed at note 17(e). The credit risk on interest rate swaps is limited to the mark to market amount to be received from counterparties over the life of contracts that are favourable to the Group. As at 31 December 2014, there is no expected credit risk on any financial instruments (2013: nil). (e) Liquidity risk management Liquidity risk is the risk that an entity will encounter difficulty in maintaining obligations associated with financial liabilities. The liquidity risk policy requires maintaining sufficient cash and an adequate amount of committed credit facilities to meet the forecast requirements of the business. Due to the dynamic nature of the underlying business, management maintains flexibility in funding by keeping additional committed credit facilities above forecast requirements. The Group manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities by continuously monitoring forecast and actual cash flows and matching maturity profiles of financial assets and liabilities. The Group may from time to time seek to purchase and retire outstanding debt through cash purchases in open market transactions, privately negotiated transactions or otherwise. Any such repurchases would depend on prevailing market conditions, liquidity requirements and possibly other factors. The table below analyses the Group’s financial liabilities and net settled derivative financial instruments into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. 31 December 2014 Interest bearing liabilities Domestic medium term notes Subordinated note* Lease liabilities Payables Interest rate swaps Forward FX contracts – inflow – outflow Foreign currency options – inflow – outflow Payables Weighted average effective interest rate % Carrying amount $’000 Contractual cash flows $’000 Less than one year $’000 Between one and five years $’000 Greater than five years $’000 7.3 6.9 10.0 149,667 541,470 1,142 182,659 654,296 1,546 10,886 38,633 219 171,773 615,663 1,327 4.3 5,124 5,458 3,718 1,740 – – – – – (448) – (79,779) 79,424 (79,779) 79,424 (2,403) – 1,180,884 (213,910) 213,058 1,182,952 (213,910) 213,058 1,175,448 – – – – 7,504 – – – – – – – – – * The subordinated note is assumed to be repaid on the first call date (15 September 2017). Caltex / 2014 annual RePORtNotes to the financial statementscontinuedfor the year ended 31 December 2014 91 31 December 2013 Interest bearing liabilities US notes Domestic medium term notes Subordinated note* Hedge payable Lease liabilities Payables Interest rate swaps Forward FX contracts – inflow – outflow Payables Weighted average effective interest rate % Carrying amount $’000 Contractual cash flows $’000 Less than one year $’000 Between one and five years $’000 Greater than five years $’000 9.9 7.3 7.1 9.9 14.0 203,557 149,583 538,345 50,693 147 229,142 204,432 712,978 63,617 152 70,544 10,886 39,272 19,992 152 158,598 193,546 673,706 43,625 – 4.3 6,595 6,858 4,148 2,710 – – – (3,350) – 1,718,811 (610,804) 608,223 1,719,769 (610,636) 608,073 1,716,804 (168) 150 2,965 – – – – – – – – – * The subordinated note is assumed to be repaid on the first call date (15 September 2017). (f) Capital management The Group’s and the parent entity’s objectives when managing capital are to safeguard their ability to continue as a going concern, so that they can continue to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. During 2014, the Group’s strategy was to maintain a minimum long term credit rating of BBB+, in order to secure access to finance at a reasonable cost. The credit rating is impacted by two key ratios: Funds from Operations/Debt and Debt/Earnings Before Interest, Tax, Depreciation and Amortisation. The Group’s gearing ratio is calculated as net debt/total capital. Net debt is calculated as total interest bearing liabilities less cash and cash equivalents. Total capital is calculated as equity as shown in the balance sheet plus net debt. The gearing ratios at 31 December 2014 and 31 December 2013 were as follows: thousands of dollars Total interest bearing liabilities Less: cash and cash equivalents Net debt Total equity Total capital Gearing ratio 2014 2013 692,279 (53,122) 639,157 2,532,591 3,171,748 20.2% 942,325 (199,922) 742,403 2,597,032 3,339,435 22.2% 92 17. Financial instruments continued (g) Fair values of financial assets and liabilities The Group’s accounting policies and disclosures may require the measurement of fair values for both financial and non-financial assets and liabilities. The Group has an established framework for fair value measurement. When measuring the fair value of an asset or a liability, the Group uses market observable data where available. Fair values are categorised into different levels in a fair value hierarchy based on the following valuation techniques: • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities. • Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). • Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). If the inputs used to measure the fair value of an asset or a liability can be categorised in different levels of the fair value hierarchy, then the fair value measurement is categorised in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. The Group recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred. Fair values of recognised financial assets and liabilities with their carrying amounts shown in the balance sheet are as follows: Total (981,396) (1,059,026) (526,512) (532,514) 31 December 2014 thousands of dollars Cash and cash equivalents Receivables (i) Interest bearing liabilities Domestic medium term notes (iii) Subordinated note Lease liabilities (v) Payables Interest rate swaps (iv) Forward foreign exchange contracts (iv) Foreign currency options (iv) Payables (i) 31 December 2013 thousands of dollars Cash and cash equivalents Receivables (i) Interest bearing liabilities US notes (ii) Domestic medium term notes (iii) Subordinated note Cross currency swaps (iv) Lease liabilities (v) Payables Interest rate swaps (iv) Forward foreign exchange contracts (iv) Payables (i) Asset/(LIABILItY) Carrying amount Fair value total quoted market price (Level 1) observable inputs (Level 2) non-market observable inputs (Level 3) 53,122 840,918 53,122 840,918 53,122 – – 840,918 (149,667) (541,470) (1,142) (188,850) (579,634) (1,425) – (579,634) – (188,850) – (1,425) (5,124) 448 2,403 (1,180,884) (5,124) 448 2,403 (1,180,884) – – – – (5,124) 448 2,403 (1,180,884) Asset/(LIABILItY) Carrying amount Fair value total quoted market price (Level 1) observable inputs (Level 2) non-market observable inputs (Level 3) 199,922 991,581 199,922 991,581 199,922 – – 991,581 (203,557) (149,583) (538,345) (50,693) (147) (204,317) (161,053) (593,483) (50,693) (152) – – (593,483) – – (204,317) (161,053) – (50,693) (152) (6,595) 3,350 (1,718,811) (6,595) 3,350 (1,718,811) – – – (6,595) 3,350 (1,718,811) – – – – – – – – – – – – – – – – – – – – – Total (1,472,878) (1,540,250) (393,561) (1,146,689) Caltex / 2014 annual RePORtNotes to the financial statementscontinuedfor the year ended 31 December 2014 93 Estimation of fair values The following summarises the major methods and assumptions used in estimating the fair values of financial instruments: (i) Receivables/payables For receivables/payables with a remaining life of less than six months, the notional amount is deemed to reflect the fair value. All other receivables/payables are discounted to determine the fair value, if the effect of discounting is material. (ii) US notes The fair value of US notes is determined as the present value of future contracted cash flows. Cash flows are discounted using standard valuation techniques at applicable market yield, having regard to the timing of cash flows. (iii) Domestic medium term notes The fair value of domestic medium term notes is determined by using an independent broker quotation. (iv) Derivatives The fair value of cross currency swaps, interest rate swaps and forward foreign exchange contracts is determined as the present value of future contracted cash flows and credit adjustments. The fair value of foreign currency options is determined using standard valuation techniques. Cash flows are discounted using standard valuation techniques at the applicable market yield, having regard to the timing of the cash flows. (v) Lease liabilities The fair value is estimated as the present value of future cash flows using the government bond rate. (h) Interest rates Caltex used the government bond rate as of 31 December 2014 plus an adequate constant credit spread to discount financial instruments. The annual interest rates used are as follows: Lease liabilities Receivables Payables 18. employee benefits thousands of dollars non-current assets Defined benefit superannuation asset Total asset for employee benefits Current liabilities Liability for annual leave Liability for long service leave Liability for termination benefits Bonus accrued non-current liabilities Liability for long service leave Liability for termination benefits Defined benefit superannuation obligation Total liability for employee benefits 2014 2% 4% 2–5% 2013 3% 4% 2–5% 2014 2013 6,719 6,719 34,885 9,265 58,898 60,152 – – 42,630 22,167 73,072 8,341 163,200 146,210 43,600 9,791 5,862 59,253 46,283 24,286 20,317 90,886 215,734 237,096 94 18. employee benefits continued (a) Employee benefits The current balances for employee benefits, which include annual leave, long service leave, employee bonus, redundancy and retirement benefits, represent the present value of the estimated future cash outflows to be made by the Group resulting from employees’ services provided up to the balance date. Employee benefits which are not expected to be settled within 12 months are calculated using future expected increases in salary rates, including related oncosts, turnover rates, and expected settlement dates based on turnover history, and are discounted using the rates attaching to the national government securities which most closely match the terms of maturity of the related liabilities. (b) Superannuation commitments The Group contributes to superannuation plans to provide benefits to employees and their dependants upon retirement, disability or death. Employer contributions (where applicable) are based on a percentage of salary. The employer is committed to contribute to the plans as prescribed by the relevant trust deeds and relevant legislation. Caltex Australia Superannuation Plan – Defined Benefit Division The Caltex Australia Superannuation Plan – Defined Benefit Division is predominantly a defined benefit plan, but it also includes the retirement account, which is a defined contribution payable by the Group. Information from the most recent actuarial valuation for the defined benefit plan at 31 December 2014 follows: thousands of dollars 2014 2013 Movements in the net (asset)/liability for defined benefit obligation recognised in the balance sheet Net liability for defined benefit obligation at the beginning of the year Current service cost Net interest Actual return on plan assets less interest income Actuarial losses arising from changes in demographic assumptions Actuarial losses/(gains) arising from changes in financial assumptions Actuarial gains arising from liability experience Employer contributions Benefits paid Net (asset)/liability for defined benefit obligation at the end of the year Represented by: Defined benefit (asset)/liability – Accumulation Division Defined benefit liability – Guaranteed Retirement Payment Plan benefit Net (asset)/liability for defined benefit obligation at the end of the year Reconciliation of the present value of the defined benefit obligation Present value of defined benefit obligation at the beginning of the year Current service cost Interest cost Contributions by plan participants Actuarial losses arising from changes in demographic assumptions Actuarial losses/(gains) arising from changes in financial assumptions Actuarial gains arising from liability experience Benefits paid Present value of defined benefit obligation at the end of the year 20,317 4,981 291 (9,765) 758 4,437 (4,038) (15,963) (1,875) (857) (6,719) 5,862 (857) 182,522 4,981 5,151 1,944 758 4,437 (4,038) (76,889) 118,866 58,372 8,263 1,149 (11,055) – (18,620) (795) (15,982) (1,015) 20,317 11,584 8,733 20,317 204,108 8,263 4,844 1,941 – (18,620) (795) (17,219) 182,522 Caltex / 2014 annual RePORtNotes to the financial statementscontinuedfor the year ended 31 December 2014 Plan assets thousands of dollars Reconciliation of the fair value of plan assets Fair value of plan assets at the beginning of the year Actual return on plan assets less interest income Interest income Employer contributions Contributions by plan participants Benefits paid Fair value of plan assets at the end of the year Reconciliation of the net liability recognised in the balance sheet Defined benefit obligation Fair value of plan assets Net liability Actuarial gains and losses recognised in other comprehensive income Actuarial losses/(gains) recognised in other comprehensive income Actual return on plan assets less interest income 95 2014 2013 162,205 9,765 4,860 15,963 1,944 (75,014) 119,723 145,736 11,055 3,695 15,982 1,941 (16,204) 162,205 118,866 (119,723) 182,522 (162,205) (857) 20,317 1,157 (9,765) (8,608) (19,415) (11,055) (30,470) The defined benefit plan assets are invested in the Future Direction Moderately Conservative and Future Direction Conservative investment funds within the AMP Superannuation Savings Trust. The percentage invested in each asset class at the balance sheet date was: Australian equity International equity Fixed income Alternatives/Other Property Cash 2014 2013 13% 16% 33% 18% 5% 15% 15% 17% 31% 15% 5% 17% The fair value of plan assets includes no amounts relating to any of the company’s own financial instruments, and any property occupied by, or other assets used by, the company. The expected return on assets assumption is determined by weighting the expected long term return for each asset class by the target allocation of assets to each asset class. The returns used for each asset class are net of investment tax and investment fees. Principal actuarial assumptions at the balance sheet date (% p.a.) Discount rate Expected salary increase rate 2014 2.4% 3.0% 2013 3.0% 2–3% Expected employer contributions for the reporting year to 31 December 2015 is $611,000. 96 18. employee benefits continued (b) Superannuation commitments continued Sensitivity analysis Reasonably possible changes at the reporting date to one of the relevant actuarial assumptions, holding other assumptions constant, would have affected the defined benefit obligation by the amounts shown below. thousands of dollars Increase Decrease Increase Decrease Discount rate (0.5% movement) Expected salary rate (0.5% movement) (2,422) 2,289 2,427 (2,211) (2,266) 2,259 2,433 (2,086) 2014 2013 Although the analysis does not take into account the full distribution of cash flows expected under the plan, it does provide an approximation of the sensitivity of the assumptions shown. Caltex Australia – Guaranteed Retirement Payment Plan benefit The Caltex Australia Guaranteed Retirement Payment Plan (GRPP) is a benefit for which, if necessary, the company will supplement an eligible member’s entitlement from the accumulation division to guarantee a minimum total payment. Balances relating to this benefit have been included in the overall defined benefit figures presented in note 18(b) in the financial statements. Caltex Australia Superannuation Plan – Accumulation Division As this is a defined contribution plan, no actuarial review has been performed on this plan. The plan benefits to members are as described in the trust deed. Funds are available to satisfy all vested benefits in the event of termination of the fund or the voluntary or compulsory termination of employment of each employee of the participating employers. thousands of dollars 2014 2013 Employer contributions to the accumulation division plan during the year 16,855 19,264 19. Commitments (a) Capital expenditure thousands of dollars 2014 2013 Capital expenditure contracted but not provided for in the financial report and payable 63,162 62,162 (b) Leases Finance leases thousands of dollars Within one year Between one and five years 31 DeCeMBeR 2014 31 DeCeMBeR 2013 Minimum lease payments 219 1,328 1,547 Interest Principal Minimum lease payments Interest Principal 109 296 405 110 1,032 1,142 152 – 152 5 – 5 147 – 147 The Group leases production plant and equipment under finance leases expiring from one to five years. No contingent rentals were paid during the year (2013: nil). Caltex / 2014 annual RePORtNotes to the financial statementscontinuedfor the year ended 31 December 2014 Operating leases thousands of dollars non-cancellable operating leases – Group as lessee Future minimum rentals payable: Within one year Between one and five years After five years 97 2014 2013 142,133 429,856 337,572 909,561 129,979 382,605 177,347 689,931 The Group leases property under operating leases expiring from one to 37 years. Leases generally provide the Group with a right of renewal at which time all terms are renegotiated. Lease payments comprise mainly a base amount; however, in a few cases, they include a base amount and incremental contingent rental. Contingent rentals are based on operating performance criteria. Contingent rentals of $383,476 were paid during the year (2013: $87,594). The expense recognised in the income statement during the year in respect of operating leases is $160,549,000 (2013: $136,643,000). There are no restrictions placed upon the Group by entering into these leases. Renewals are at the option of the specific entity that holds the lease. thousands of dollars 2014 2013 Non-cancellable operating leases – Group as lessor Future minimum rentals receivable: Within one year Between one and five years After five years 70,580 150,124 21,845 242,549 78,923 149,042 19,119 247,084 The Group leases property under operating leases expiring from one to 17 years. Some of the leased properties have been sublet by the Group. The leases and subleases expire between 2015 and 2032. Note 2 shows the rental income recognised in the income statement in respect of operating leases. 20. Contingent assets and liabilities The details and estimated maximum amounts of contingent assets and liabilities (for which no provisions are included in the financial report) are set out below. The directors are not aware of any circumstance or information which would lead them to believe that these assets and liabilities will crystallise and consequently no provisions are included in the financial report in respect of these matters. thousands of dollars (a) Contingent assets – legal and other claims 2014 – 2013 – In the ordinary course of business, the Group is involved as a plaintiff in legal proceedings. Where appropriate, Caltex takes legal advice. The Group does not consider that the outcome of any current proceedings is likely to have a material effect on its operations or financial position. thousands of dollars (b) Contingent liabilities – legal and other claims 2014 – 2013 – In the ordinary course of business, the Group is involved as a defendant in legal proceedings. Where appropriate, Caltex takes legal advice. The Group does not consider that the outcome of any current proceedings is likely to have a material effect on its operations or financial position. A liability has been recognised for any known losses expected to be incurred where such losses are capable of reliable measurement. 98 20. Contingent assets and liabilities continued (c) Bank guarantees The Group has granted indemnities to banks to cover bank guarantees given on behalf of controlled entities to a maximum exposure of $2,627,856 (2013: $2,192,587). (d) Deed of Cross Guarantee and class order relief Note 22(a) lists the companies in the Group that are parties to a Deed of Cross Guarantee dated 22 December 1992 with Caltex Australia Limited and each other (these companies are notated with (iii)). As parties to the Deed of Cross Guarantee, and by virtue of ASIC Class Order CO 98/1418, these companies are relieved from complying with certain requirements of the Corporations Act. Under the Deed of Cross Guarantee, each company agrees to guarantee all of the debts (in full) of all companies that are parties to the deed subject to, and in accordance with, the terms set out in the deed. No companies have been added to or removed from the Deed of Cross Guarantee during the year ended 31 December 2014 or from 1 January 2015 to the date of signing this financial report. 21. Auditor’s remuneration Dollars Audit services – KPMG Australia Non-audit services – KPMG Australia: Other assurance services Taxation services 22. Particulars in relation to controlled entities (a) Name Companies Ampol Bendigo Pty Ltd Ampol International Holdings Pte Ltd Ampol Management Services Pte Ltd Ampol Property (Holdings) Pty Ltd Ampol Refineries (Matraville) Pty Ltd Ampol Singapore Trading Pte Ltd Ampol Road Pantry Pty Ltd Australian Petroleum Marine Pty Ltd B & S Distributors Pty Ltd Bowen Petroleum Services Pty Ltd Brisbane Airport Fuel Services Pty Ltd Calgas Pty Ltd Calstores Pty Ltd Caltex Australia Custodians Pty Ltd Caltex Australia Management Pty Ltd Caltex Australia Nominees Pty Ltd Caltex Australia Petroleum Pty Ltd Caltex Fuel Services Pty Ltd Caltex Lubricating Oil Refinery Pty Ltd Caltex Petroleum (Qld) Pty Ltd Caltex Petroleum (Victoria) Pty Ltd Caltex Petroleum Pty Ltd Caltex Petroleum Services Pty Ltd Caltex Refineries (NSW) Pty Ltd Caltex Refineries (Qld) Pty Ltd 2014 2013 995,900 919,400 34,800 43,700 78,500 81,400 70,000 151,400 % InteRest note 2014 2013 (iii) (ii) (ii),(viii) (iii) (ii),(ix) (iii) (iv) (iii),(vi) (iii) (iii) (iii) (iii) (iii) (iii) (iii) (iii) (iii) 100 100 100 100 100 100 100 100 50 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 50 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Caltex / 2014 annual RePORtNotes to the financial statementscontinuedfor the year ended 31 December 2014 99 % InteRest note 2014 2013 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 60 50 100 50 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 60 50 100 50 100 100 100 100 (iii) (iii) (iii) (iii) (iii) (iii) (ii) (iii) (iii) (iii) (iv) (iv) (iii) (iv) (v) (vi) (vi) (vii) Name Circle Petroleum (Q’land) Pty Ltd Cocks Petroleum Pty Ltd Cooper & Dysart Pty Ltd Graham Bailey Pty Ltd Hanietee Pty Ltd Hunter Pipe Line Company Pty Ltd Jayvee Petroleum Pty Ltd Jet Fuels Petroleum Distributors Pty Ltd Link Energy Pty Ltd Manworth Pty Ltd Newcastle Pipe Line Company Pty Ltd Northern Marketing Management Pty Ltd Northern Marketing Pty Ltd Octane Insurance Pte Ltd Pilbara Fuels Pty Ltd R & T Lubricants Pty Ltd Ruzack Nominees Pty Ltd Solo Oil Australia Pty Ltd Solo Oil Corporation Pty Ltd Solo Oil Investments Pty Ltd Solo Oil Pty Ltd South Coast Oils Pty Ltd South East Queensland Fuels Pty Ltd Sydney Metropolitan Pipeline Pty Ltd Teraco Pty Ltd Tulloch Petroleum Services Pty Ltd Western Fuel Distributors Pty Ltd Unit trusts Eden Equity Unit Trust Petroleum Leasing Unit Trust Petroleum Properties Unit Trust South East Queensland Fuels Unit Trust (i) All companies were incorporated in Australia except those companies noted in (ii). The unit trusts were formed in Australia. (ii) These companies were incorporated in Singapore. (iii) These companies are parties to a Deed of Cross Guarantee dated 22 December 1992 with Caltex Australia Limited and each other. As parties to the Deed of Cross Guarantee, and by virtue of ASIC Class Order CO 98/1418, these companies are relieved from certain requirements of the Corporations Act. Under the Deed of Cross Guarantee, each company agrees to guarantee all of the debts (in full) of all companies that are parties to the deed subject to, and in accordance with, the terms set out in the deed. No companies have been added to or removed from the Deed of Cross Guarantee during the year ended 31 December 2014 or from 1 January 2015 to the date of signing this financial report. (iv) These entities have been included as controlled entities in accordance with AASB 127 Consolidated and Separate Financial Statements. In each case, control exists because a company within the Caltex Australia Group has the ability to dominate the composition of the entity’s board of directors, or enjoys the majority of the benefits and is exposed to the majority of the risks of the entity. (v) Caltex Petroleum Services Pty Ltd is the sole unit holder of this trust. (vi) Solo Oil Pty Ltd is the sole unit holder of these trusts. (vii) Caltex Australia Petroleum Pty Ltd and Caltex Petroleum Services Pty Ltd each own half of the units in this trust. (viii) Ampol Management Services Pte Ltd was incorporated in Singapore on 28 May 2013. (ix) Ampol Singapore Trading Pte Ltd changed its name from Ampol Singapore Holdings Pte Ltd on 14 March 2013. 100 22. Particulars in relation to controlled entities continued (b) Income statement for entities covered by the Deed of Cross Guarantee thousands of dollars Revenue Cost of goods sold – historical cost Gross profit Other income Operating expenses Finance costs Share of profit of equity-accounted investees Profit before income tax expense Income tax expense net profit Retained earnings at the beginning of the year Movement in reserves Dividends provided for or paid Retained earnings at the end of the year 2014 2013 24,181,616 (22,710,323) 24,652,221 (22,782,130) 1,471,293 1,870,091 (21,730) (1,319,134) (111,370) 917 19,976 (5,367) 14,609 44,881 (1,089,172) (88,791) 158 737,167 (204,785) 532,382 2,036,998 6,026 (99,900) 1,591,287 21,329 (108,000) 1,957,733 2,036,998 Caltex / 2014 annual RePORtNotes to the financial statementscontinuedfor the year ended 31 December 2014 (c) Balance sheet for entities covered by the Deed of Cross Guarantee thousands of dollars Current assets Cash and cash equivalents Receivables Inventories Current tax asset Other total current assets non-current assets Receivables Investments accounted for using the equity method Other investments Property, plant and equipment Intangibles Deferred tax assets Employee benefits Other total non-current assets total assets Current liabilities Payables Interest bearing liabilities Current tax liabilities Employee benefits Provisions total current liabilities non-current liabilities Payables Interest bearing liabilities Employee benefits Provisions total non-current liabilities total liabilities net assets equity Issued capital Treasury stock Reserves Retained earnings total equity 101 2014 2013 38,707 869,988 936,689 56,957 31,963 189,960 1,014,367 2,027,857 – 34,902 1,934,304 3,267,086 3,246 24,181 3 2,321,944 163,035 444,558 6,719 907 2,964,593 4,898,897 983,423 115 – 163,200 164,583 3,048 23,863 3 2,084,695 119,094 471,036 – 2,474 2,704,213 5,971,299 1,700,183 71,407 55,361 146,210 82,560 1,311,321 2,055,721 7,641 692,169 59,253 332,678 1,091,741 2,403,062 2,495,835 – 870,921 90,886 383,986 1,345,793 3,401,514 2,569,785 543,415 (607) (4,706) 1,957,733 543,415 (610) (10,018) 2,036,998 2,495,835 2,569,785 102 23. Investments accounted for using the equity method (a) Investments in associates and joint ventures Airport Fuel Services Pty Ltd Australasian Lubricants Manufacturing Company Pty Ltd Cairns Airport Refuelling Service Pty Ltd Geraldton Fuel Company Pty Ltd South Coast Fuels Pty Ltd (i) % InteRest 2014 2013 Balance date 40 50 25 50 50 40 50 25 50 50 31 December 31 December 31 December 31 December 31 December (i) South Coast Fuels Pty Ltd was voluntarily deregistered on 14 January 2015. The companies listed in the above table were all incorporated in Australia and are principally concerned with the sale, marketing and/or distribution of fuel products. (b) Investments in associates thousands of dollars Revenue (100%) Profit (100%) share of associates’ net profit recognised total assets (100%) total liabilities (100%) net assets as reported by associates (100%) share of associates’ net assets equity accounted 2014 2013 1,407,645 159,412 3,762 4,003 1,372 1,138 25,443 26,651 9,797 12,682 15,646 13,969 7,696 6,923 Results of associates Share of associates’ profit before income tax expense Share of associates’ income tax expense Share of associates’ net profit Unrealised profit in inventories Share of associates’ net profit – equity accounted Commitments Share of associates’ capital expenditure contracted but not provided for in the financial report and payable: Within one year Share of associates’ operating lease commitments not provided for in the financial report and payable: Within one year Between one and five years Share of associates’ finance lease commitments not provided for in the financial report and payable: Within one year Between one and five years Future finance charges 2014 2013 1,966 (590) 1,376 (4) 1,372 1,610 (482) 1,128 10 1,138 – – 173 340 513 788 1,397 2,185 (165) 2,020 190 951 1,141 854 1,797 2,651 (290) 2,361 Caltex / 2014 annual RePORtNotes to the financial statementscontinuedfor the year ended 31 December 2014 103 (c) Investments in joint ventures thousands of dollars Revenue (100%) Loss (100%) share of joint ventures’ net loss recognised total assets (100%) total liabilities (100%) net (liabilities) / assets as reported by joint venture (100%) share of joint ventures’ net assets equity accounted 2014 2013 495,495 468,084 (458) (415) (455) (980) 382,444 342,579 383,251 339,579 (807) 3,000 16,485 16,940 Results of joint ventures Share of joint ventures’ loss before income tax expense Share of joint ventures’ income tax benefit Share of joint ventures’ net loss Unrealised loss in inventories Share of joint ventures’ net loss – equity accounted joint ventures’ assets and liabilities Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Commitments Share of joint ventures’ capital expenditure contracted but not provided for in the financial report and payable: Within one year Share of joint ventures’ operating lease commitments not provided for in the financial report and payable: Within one year Between one and five years (d) Reconciliation to income statement Share of net profit of associates accounted for using the equity method Share of net loss of joint ventures accounted for using the equity method (e) Reconciliation to balance sheet Investment in associates accounted for using the equity method Investment in joint ventures accounted for using the equity method 2014 2013 (413) 124 (289) (166) (455) 377,601 4,843 382,444 369,623 13,628 383,251 (291) 88 (203) (777) (980) 341,776 803 342,579 324,165 15,414 339,579 – – 1,111 2,659 3,770 1,372 (455) 917 1,233 4,040 5,273 1,138 (980) 158 7,696 16,485 24,181 6,923 16,940 23,863 104 24. Interest in joint venture operations The Group has joint interests in multiple Joint User Hydrant Installations (JUHIs), which are based at airports across Australia. The principal activity of the JUHIs is refuelling aircraft at the airports. For the year ended 31 December 2014, the contribution of the JUHIs to the operating profit of the Group was nil (2013: nil). Included in the assets and liabilities of the Group are the Group’s interests in the assets and liabilities employed in the joint venture operation: thousands of dollars non-current assets Plant and equipment expenditure Less: accumulated amortisation total non-current assets total assets 25. notes to the cash flow statements (a) Reconciliation of cash and cash equivalents For the purposes of the cash flow statements, cash and cash equivalents includes: Cash at bank Total cash and cash equivalents (b) Reconciliation of net profit to net operating cash flows Net profit Adjustments for: Net gain on sale of property, plant and equipment Interest paid capitalised Amortisation of finance costs Depreciation/amortisation of property, plant and equipment Amortisation of intangibles Treasury stock movements net of expense Share of associates’ and joint ventures’ net (loss)/profit Movements in assets and liabilities: Decrease in receivables Decrease/(increase) in inventories Decrease in other assets (Decrease)/increase in payables (Decrease)/increase in current tax liabilities Increase in deferred tax assets Increase/(decrease) in provisions net operating cash inflows 2014 2013 56,852 (33,282) 23,570 23,570 55,008 (32,720) 22,288 22,288 53,122 53,122 199,922 199,922 22,670 528,757 (726) (14,693) (9,721) 185,119 17,866 (1,921) (317) 150,663 921,025 3,130 (535,150) (112,065) 25,774 9,915 661,569 (44,881) (7,238) 4,359 155,079 10,538 (13,253) 292 58,340 (373,433) 6,392 220,925 45,499 44,708 (28,144) 607,940 Caltex / 2014 annual RePORtNotes to the financial statementscontinuedfor the year ended 31 December 2014 105 26. Business combinations 2014 Scott’s Fuel Divisions (Scott’s) On 4 June 2014, Caltex acquired the assets and liabilities of the Scott’s Fuel Divisions (Scott’s) for a consideration of $86,466,000 plus incidental acquisition costs. This acquisition included the businesses known as Scott’s Agencies and Sabadin Petroleum. The Scott’s Fuel Divisions operate throughout the regional areas of South Australia, Victoria, southern New South Wales and southern/central Northern Territory. This extensive network consists of 28 retail service stations and 18 depots. The acquisition complements Caltex’s existing national network and is consistent with Caltex’s strategy of being Australia’s leading transport fuels provider. In the seven months up to 31 December 2014, Scott’s contributed a gross sales revenue of $180,395,000 and a net profit of $10,094,000 to the consolidated gross sales revenue and net profit for the year. If the acquisition had occurred on 1 January 2014, the Group estimates that gross sales revenue would have been $286,000,000 greater and net profit would have been $9,500,000 greater. The acquisition had the following effect on the Group’s assets and liabilities: thousands of dollars Intangibles Property, plant and equipment Inventories Deferred tax assets Provisions Net identifiable assets and liabilities Goodwill on acquisition Consideration paid, satisfied in cash Net cash outflow Recognised values 8,101 42,202 11,252 3,752 (8,414) 56,893 29,573 86,466 (86,466) The recognised values represent the fair value of assets recorded on acquisition. Intangible assets acquired of $8,101,000 represents the amount paid to Scott’s for customer relationships and trade restraint, which meets the criteria for recognition as a separately identifiable intangible asset at the date of acquisition. These intangible assets are to be amortised over the remainder of the agreement term. Goodwill acquired of $29,573,000 represents other intangible assets that did not meet the criteria for recognition as separately identifiable assets at the date of acquisition. None of the goodwill recognised is expected to be deductible for tax purposes. There were no other material business combinations during the year ended 31 December 2014. 106 26. Business combinations continued 2013 Queensland Fuel Group (QFG) On 1 October 2013, the Group terminated the franchise and acquired the assets and liabilities of Queensland Fuel Group Pty Ltd (QFG) for a consideration of $40,000,000 plus $2,967,000 for inventory, GST and provisions, and incidental acquisition costs. QFG was a Caltex Franchise Reseller for over 15 years which operated retail sites and supplied commercial customers and primary producers. QFG’s prime marketing area was centred in the cities of Gladstone and Rockhampton, with a smaller network on the Sunshine Coast. In the three months up to 31 December 2013, QFG contributed a gross sales revenue of $52,433,701 and a net profit of $3,264,375 to the consolidated gross sales revenue and net profit for the year. If the acquisition had occurred on 1 January 2013, the Group estimates that gross sales revenue would have been $210,723,852 greater and net profit would have been $14,065,658 greater. The acquisition had the following effect on the Group’s assets and liabilities: thousands of dollars Intangibles Property, plant and equipment Inventories Receivables Provisions Net identifiable assets and liabilities Goodwill on acquisition Consideration paid, satisfied in cash Net cash outflow Recognised values 8,797 2,265 2,915 280 (228) 14,029 28,938 42,967 (42,967) The recognised values represent the fair value of assets recorded on acquisition. Intangible assets acquired of $8,797,000 represents the amount paid to QFG for customer relationships and trade restraint, which meets the criteria for recognition as a separately identifiable intangible asset at the date of acquisition. These intangible assets are to be amortised over the remainder of the agreement term. There were no other material business combinations during the year ended 31 December 2013. Details of entities over which control has been gained or lost during the year 2014 There were no entities over which control was gained or lost during the period. 2013 On 28 May 2013, Ampol Management Services Pte Ltd was incorporated in Singapore. Ampol Management Services Pte Ltd is a wholly owned subsidiary of Caltex Australia Limited. There were no other entities over which control was gained or lost during the period. Caltex / 2014 annual RePORtNotes to the financial statementscontinuedfor the year ended 31 December 2014 27. Financing arrangements thousands of dollars The Group has access to the following lines of credit: Total facilities available: Bank overdrafts Bank loans and capital markets Facilities utilised at balance date: Bank overdrafts Bank loans and capital markets Facilities not utilised at balance date: Bank overdrafts Bank loans and capital markets 107 2014 2013 22,223 1,541,137 1,563,360 41,232 2,092,178 2,133,410 – 691,137 691,137 22,223 850,000 872,223 839 942,178 943,017 40,393 1,150,000 1,190,393 These facilities are unsecured and have an average maturity of 2.9 years (2013: 2.6 years) assuming the subordinated notes are repaid on the first call date (15 September 2017). 28. Related party information (a) Key management personnel The key management personnel of the Group during 2014 and 2013 were: (i) Directors of Caltex Australia Limited during 2014 and 2013: Current directors Ms Elizabeth Bryan, Chairman and Independent, Non-executive Director Mr Julian Segal, Managing Director & CEO Mr Trevor Bourne, Independent, Non-executive Director Mr Richard Brown, Non-executive Director Ms Barbara Burger, Non-executive Director Mr Greig Gailey, Independent, Non-executive Director Mr Ryan Krogmeier, Non-executive Director Mr Bruce Morgan, Independent, Non-executive Director (from 29 June 2013) Former director Mr John Thorn, Independent, Non-executive Director (to 9 May 2013) Former alternate director Ms Colleen Jones-Cervantes* (to 25 July 2013) * Ms Colleen Jones-Cervantes previously served as alternate director for Mr Krogmeier (from 30 March 2012) and Mr Brown and Ms Burger (from 28 June 2012). 108 28. Related party information continued (a) Key management personnel continued (ii) Senior executives Current senior executives Mr Julian Segal, Managing Director & CEO Mr Andrew Brewer, General Manager – Supply Chain Operations (from 31 March 2014) Mr Simon Hepworth, Chief Financial Officer Mr Peter Lim, General Manager – Legal & Corporate Affairs Mr Mike McMenamin, General Manager – Strategy, Planning & Development Mr Bruce Rosengarten, General Manager – Marketing (from 1 November 2013) Mr Gary Smith, General Manager – Refining & Supply (to 9 May 2014) Mr Simon Willshire, General Manager – Human Resources Former senior executive Mr Andy Walz, General Manager – Marketing (to 31 March 2013) (b) Key management personnel compensation Dollars Short term benefits Other long term benefits Post-employment benefits Share based payments 2014 2013 10,511,019 218,675 294,518 4,900,945 8,535,008 727,720 315,382 4,008,445 15,925,157 13,586,555 Information regarding directors’ and executives’ compensation and some equity instruments disclosures is provided in the Remuneration Report section of the Directors’ Report on pages 31 to 55. (c) Other related entities Chevron Global Energy Inc. holds a 50% interest in Caltex Australia Limited. Transactions with the Chevron Group are summarised below. On 26 July 2012, Caltex Australia Limited announced a restructuring of its supply chain. As part of this supply chain restructuring, an agreement was made with Chevron for the procurement and supply of transport fuels (petrol, diesel and jet fuel) with associated shipping services to provide a reliable and efficient supply of imported product. This agreement was put in place to provide certainty of product supply and to meet the shortfall following Kurnell refinery’s conversion to an import terminal and growing demand. This agreement is on arm’s length terms and at market based prices. The Group paid $7,070,000 (2013: $6,135,000) to the Chevron Group for technical service fees. The Group received $5,244,000 (2013: $3,558,000) for technical service fees from the Chevron Group. These fees are in the ordinary course of business and on normal commercial terms and conditions. The Group paid $1,146,000 (2013: $1,469,000) to the Chevron Group, including Iron Horse Insurance Company for insurance coverage. Dealings with Iron Horse Insurance Company are in the ordinary course of business and on normal commercial terms and conditions. The Group purchased crude, other refinery feedstocks and petroleum products from the Chevron Group of $4,355,821,000 (2013: $6,004,682,000). The Group sold crude, other refinery feedstocks and petroleum products to the Chevron Group of $393,366,000 (2013: $466,993,000). These purchases and sales are in the ordinary course of business and on normal commercial terms and conditions. Payments were made to the Chevron Group in 2013 (2014: nil) in respect of the secondment of Mr Walz. Details of these payments are shown in the Remuneration Report on pages 31 to 55. The Chevron Group seconded three employees (2013: one employee) primarily to provide specialist expertise at Lytton refinery and specialist support to the Strategy, Planning & Development group. The total cost borne by Caltex Australia in respect of these secondees was $1,790,157 (2013: $448,809 for one secondee). This cost includes salary and bonuses, allowances including relocation, and indirect payroll related expenses. Caltex Australia seconded six employees to various roles within the Chevron Group during 2014 (2013: seven employees). Caltex paid the salary and bonuses, allowances including relocation, and indirect payroll related expenses for two of these Caltex employees and the Chevron Group paid the associated costs for the remaining four employees. Amounts receivable from and payable to other related entities are set out in notes 7 and 13 respectively. Caltex / 2014 annual RePORtNotes to the financial statementscontinuedfor the year ended 31 December 2014 109 (d) Associates The Group sold petroleum products to associates totalling $123,073,000 (2013: $135,910,000). The Group received income from associates for rental income of $149,000 (2013: $145,457). Details of associates are set out in note 23. Amounts receivable from associates are set out in note 7. Dividend and disbursement income from associates is $600,000 (2013: $450,000). Caltex has interests in associates primarily for the marketing, sale and distribution of fuel products. Details of Caltex’s interests are set out in note 23. (e) Joint ventures Caltex has interests in joint ventures primarily for the marketing, sale and distribution of fuel products. There were no related party transactions with Caltex’s joint venture entities during 2014 (2013: nil). Details of Caltex’s interests are set out in notes 23 and 24. (f) Executive share plan and performance rights Executive share plan Since 1 January 2010, a mandatory deferral of short term incentives (STI) applies to senior executives. Under the deferral policy, one third of their STI, as long as the incentive is greater than $105,000, will be delivered in Caltex shares, which have a six month service related forfeiture risk and are restricted from sale for two years. The directors approved the 2014 STI in February 2015 which includes a deferred value of $1,140,865 with a vesting date in October 2015 and will be held under restriction until April 2017. The number of shares to be issued to plan participants will be purchased on market during April 2015. No STI was awarded to senior executives for the 2013 year due to Caltex failing to meet the required profit thresholds under the Rewarding Results Plan. The 2012 STI was approved in February 2013 for a total value of $2,425,000 which equated to 115,993 shares at a grant date fair value of $20.90 per share (formalised in April 2013). The service related forfeiture condition was met in October 2013 and the shares will be held under restriction until April 2015. 110 Notes to the financial statements continued for the year ended 31 December 2014 28. Related party information continued (f) Executive share plan and performance rights continued Performance rights Since 1 January 2007, senior executives may receive performance rights under Caltex Australia Limited’s Equity Incentive Plan, based on the achievement of specific targets related to the performance of the Group. The measure of performance is Total Shareholder Returns (TSR) over a three year period relative to two comparator groups. Summary of performance rights in the plan: oPenInG BALAnCe GRAnteD vesteD DURInG tHe YeAR LAPseD DURInG tHe YeAR CLosInG BALAnCe number of performance rights start date number performance rights Fair value of performance rights ($) Distribution date number of performance rights Weighted average fair value per share ($) Lapsed date number of performance rights Weighted average fair value per share ($) number of performance rights Fair value aggregate ($) 2014 1,561,834 611,151 264,662 7 Apr 14 7 Apr 14 7 Apr 14 405,972 135,324 135,324 2,437,647 676,620 12.57 28 Feb 14 22.18 1 Apr 14 20.16 9 May 14 4 Jul 14 30 Sep 14 31 Dec 14 (17,200) (245,667) (18,617) (33,403) (29,828) (23,211) (367,926) 2013 1,456,331 22 Apr 13 1,450,983 22 Apr 13 400,584 267,056 10.98 19.42 2 Apr 13 8 Mar 13 15 Apr 13 (825,373) (8,667) (10,537) 2,907,314 667,640 (844,577) 20.98 28 Feb 14 21.59 1 Apr 14 22.47 9 May 14 4 Jul 14 22.25 27.99 1 Aug 14 34.21 30 Sep 14 31 Dec 14 2 Apr 13 22.54 8 Mar 13 22.38 21.93 15 Apr 13 23 Aug 13 (40,904) (361,262) (130,094) (90,698) (7,940) (67,059) (30,273) (728,230) (262,081) (6,047) (18,617) (5,985) (292,730) – – – – – – – – – – – 1,340,333 13,155,109 215,272 1,618,845 462,806 9,402,724 2,018,111 24,176,678 1,561,834 12,955,560 611,151 3,723,317 264,662 5,139,736 2,437,647 21,818,613 Caltex / 2014 annual RePORt 111 The inputs used in the measurement of the fair values at each grant date were as follows: 2014 GRAnt 2013 GRAnt 2012 GRAnt AsX 100 Accumulation Index Free cash flow and strategic hurdle AsX 100 Accumulation Index Free cash flow and strategic hurdle AsX 100 Accumulation Index International refining and marketing companies Grant date Vesting date Fair value at grant date Share price at grant date Volatility Dividend yield Risk free interest rate 7 April 2014 1 April 2017 $12.57 $21.85 35% 2.7% 3.0% 7 April 2014 1 April 2017 $20.16 $21.85 35% 2.7% 3.0% 22 April 2013 1 April 2016 $10.98 $20.60 40% 2.0% 2.7% 22 April 2013 1 April 2016 $19.42 $20.60 40% 2.0% 2.7% 2 April 2012 1 April 2015 $7.69 $14.03 45% 4.7% 3.5% 2 April 2012 1 April 2015 $7.52 $14.03 45% 4.7% 3.5% thousands of dollars Executive share plan expense 29. net tangible assets per share Net tangible assets per share (dollars) 2014 7,050 2014 8.64 2013 8,181 2013 9.05 Net tangible assets are net assets attributable to members of Caltex less intangible assets. The weighted average number of ordinary shares used in the calculation of net tangible assets per share was 270 million (2013: 270 million). 112 30. segmented reporting (a) Segment disclosures The accounting policies used by the Group in reporting segments are detailed in note 1. Types of products and services The following summary describes the operations in each of the Group’s reportable segments: Marketing The Marketing function promotes and sells Caltex fuels, lubricants, specialty products and convenience store goods through a national network of Caltex, Caltex Woolworths and Ampol branded service stations, as well as through company owned and non-equity resellers and direct sales to corporate customers. Supply Chain Caltex sources the supply of both crude oil and refined products on the international market and refines crude oil into petrol, diesel, jet fuel, along with small amounts of fuel oil and specialty products, liquid gas petroleum and other gases. Caltex buys and sells products and schedules product movements to meet marketing sales and the company’s broad distribution capabilities encompass pipelines, terminals, depots and both a company and contracted transportation fleet. (b) Information about reportable segments MARketInG sUPPLY CHAIn totAL oPeRAtInG seGMents thousands of dollars 2014 2013 2014 2013 2014 2013 Gross segment revenue Product duties and taxes 20,409,251 (5,269,246) 20,144,017 (5,151,283) 2,812,772 – 3,580,978 – 23,222,023 (5,269,246) 23,724,995 (5,151,283) External segment revenue 15,140,005 14,992,734 2,812,772 3,580,978 17,952,777 18,573,712 Inter-segment revenue – – 13,834,802 13,850,421 13,834,802 13,850,421 total segment revenue 15,140,005 14,992,734 16,647,574 17,431,399 31,787,579 32,424,133 Share of profit of associates and joint ventures 917 158 – – 917 158 Depreciation and amortisation (79,799) (69,880) (90,072) (87,524) (169,871) (157,404) Replacement Cost of Sales Operating Profit before interest and income tax other material items: Inventory gains/(losses) Capital expenditure (including acquisitions) 811,910 764,151 64,044 (170,655) 875,954 593,496 35,631 (20,681) (551,325) 267,126 (515,694) 246,445 (274,193) (240,085) (230,940) (320,853) (505,133) (560,938) Caltex / 2014 annual RePORtNotes to the financial statementscontinuedfor the year ended 31 December 2014 113 (c) Reconciliation of reportable segment revenues, profit or loss and other material items thousands of dollars Revenues Total revenue for reportable segments Product duties and taxes Elimination of inter-segment revenue Total reportable segments gross revenue Non-fuel income and rebates Other revenue Consolidated revenue Profit or loss Segment Replacement Cost of Sales Operating Profit before interest and income tax, excluding significant items Other expenses Replacement Cost of Sales Operating Profit before interest and income tax, excluding significant items Significant items excluded from profit and loss reported to the chief operating decision maker: Consulting fees Foreign exchange gains on repayment of finance facilities Redundancy expenses Contract cancellation costs Provisions relating to asset rationalisation projects Gain on sale of bitumen business, net of costs relating to acquisitions and disposals Provisions relating to closure of the Kurnell refinery Replacement Cost of sales operating Profit before interest and income tax Inventory (losses)/gains Consolidated historical cost profit before interest and income tax Net financing costs Net profit/(loss) attributable to non-controlling interest Consolidated profit before income tax 2014 2013 31,787,579 5,269,246 (13,834,802) 23,222,023 656,157 353,020 32,424,133 5,151,283 (13,850,421) 23,724,995 627,193 324,195 24,231,200 24,676,383 875,954 (81,443) 593,496 (42,101) 794,511 551,395 (25,065) 4,755 (53,814) (12,000) (53,728) – – 654,659 (515,694) 138,965 (111,370) 2,739 30,334 – – – – – 38,766 (11,003) 579,158 246,445 825,603 (88,791) (1,271) 735,541 thousands of dollars other material items 2014 Depreciation and amortisation Inventory gains Capital expenditure other material items 2013 Depreciation and amortisation Inventory losses Capital expenditure Reportable segment totals other Consolidated totals (169,871) (515,694) (505,133) (157,404) 246,445 (560,938) (33,114) – (4,412) (202,985) (515,694) (509,545) (8,213) – (6,998) (165,617) 246,445 (567,936) (d) Geographical segments The Group operates in Australia and Singapore. Revenue is predominantly generated in Australia. All of the Group’s non-financial non-current assets are located in the Group’s country of domicile, Australia. (e) Major customer Revenues from one customer of the Group’s Marketing segment represent approximately $4,700,000,000 (2013: $4,800,000,000) of the Group’s total gross sales revenue (excluding product duties and taxes). 114 30. segmented reporting continued (f) Revenue from products and services thousands of dollars Petrol Diesel Jet Lubricants Specialty and other products Non-fuel income and rebates Product duties and taxes Other revenue 2014 2013 7,101,556 7,599,818 2,307,913 273,552 669,938 656,157 5,269,246 353,020 7,343,355 7,856,634 2,248,123 279,891 845,709 627,193 5,151,283 324,195 24,231,200 24,676,383 31. Parent entity disclosures As at, and throughout, the financial year ended 31 December 2014, the parent entity of the Group was Caltex Australia Limited. thousands of dollars Result of the parent entity Profit for the period Other comprehensive income Total comprehensive income for the period Financial position of parent entity at year end Current assets Total assets Current liabilities Total liabilities total equity of the parent entity comprising: Issued capital Treasury stock Reserves Retained earnings Total equity 2014 2013 78,770 6,497 85,267 6,317 9,227 15,544 61,059 2,068,326 2,808 1,512,017 133,664 2,240,726 126,286 1,667,865 543,415 (607) (6,267) 19,768 556,309 543,415 (610) (10,840) 40,896 572,861 Parent entity guarantees in respect of the debts of its subsidiaries The parent entity has entered into a Deed of Cross Guarantee with the effect that each company agrees to guarantee all of the debts (in full) of all companies that are parties to the deed subject to, and in accordance with, the terms set out in the deed. Further details of the Deed of Cross Guarantee and the subsidiaries subject to the deed are disclosed in note 22(a). 32. events subsequent to the end of the year On 10 February 2015, Mr Adam Ritchie was appointed as the new General Manager – Supply, effective from 1 April 2015. There were no other items, transactions or events of a material or unusual nature, that, in the opinion of the Board, are likely to significantly affect the operations of Caltex, the results of those operations or the state of affairs of the Group subsequent to 31 December 2014. Caltex / 2014 annual RePORtNotes to the financial statementscontinuedfor the year ended 31 December 2014 Comparative Financial Information 115 The additional information on pages 115 to 116 is provided for the information of shareholders. The information is based on, but does not form part of, the 2014 Financial Report. Caltex Australia Limited consolidated results 2014 2013 2012 2011 2010 Profit and loss ($ million) Historical cost operating profit before significant items, interest and income tax expense Interest income Borrowing costs before significant items (i) Historical cost income tax expense before significant items Historical cost operating profit after tax and before significant items Significant items (net of tax) Historical cost operating profit/(loss) after income tax Dividends Amount paid and payable ($/share) Times covered (excl. significant items) Dividend payout ratio – replacement cost basis (iv) (excl. significant items) Dividend franking percentage Other data Total revenue ($ million) Earnings per share – historical cost (cents per share) Earnings per share – replacement cost (cents per share) (excl. significant items) Earnings before interest and tax – historical cost basis ($m) (excl. significant items) Earnings before interest and tax – replacement cost basis ($m) (excl. significant items) Operating cash flow per share ($/share) Interest cover – historical cost basis Interest cover – replacement cost basis (excl. significant items) Return on capital employed – historical cost basis (%) (v) Return on capital employed – replacement cost basis (excl. significant items) (%) (iv) Equity attributable to members of the company ($m) Total equity ($m) Return on equity attributable to members of the parent entity after tax and before significant items – historical cost basis (%) Total assets ($m) Net tangible asset backing ($/share) Debt ($m) Net debt ($m) Net debt to net debt plus equity (%) 279 8 (99) (56) 132 (112)(i) 20 0.70 0.70 38% 100% 798 9 (98) (205) 504 26 (ii) 530 0.34 5.49 28% 100% 624 2 (99) (161) 640 1 (69) (170) 366 (309) (iii) 57 402 (1,116) (714) 0.40 3.39 24% 100% 0.45 3.31 46% 100% 522 2 (59) (131) 333 (16) 317 0.60 2.06 51% 100% 24,231 7 24,676 196 23,542 21 22,400 (264) 18,931 117 183 123 170 98 118 279 798 624 640 522 795 2.5 1.3 8.8 0.7 15.5 2,521 2,533 1 5,129 8.64 692 639 20 551 2.3 9.3 6.2 15.8 9.9 2,588 2,597 20 6,021 9.05 942 742 22 756 1.5 1.9 7.8 2.0 15.8 2,148 2,160 3 5,386 7.55 950 740 26 442 1.7 (14.0) 6.5 (25.2) 9.3 2,206 2,218 (32) 4,861 7.82 619 617 22 500 1.6 8.7 8.7 8.7 8.8 3,071 3,083 10 5,291 11.08 563 544 15 (i) (ii) (iii) Includes significant items before tax totalling a loss of $160,163,000, that have been recognised in the income statement. These items relate to the Group cost and efficiency review project and include consulting fees ($25,065,000), redundancy costs ($53,814,000), contract cancellation costs ($12,000,000), interest expense ($20,311,000), foreign exchange gains ($4,755,000) and accelerated depreciation ($22,773,000) and environmental liabilities ($30,955,000). Includes significant items totalling a gain of $27,763,000 before tax, that have been recognised in the income statement. These items relate to a gain on the sale of the bitumen business, net of costs relating to acquisitions and disposals ($38,766,000) and the net adjustment to provisions ($11,003,000) relating to the closure of the Kurnell refinery. Includes significant items relating to employment benefit and remediation provisions ($430,000,000) arising from the announcement on 26 July 2012 of the planned 2014 closure of the Kurnell refinery in New South Wales, Australia and its proposed conversion to an import terminal. The remaining expenses of $11,355,000 relate to cancelled capital projects associated with the Kurnell refinery. (iv) Dividend payout ratio – replacement cost basis calculated as follows: (v) Return on capital employed is calculated as follows: Net Profit After Tax Net Debt + Equity Dividends paid and payable in respect of financial year Replacement cost profit after income tax (excl. significant items) 116 Replacement Cost of Sales operating profit Basis of Accounting • To assist in understanding the Group’s operating performance, the directors have provided additional disclosure of the Group’s results for the year on a replacement cost of sales operating profit basis (i), which excludes net inventory gains and losses. • On a replacement cost of sales operating profit basis excluding significant items, the Group’s net profit after income tax for the year was $493 million, compared to a profit of $332 million in 2013. • 2014 net profit before interest, income tax and significant items on a replacement cost of sales operating profit basis was $795 million, an increase of $244 million over 2013. $ million Five years* 2014 2013 2012 2011 2010 Historical cost net profit before interest, income tax and significant items (Deduct)/add inventory (gains)/losses (ii) Replacement cost of sales operating net profit before interest, income tax and significant items Net borrowing costs Historical cost income tax expense before significant items Add/(deduct) tax effect of inventory gains/(losses) Replacement cost of sales operating profit after income tax (iii) * Note: Totals in table may not sum due to rounding. 2,863 184 3,044 (402) 279 516 795 (91) 798 (246) 551 (89) 624 132 756 (97) 640 (197) 442 (68) 522 (21) 500 (57) (723) (56) (205) (161) (170) (131) (56) (155) 74 (40) 59 6 1,865 493 332 458 264 318 (i) (ii) (iii) The replacement cost of sales operating profit basis (RCOP) removes the impact of inventory gains and losses, giving a truer reflection of underlying financial performance. Gains and losses in the value of inventory due to fluctuations in the USD price of crude oil and foreign exchange impacts constitute a major external influence on company profits. RCOP restates profit to remove these impacts. The Caltex RCOP methodology is consistent with the methods used by other refining and marketing companies for restatement of their financials. As a general rule, an increase in crude prices on an Australian dollar basis will create an earnings gain for Caltex (but working capital requirements will also increase). Conversely, a drop in crude prices on an Australian dollar basis will create an earnings loss. This is a direct consequence of the first in first out (FIFO) costing process used by Caltex in adherence with accounting standards to produce the financial result on a historical cost basis. With Caltex holding approximately 45 to 60 days of inventory, revenues reflect current prices in Singapore whereas FIFO costings reflect costs some 45 to 60 days earlier. The timing difference creates these inventory gains and losses. To remove the impact of this factor on earnings and to better reflect the underlying performance of the business, the RCOP NPAT methodology calculates the cost of goods sold on the basis of theoretical new purchases instead of actual costs from inventory. The cost of these theoretical new purchases is calculated as the average monthly cost of cargoes received during the month of those sales. Historical cost results include gross inventory gains or losses from the movement in crude oil prices. In 2014, the historical cost result includes $516 million inventory loss (2013: $246 million inventory gain). Net inventory loss is adjusted to reflect impact of revenue lags. Replacement cost of sales operating profit after income tax is calculated before taking into account any significant items over the five years. The total effect of these significant items in each year was: 2010: $23 million expenses before tax ($16 million after tax) 2011: $1,594 million expenses before tax ($1,116 million after tax) 2012: $441 million expenses before tax ($309 million after tax) 2013: $28 million gain before tax ($26 million after tax) 2014: $160 million expenses before tax ($112 million after tax). Caltex / 2014 annual RePORt Shareholder Information 117 Share capital The information contained on pages 117 to 118 of this Annual Report is current as at 23 February 2015. Substantial shareholders The following shareholders are substantial shareholders of Caltex Australia Limited. shareholder Chevron Global Energy Inc ordinary shares held % of issued shares 135,000,000 50% Distribution of shareholdings Caltex Australia Limited has one class of equity securities (ordinary shares) and the number of holders of those securities is 20,623. The shareholdings in Caltex Australia Limited shares are distributed as set out in the table below. number of shares 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over total number of shareholders number of shares held % of issued shares 15,316 4,615 429 228 35 6,514,308 10,426,109 3,176,630 5,625,368 244,257,585 20,623 270,000,000 2.41 3.86 1.18 2.08 90.47 100 As at 23 February 2015, 270 shareholders hold less than a marketable parcel of Caltex Australia Limited shares. Details of the 20 largest shareholders of Caltex Australia Limited shares are listed in the table below. shareholder number of shares held % of issued shares 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Chevron Global Energy Inc HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Limited National Nominees Limited Citicorp Nominees Pty Limited HSBC Custody Nominees (Australia) LimitedBNP Paribas Noms Pty Ltd RBC Investor Services Australia Nominees Pty Limited Pan Australian Nominees Pty Limited Citicorp Nominees Pty Limited AMP Life Limited National Nominees Limited RBC Investor Services Australia Nominees Pty Limited Australian Foundation Investment Company Limited AET SFS Pty Ltd Share Direct Nominees Pty Ltd <10026 A/C> Invia Custodian Pty Limited BNP Paribas Nominees Pty Ltd UBS Nominees Pty Ltd RBC Investor Services Australia Nominees Pty Limited total On-market buy-back There is currently no on-market buy-back. 135,000,000 33,947,179 27,413,829 20,154,862 10,436,592 3,174,156 2,687,204 1,854,449 1,341,965 1,138,731 924,336 918,430 820,733 455,000 309,471 299,398 297,628 274,913 237,760 236,762 241,923,398 50.00 12.57 10.15 7.46 3.87 1.18 1.00 0.69 0.50 0.42 0.34 0.34 0.30 0.17 0.11 0.11 0.11 0.10 0.09 0.09 89.60 Securities exchange listing The company’s shares and Caltex Subordinated Notes are listed on the Australian Securities Exchange (ticker: CTX and CTXHA). General enquiries Investor Relations Rohan Gallagher +61 2 9250 5247 Company Secretaries Peter Lim, Katie King, John Remedios and Nawal Silfani The address and telephone of the registered office is: Level 24 2 Market Street Sydney NSW 2000 Telephone: +61 2 9250 5000 Fax: +61 2 9250 5742 The postal address is: GPO Box 3916 Sydney NSW 2001 Website: www.caltex.com.au The address at which the register of shares is kept is: Computershare Investor Services Pty Limited Level 4, 60 Carrington Street Sydney NSW 2000 Australia Tollfree: 1300 850 505 (enquiries within Australia) Telephone: +61 3 9415 4000 (enquiries outside Australia) Fax: +61 3 9473 2500 Website: www.computershare.com.au The postal address is: GPO Box 2975 Melbourne VIC 3001 Australia 118 Shareholder Information continued Shareholder enquiries Shareholders with queries about their shares or dividend payments should contact Caltex’s share registry, Computershare, on phone 1300 850 505 or fax +61 3 9473 2500, or through its website (www.computershare.com.au) using their holder identification number (HIN) or shareholder reference number (SRN) to access their shareholder specific information, or write to: Computershare Investor Services Pty Limited GPO Box 2975 Melbourne VIC 3001 Australia All enquiries should include a SRN or HIN, which is recorded on the shareholder’s holding statement. Change of address Shareholders on the issuer sponsored sub-register who have changed their address should notify the share registry in writing. CHESS holders should notify their controlling sponsor. Caltex publications Caltex’s annual report published in March each year is the main source of information for shareholders. The annual report is available on Caltex’s website (www.caltex.com.au). Shareholders who wish to receive a hard copy of the annual report or half year report should notify the share registry in writing. Voting rights The share capital of Caltex Australia Limited comprises 270 million fully paid ordinary shares. Shareholders in Caltex Australia Limited have a right to attend and vote at all general meetings in accordance with the company’s Constitution, the Corporations Act and the ASX Listing Rules. At a general meeting, individual shareholders may vote their shares in person or by proxy. A corporate shareholder may vote by proxy or through an individual who has been appointed as the company’s body corporate representative. Shareholders with at least two shares may appoint up to two proxies to attend and vote at a general meeting. If shares are held jointly and two or more of the joint shareholders wish to vote, the vote of the shareholder named first in the register will be counted, to the exclusion of the other joint shareholder or shareholders. Shareholders who are entitled to vote at the meeting should note that: • on a poll, each shareholder has one vote for each share they hold, and • on a show of hands, each shareholder has one vote. If the shareholder has appointed a proxy, the proxy may vote but, if two proxies are appointed, neither proxy may vote on a show of hands. For a complete analysis of shareholders’ voting rights, it is recommended that shareholders seek independent legal advice. Caltex / 2014 annual RePORt Statistical Information 119 Year ended 31 December 2014 2013 2012 2011 2010 People Employees (i) Assets Fuel refineries Lube oil refinery(ii) Road tankers (iii) Rail cars (operational) Storage terminals operated by Caltex(iv) Star convenience stores (Star Mart, Star Supermarket and Star Shop) Service stations (owned or leased) Depots 3,067 3,638 3,610 3,550 3,546 1 – 252 42 13 496 795 81 2 – 216 66 12 491 765 76 2 – 168 66 12 480 738 76 2 1 168 66 13 476 746 79 2 1 170 66 12 472 743 79 operations Nameplate refining capacity (barrels per day) Caltex Refineries (NSW) Pty Ltd (v) Caltex Refineries (Qld) Pty Ltd Caltex Lubricating Oil Refinery Pty Ltd (ii) Fuel production (ML) Lubricants production (ML)(ii) Total sales volume (ML) Lost time injury frequency rate (LTIFR)(vi) – 109,000 – 10,245 – 16,991 0.77 135,000 109,000 – 11,398 – 16,957 0.63 135,000 109,000 – 11,648 – 16,628 0.59 135,000 109,000 3,750 10,686 15 16,619 0.99 135,000 109,000 3,750 10,607 78 16,047 1.35 Includes employees of Calstores Pty Ltd and Caltex 100% owned resellers. (i) (ii) Lube oil refinery closed in December 2011. (iii) From 2009, road tanker numbers include Caltex 100% owned reseller fleet. (iv) Caltex has access to product supply at a further seven terminals. (v) Caltex Refineries (NSW) Pty Ltd (Kurnell refinery) ceased production in October 2014. (vi) Employee and contractor lost time injury frequency rate per million work hours. From 2010, the injury frequency rate was changed to include Marketing contractors. 120 CALtEx / 2014 ANNUAL REpoRt Directory CoRPoRAte oFFICes MARketInG oFFICes CUstoMeR sUPPoRt FeeDBACk LIne Complaints, compliments and suggestions Mon–Fri 8.30am to 5.00pm (EST) T: 1800 240 398 Card Support Centre Card enquiries 24 hours/seven days T: 1300 365 096 Lubelink Mon–Thurs 8.00am to 6.00pm (EST) Fri 8.00am to 5.00pm (EST) T: 1300 364 169 www.caltex.com.au Caltex Australia Limited ACN 004 201 307 Caltex Australia Petroleum Pty Ltd ACN 000 032 128 New South Wales Caltex Banksmeadow terminal Penhryn Road Banksmeadow NSW 2019 T: +61 2 9695 3600 F: +61 2 9666 5737 Queensland/ Northern Territory Caltex Lytton terminal Tanker Street, off Port Drive Lytton QLD 4178 T: +61 7 3877 7333 F: +61 7 3877 7464 Victoria/Tasmania Caltex Newport terminal 411 Douglas Parade Newport VIC 3015 T: +61 3 9287 9555 F: +61 3 9287 9572 Western Australia Caltex Fremantle 85 Bracks Street North Fremantle WA 6159 T: +61 8 9430 2888 F: +61 8 9335 3062 Level 24 2 Market Street Sydney NSW 2000 Australia Mail: GPO Box 3916 Sydney NSW 2001 Australia T: +61 2 9250 5000 F: +61 2 9250 5742 www.caltex.com.au sHARe ReGIstRY Computershare Investor Services Pty Limited GPO Box 2975 Melbourne VIC 3001 Australia Tollfree: 1300 850 505 (enquiries within Australia) T: +61 3 9415 4000 (enquiries outside Australia) F: +61 3 9473 2500 www.computershare.com.au ReFIneRY Caltex Refineries (Qld) Pty Ltd ACN 008 425 581 South Street Lytton QLD 4178 T: +61 7 3362 7555 F: +61 7 3362 7111 Environmental hotline: 1800 675 487 The Caltex 2014 Annual Report cover is printed on Pacesetter Laser Pro. 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