C a l t e x A u s t r a l i a L i m i t e d 2 0 1 6 A N N U A L R E P O R T 2016 ANNUAL REPORT FREEDOM OF CONVENIENCE CALTEX AUSTRALIA LIMITED 2016 ANNUAL REPORT About this Report This 2016 Annual Report for Caltex Australia Limited (ACN 004 201 307) has been prepared as at 21 February 2017. Please note that terms such as Caltex and Caltex Australia have the same meaning as Caltex Group, unless the context requires otherwise. An interactive version of the Annual Report is available on our website. Visit www.caltex.com.au to download or view a copy. Shareholders can request a printed copy of the Annual Report free of charge by emailing secretariat@caltex.com.au or writing to the Company Secretary, Caltex Australia Limited, Level 24, 2 Market Street, Sydney NSW 2000 Australia. Contents About Caltex 2016 Highlights Message from our Chairman and Managing Director & CEO Our strategy and Values Operations Reports – Supply – Supply Chain Operations – Marketing Sustainable Operations – People and Values – Safety and environment – Caltex in the community 2016 Financial Report 1 6 8 10 12 14 16 18 20 25 27 To view the company’s most up-to-date financial calendar, please visit www. caltex. com.au PROUDLY AUSTRALIAN A truly Australian fuel and convenience company By Caltex Australia About Caltex What sets Caltex apart from other fuel and convenience companies in Australia is that we are an Australian company which operates independently, with our strategy and direction set by the management and the Board in Australia. We are listed on the ASX and have more than 3,000 employees working across the country. Caltex delivers high-quality fuels, lubricants, services and convenience offerings to its diverse range of customers through an extensive Australian network of retail sites, depots and distribution centres. Supporting Australian businesses Caltex realises that the more we can help our 70,000+ Australian business customers to be prosperous, the better our business is. Our history Our company history traces back to the early 1900s. In the late 1940s, the ASX listed the all- Australian oil importer Ampol, which merged with Caltex in 1995. Caltex has a long record of adapting to change and investing in new growth opportunities. 2016 ANNUAL REPORT 1 FREEDOM OF CONVENIENCE Convenience is being redefined By Caltex Australia About Caltex Our extensive convenience retail network – one of Australia’s largest – and our proven track record of moving products across Australia’s wide expanses provide Caltex with the competitive advantage needed to deliver new solutions to the convenience marketplace. We are listening to our customers and delivering the freedom of convenience which meets their needs. Making customers happy In 2016, Caltex delighted our customers with our new barista coffee offer, our great range of fresh food and the new convenient services provided through a growing number of our stores. Embracing digital technology Most motorists fill up their vehicles while on their way to another destination. One app which we are trialling lets customers pay from their car, meaning no lines, no waiting and more time for our customers. 2 CALTEX AUSTRALIA 2016 ANNUAL REPORT 3 MOVING MORE AUSTRALIANS THAN ANY OTHER One third of all Australia’s transport fuel needs are supplied By Caltex Australia About Caltex Caltex has become Australia’s outright leader in transport fuels by adapting to become an integrated transport fuels supply chain business. We source high quality, competitive fuels from around the world, and our network of infrastructure across Australia positions us to meet the needs of businesses, communities and families in even the most remote regions of Australia. Kurnell import terminal The transformation of Kurnell into Australia’s largest transport fuels terminal has enabled the continued reliable supply of high quality fuels to Caltex customers. Ampol Singapore A wholly owned subsidiary, Ampol Singapore sources all crude oil, refined fuels and feedstocks as well as managing the associated shipping for Caltex. 4 CALTEX AUSTRALIA 2016 ANNUAL REPORT 5 2016 HIGHLIGHTS Strong Supply & Marketing performance and record Lytton refinery production underpinned the 2016 Results. $610 M Full year historic cost profit after tax 6 CALTEX AUSTRALIA 6.5% Increase in underlying Supply & Marketing earnings before interest and tax to $709 million in 2016 6.2B Litres produced at the Lytton refinery, the highest ever production 16B Litres of transport fuel sold $270M Off-market buy-back completed in April 2016 Historic cost of sales operating profit (HCOP) ($million) Replacement cost of sales operating profit (RCOP) ($million) Year Year On a historic basis, Caltex recorded an after-tax profit of $610 million for the 2016 full year. This includes a product and crude oil inventory gain of $86 million after tax. Caltex recorded an after-tax profit for the 2016 full year of $524 million, excluding significant items, on a RCOP basis. This is our preferred measure, as it excludes net inventory gains and losses and better represents the underlying performance of the business. RCOP NPAT of $524 million is down on previous year due to 17% lower refiner margin. Transport fuel sales (Billion Litres) Refinery transport fuel production (Billion Litres) Year Year Total sales volumes of transport fuels were 16.0 Billion Litres, broadly in line with prior year. Overall sales volumes were maintained in a challenging market, with all commercial contracts retained. Lytton refinery transport fuel production, with record production volumes, showed strong operational performance. * Reflects production from the Lytton refinery only, following the conversion of the Kurnell refinery. 2016 ANNUAL REPORT 7 $610 M Full year historic cost profit after tax 5753020522610161314151245833249352462816131415125.15.55.15.54.32.2*3.1*2.9*3.3*5.4161314151215.716.016.416.016.11613141512 MESSAGE FROM THE CHAIRMAN AND THE MANAGING DIRECTOR & CEO In 2016, Caltex Australia continued on our “Freedom of Convenience” journey. Greig Gailey Chairman Julian Segal Managing Director & CEO During the year, we continued to strengthen the capabilities which will best place us to capture the opportunities ahead in the fuels and convenience marketplace. Consistent with our history, Caltex Australia is adapting and improving our business so we can use our advantages to navigate our dynamic industry and embrace the future before us. Caltex places the highest priority on the health and safety of our workforce and customers. All levels of the organisation – from entry level through to the Board – are evaluated on personal and process safety. While we have seen improvement – Lytton achieved an incident-free turnaround and inspection on one of our process units and our contractor workforce achieved its best safety performance in recent history – we will continue to strive for improved safety performance. Our incident recording of 2.35 TTIFR still demonstrates room for improvement, and we will continue our relentless focus on injury prevention into 2017. Supply & Marketing delivered strong earnings before tax of $709 million, reflecting a resilient retail business, continued growth in premium fuels and Ampol Singapore sourcing and supply benefits. Our Vortex premium fuels continued to impress, with a growth of 2% in retail premium petrol sales and 17% in total premium diesel sales. Caltex’s historical resilience has bolstered our confidence in our ability to make the most of our growth and extension opportunities. As we create new solutions for our customers, we will leverage our existing consumer and mobility assets and supply chain expertise through prudent investment. 8 CALTEX AUSTRALIA Off-market Buy-back completed $270M Premium diesel Growth in sales 17% As always, creating value for shareholders is at the heart of our decisions. We have established strong foundations in retailing, supply chain management, sourcing and infrastructure which will serve us well as we seek to maximise long term shareholder returns. The successful closure of the Kurnell refinery in 2014 and the company’s ongoing quest to reduce costs and improve efficiency has resulted in significantly improved cash flows. This enabled us to conduct a successful $270 million off-market share buy-back in April 2016 of approximately 9.2 million shares. In late December, Woolworths announced that it had entered into an agreement to sell its fuels business to BP. While we are disappointed that our longstanding supply arrangement with Woolworths is likely to end, we are pleased that Caltex maintained strict financial discipline during the bidding process. We remain committed to the creation of top quartile shareholder returns but only through profitable, capital-efficient growth, and we will only spend our shareholders’ money on opportunities which deliver sustainable value. We will continue to honour our 3.5 billion litre fuel supply arrangement with Woolworths until its transaction with BP is complete. Caltex Australia’s review of its franchise model has confirmed the model allows franchisees to make a profit, draw a wage, and pay employees in accordance with lawful wage rates. The review examined the profitability of the model for franchisees and included external legal advice supported by an assessment of franchise profitability conducted by a leading, independent advisory firm. This work follows allegations of wage underpayment by some franchisees in the Caltex Australia network and speculation about the fairness of the company’s franchise model. The company continues to enhance its governance system and procedures for franchised sites, including already-implemented changes to the process for accepting franchisees into its network. Wage underpayment or mistreatment of staff is unacceptable to Caltex, and we will continue to remove franchisees who do the wrong thing. Finally, 2016 has been a year of change and challenges – and more of these are likely ahead of us. On behalf of Caltex’s Board and management, thank you to Caltex’s employees, franchisees, contractors, distributors, and suppliers for their continued support and hard work. Together, we have an exciting and promising future before us. In Victoria, Caltex will expand our reach with the purchase of Milemaker Petroleum’s retail fuel operations, protecting volume and gaining operational control of 46 service stations. The strategic acquisition, expected to complete in the first half of 2017, will improve our position in the key regional Victoria market. Late in the fourth quarter, we also announced our first overseas acquisition – the purchase of independent fuel retailer Gull New Zealand (Gull), including New Zealand’s largest import terminal, 77 retail sites and four marinas in a market of some 7.7 billion litres. With Ampol Singapore having established strong supply and shipping capabilities, entry into the similar and geographically-advantaged New Zealand market is a logical growth step for us. These acquisitions will deliver on our strategic plan by optimising Caltex’s infrastructure position, building trading and shipping capability, growing the supply base and enhancing our retail fuel offerings. On an historic cost profit basis, Caltex recorded an after tax profit of $610 million for the 2016 full year. This compares with the 2015 full year profit of $522 million, which included a gain relating to significant items of $29 million after tax. The 2016 result includes a product and crude oil inventory gain of $86 million after tax. This compares with the inventory loss of $135 million after tax in 2015. On an RCOP basis, Caltex recorded an after tax profit for the 2016 full year of $524 million, excluding significant items. This compares with an RCOP after tax profit of $628 million for the 2015 full year, excluding significant items. The overall result reflects a strong underlying Supply & Marketing EBIT of $709 million within highly competitive wholesale, commercial and retail markets, offset by adverse foreign exchange and pricing lags of $29 million. Excluding these net externalities, the underlying Supply and Marketing EBIT is up 9.3% on the 2015 result. Less favourable externalities than in 2015 have led to a lower Lytton refining EBIT, despite continued improvements to operating performance. Lytton refinery sales volumes increased 14% and production by 15% compared to 2015 full year total, noting that 2015 was impacted by the major planned outage which occurs at the refinery once every five years. The benefits of optimising our business through our Protect and Grow strategy have already begun to surface. We reported record production from our Lytton refinery due to improved process unit reliability. We also gained significant supply chain efficiencies as 2016 marked the first full year of our subsidiary Ampol Singapore directly sourcing all of our crude, feedstocks and refined products. This has supported the competitive and reliable supply of transportation fuels to our customers across Australia. 9 2016 ANNUAL REPORT OUR STRATEGY Caltex aspires to top quartile total shareholder returns through our Freedom of Convenience strategy, which is to be the market leader in complex supply chains and the evolving convenience marketplace by delivering the fuel and other everyday needs of our diverse customers through our networks. Caltex’s strategic journey continues We are now building on our position as Australia’s leader in transport fuels to deliver services and convenience offerings to our diverse range of customers. We are well positioned to use a “whole of business” mindset through our operations across our integrated supply chain – from source to customer. We will continue to optimise all areas of our business to strengthen Caltex’s place in a highly competitive industry. In 2016, we were excited to have the opportunity to invest in businesses which complement our existing model. We have also strengthened our capabilities as we extend our offerings in markets new to Caltex, such as the convenience marketplace. As always, Caltex will strive to lead, not follow, others by redefining customer expectations and placing ourselves at the crossroads of what is needed today, and what is possible tomorrow. 10 Freedom of Convenience To be the market leader in complex supply chains and the evolving convenience marketplace, by delivering the fuel and other everyday needs of our diverse customers through our networks. Protect and Grow Optimise, enhance and expand core integrated fuel value chains and fuel retail offer Optimise infrastructure position Build trading and shipping capability Work with customers to protect and grow the supply base Enhance the fuel retail customer offering Create new customer solutions in the convenience marketplace + Extend Invest in capabilities and businesses that leverage our existing consumer and mobility assets Enhance capabilities and competitiveness Safety Efficiency People CALTEX AUSTRALIA OUR VALUES We hold safety and integrity as core personal commitments We look after our own safety and the safety of others. We are intolerant of personal injury. We treat each other and the environment with respect. We are upfront and do the right thing. We think and act like business owners We are results driven. We treat the business as our own. We never lose sight of tomorrow. We play to win We expect to achieve the extraordinary. We are smart with money. We make tough decisions to create shareholder value. We deliver superb outcomes for our customers We are one team, servicing our customers together. We listen, understand and deliver. We deliver with energy, conviction and tenacity We act with a sense of urgency. We are decisive and agile. We boldly find new ways to succeed We step out from the traditional to seize opportunities. We are curious, adventurous and innovative. We have the courage to change. 11 One Caltex Top quartile shareholder returns for investors 2016 ANNUAL REPORT OPERATIONS REPORTS Supply Our supply team continues to build its capabilities to competitively and reliably supply the transportation fuels, feedstocks, crude and other products which our Australia-wide customer base and refining system require. With Chevron’s 2015 departure from Caltex’s supply chain, 2016 marked the first full year of Caltex’s standalone trading and shipping capability through Ampol Singapore. 12 Import locations The number of locations Caltex typically imports products to 14 Singapore office Number of employees at the end of 2016 53 CALTEX AUSTRALIA Trading and shipping Our Ampol Singapore team of experienced and capable industry professionals safely and reliably provides Caltex with high quality, competitive supply, as well as a better understanding of the dynamic global oil market. This is critical to our integrated fuels supply chain – one of our greatest strengths. In 2016, Ampol Singapore continued to extend its value creation from sourcing crude oil, refined products and feedstocks for Australia from global markets by leveraging the strong relationships built during Ampol’s three years of operations. The majority of refined products came from key regional supply locations across North Asia, Singapore and India/Middle East. Crude oil was sourced from a variety of global locations depending on pricing and quality, with a focus on regional grades. Our conservative approach to trading and shipping remains unchanged, with our activities focused on our strength of physical system supply and optimisation, with no speculation and prudent management of our commodity risks. In July 2016, Ampol successfully transitioned to a standalone shipping organisation, which was completed incident free. This additional capability enables Caltex to maintain our high safety and environmental standards, while gaining control of this critical operational and commercial activity to meet the fuel supply needs of our geographically remote nation. To support this, Ampol has established relationships across the shipping industry, including achieving full membership in the world-renowned Oil Companies International Marine Forum (OCIMF). Supply operations and optimisation Caltex continues to improve the value created by our integrated supply chain, using the knowledge we have gained from our longstanding operations within the unique Australian market combined with our new capabilities. We rapidly adapt our operations to dynamic market conditions and identify new opportunities by understanding the factors which influence value and costs across our supply chain, and its complex and linked operations. The team is continuously optimising the complex system flow into and from our Lytton refinery and then through our distribution networks to customers from the major metropolitan markets such as Sydney, Brisbane and Melbourne to remote communities all around Australia. By combining new knowledge from Ampol Singapore with our experienced team in Australia, we have found innovative and more efficient ways of operating our supply chain, while ensuring we always maintain our commitment to reliable supply to our customers. This capability, coupled with significant planning and alignment across Supply, Supply Chain Operations and Marketing, is a unique competitive advantage for our business. Future focus In 2017, Caltex will focus on embedding the standalone trading and shipping capabilities established over the last three years. We will also look to improve our integrated decision making from source to customer, driving further value from our system-backed fuels supply chain. We are excited about the opportunity to integrate and optimise our new fuels supply chain to Gull NZ, the acquisition of which was announced in December 2016. 13 2016 ANNUAL REPORT OPERATIONS REPORTS Supply Chain Operations Caltex’s Supply Chain Operations manages a complex, nation-wide network of facilities, including the Lytton refinery, 13 terminals, 64 depots, pipelines and freight logistics. Lytton production Record performance (Billion Litres) 6.2 Lytton refinery Met South East Queensland’s transport fuel needs by 90% Capable management of this infrastructure and logistics, always with safety as our top priority, underpins our integrated supply chain – the core of meeting our customers’ needs. Lytton refinery Supplying approximately 90% of South East Queensland’s transport fuel needs and with nearly 500 employees and contractors, Lytton refinery plays an important role for Queensland. The refinery continued to make operational improvements in 2016, which resulted in a record production of 6.2 billion litres of the high value products petrol, diesel and jet fuel – the highest ever in its 50-plus year history. This compares with production of 5.3 billion litres in 2015 (during which we had a planned major shutdown) and 5.8 billion litres in 2014. The Lytton refinery is a key element in Caltex’s East Coast supply chain, including Ampol Singapore and the terminal network. This tight integration continued to drive value and helped the refinery achieve its record production of high value products. Lytton refinery’s focus on reliability and gross margin improvement resulted in an increase in the refinery’s nameplate capacity by 3,000 barrels per day during the year. Mechanical availability in 2016 was 97.4%, up from 97% in 2015. Utilisation for 2016 increased to a record 90%, compared to 87% in 2015 (outside the major maintenance period) and 2014. The 2016 record results are an outstanding achievement, reflecting continued year-on-year improvement. 14 CALTEX AUSTRALIA Operating two pipelines, the refinery maintained its position as the major supplier of ground fuels (petrol and diesel) to the broader Brisbane market, supplying more than 90% of the demand in 2016. Infrastructure operations At Kurnell Terminal, Australia’s largest fuel import terminal, optimisation continued following the first full year of operation in 2015. The terminal both imports fuel to meet local Sydney basin demand, and is integrated into the broader supply chain to allow optimisation across Caltex’s East Coast markets. During the year, decommissioning and demolition work relating to the former refinery operation continued at the Kurnell site, on budget and on schedule to be completed in the first half of 2018. Construction has commenced on a $75 million investment upgrade at the Caltex Newport fuel terminal in Victoria, announced in August and due for completion by the end of 2017. The project includes the installation of two new tanks, providing an additional 40 million litres of storage capacity, new pipe and pumping infrastructure, increased truck loading capacity and upgrades to the terminal’s safety systems. The upgrade will enable the company to meet the growing demand for petrol, diesel and jet fuel from across Victoria. In Brisbane, the Caltex/Shell Aviation joint venture BAPFII pipeline was commissioned to supply jet fuel to Brisbane Airport from the Lytton refinery. The pipeline will underpin the continued rapid expansion of this international aviation hub over the next 20 years. Following a review of the supply chain to best service the Eyre Peninsula in South Australia, the decision was made to convert the Port Lincoln terminal to a depot, eliminating the need for shipped product into Port Lincoln. Product to the area will be supplied via truck from the Caltex Pelican Point terminal in Adelaide, which is ship-supplied. These changes are expected to take place in 2017. Lubricant manufacturing 2016 was the first full year of operational control of the Caltex assets of the former Australasian Lubricants Manufacturing Company (ALMC) joint venture. We continue to improve our lubricants customer offer and to deliver a more competitive supply chain in response to changes in the Australian lubricants market. During the year, we drove improvements both in our Lytton blending, manufacturing and warehouse plant in Queensland and in our logistics, capturing operational efficiencies and better customer service. Logistics 2016 was a year of consolidation for logistics, as we combined our two previously separate logistics functions into one national logistics business. The new leadership team is focused on providing safe, reliable and cost-competitive logistics solutions to our customers by leveraging our carrier and depot networks to protect and grow our business. Significant progress was made in optimising our depot and carrier networks during the year. This work will result in more efficient coverage of our customer base and deliver improved customer outcomes and a more competitive business offer. Future focus Infrastructure is a key element of Caltex’s integrated supply chain, and our focus remains on providing safe, reliable and competitive operation of these assets to underpin reliable supply to our customers. Continuous improvement is embedded in our operations mindset. In 2017, we will continue to extract value from our integrated supply chain, build on the excellent performance of the Lytton refinery, and drive benefits from our reshaped logistics organisation. Caltex will continue to invest in our assets with a long term view of what matters most to our customers and will create value for our shareholders. Keeping our Kurnell decommissioning and demolition program and our Newport terminal upgrade on plan – and incident free – will strengthen our ability to provide fuel reliably for our customers and drive cost/capital efficiency. As the successful operator of one of Australia’s largest infrastructure networks, we will continually investigate new opportunities to leverage our expertise. 15 2016 ANNUAL REPORT OPERATIONS REPORTS Marketing As our business continues to grow, so does our commitment to serving our customers, who rely on us for approximately 16 billion litres of fuel each year and a range of lubricants and fresh and packaged retail offerings. Vortex 98 Grew year on year 7% Vortex diesel Grew year on year 12% Business-to-business Number of commercial customers 70,000+ Our commitment to our broad range of customers, combined with our integrated approach to our value chain, enables us to leverage our supply base for both our business-to-business and our retail customers. This, together with our enviable infrastructure position across the country and our product and sourcing capabilities, positions us well in a competitive, dynamic market. While our total sales volumes in 2016 were flat, reflecting the challenging market for both volumes and margins, our priority segments in premium fuels continued to achieve strong growth. Consumer sales Caltex has one of the nation’s most extensive fuel and convenience networks. Consumers depend on our forecourt convenience sites, service centres, truck stops, service stations, diesel stops and depot fronts – many of them 24/7. Also one of Australia’s largest franchisors, Caltex has independent franchisees operating more than 640 sites. In 2016, 1,900 sites accepted StarCard, making ours the largest fuel card network in Australia. Caltex continued to drive Vortex premium fuels, recording excellent growth of 7.2% for the period. Higher sales in premium fuels continued to offset the long term decline in demand for regular unleaded petrol, including E10. A continuation of the eight-hose, multi-product dispenser upgrade program saw a further $6 million invested in 2016 improving the convenience of fuel selection for customers and increasing the availability of Vortex Premium fuels at our sites. Our Convenience business continues to generate substantial sales $1.17 billion for the year ending 2016 compared to $1.15 billion in 2015. 16 CALTEX AUSTRALIA Targeted investment in our retail network continued to underpin market opportunities and during the year included 22 new-to-Caltex sites plus four retail-owned retail-operated, 11 knock down rebuilds and two major upgrades. Continued implementation of improved procurement processes allowed us to deliver our build and refurbishment projects efficiently, without compromising stores’ build-quality and functionality. During the first half of the year, we completed a major study on “convenience” which suggested that the Australian convenience market is under-served. We undertook further work to identify ways to take hold of this opportunity, ensure the quality of our offer and differentiate Caltex from competitors. The results of this work will be rolled out in 2017 for pilot testing. Subsequent to year end, Caltex introduced its new brand, The Foodary, into the retail convenience offering with the opening of a pilot store in Concord, NSW. Along with freshly made food and barista services, The Foodary features a range of services and digital offerings to improve the customer experience. Our digital offerings are designed to simplify and streamline the retail environment for our digitally-connected and time-poor customers. We successfully trialled two new digital offers: “Price Bid”, which allowed customers to bid on a fuel price and fuel type at a selected location; and secondly, an innovative fuel payment app, which allowed customers to pay quickly without leaving their vehicles. The response was strong, and in 2017 we anticipate rolling out the payment app and other new mobile digital applications to make shopping at Caltex simple, fast and convenient. Caltex was honoured to be recognised in August 2016 by the Australasian Association of Convenience Stores (AACS) as “Retailer of the Year” for the second consecutive year. This prestigious award, in particular, recognises innovation in convenience retailing. Business-to-business sales More than 70,000 businesses rely on the reliable supply of high quality Caltex products including petrol, diesel, jet fuel, lubricants, StarCard and specialty products. Our commercial customers include mining, oil and gas, marine, industrial, transport, aviation, distribution, automotive, government and agricultural segments across urban and rural Australia. Caltex provides the jet fuel supplied to nearly all of the airports on the east coast of Australia. We also operate 64 depots in regional Australia, complementing our strong import terminal network and logistics capability and demonstrating our commitment to fuelling Australia. In keeping with Caltex’s overall priority of optimising our entire value chain from product sourcing though to our customer, we continued building our relationships with, while at the same time rationalising and creating greater efficiencies in, our distributor supply network to better service our customers throughout regional Australia. This also involved working with and investing alongside our distributors to protect and grow our supply base, whilst enhancing our fuel retail customer offering to attract more customers to Caltex and our distribution partners. In 2016, there was substantial growth in jet fuel, with volumes increasing by 5%. Caltex now enjoys a more diversified jet fuel customer mix, including the growing number of new airline carriers entering the Australian market. We will continue to build our capacity to service this sector. In 2016, Caltex launched its telematics system to the Australian transport industry, giving our customers the power to manage their fleets more effectively. The telematics technology captures and collates data on vehicles, and uses this data to produce meaningful information on the vehicle and driver. This data then enables businesses to manage their fleets more effectively, and ultimately reduce costs, improve the safety of their employees and vehicle assets, and increase productivity. Acquisitions Caltex has expanded its reach in Victoria with the purchase of Milemaker Petroleum’s retail fuel operations, securing volume and operational control of 46 service stations. This high quality business, with a history of being a Caltex-branded reseller and customer for more than 32 years, will transfer to a direct Caltex operation in 2017. Our acquisition of Gull New Zealand, announced in December and scheduled for completion in Q2 2017, enhances our retail fuel offering further through a low-risk entry into a new market. Caltex looks forward to serving the customers of Gull’s 77 retail-branded sites and four marinas. Building capability To meet the challenges of a rapidly changing marketplace, and enhance the diversity of our customer offers, emphasis has been, and will continue to be, on securing staff with strong retail skills. Future focus In 2017, Caltex will continue to refine its Marketing business to ensure that it is customer-led and remains competitive in a highly contested market. We are committed to continuing to meet and exceed our customers’ expectations with strong propositions, enhancing our product range and convenience offering, and delivering innovative solutions for our customers. Our focus is on building long term relationships. 17 2016 ANNUAL REPORT SUSTAINABLE OPERATIONS From sourcing products through to serving our customers, Caltex exercises CARE in everything we do. We prioritise people and the environment, and have put Board-endorsed policies and day-to-day procedures in place so that all of our activities demonstrate this value. People and Values Even while our organisation is under transformation, our Values consistently guide our actions and strengthen the pursuit of our Vision. Enhancing capabilities and competitiveness Throughout 2016, we continued to build on our talent management practices to enhance key capabilities and build sustained competitiveness company-wide. These practices support our Vision and the delivery of our strategic commitments by building the skills that will underpin our growth, managing risk, building a deeper succession pipeline and better resourcing critical roles. Targeted efforts have also attracted key talent into retail operations, food development, supply chains, trading and shipping, and marketing. In addition, the Caltex Academy was established in 2016. Run in partnership with a leading Australian university and an international business school, the Caltex Academy delivers a targeted and consistent approach to the development of our people at key stages in their career. Initially targeting business knowledge and commercial acumen for all non-finance leaders, and strategy, execution and leadership development for senior leaders, the Academy will expand over time to include on-demand programs for all employees. Personal Best, Caltex’s performance management system introduced in 2015, improved 2016 performance and employee/manager relationships through better feedback and coaching, career support and expectations, and goal setting. The approach has revolutionised performance management at Caltex. Diversity and inclusion For the second consecutive year, Caltex received an Employer of Choice for Gender Equality (EOCGE) citation from the Workplace Gender Equality Agency (WGEA). This award reflects Caltex’s leadership in and commitment to diversity, as well as the best practice programs we have put in place to promote gender equality. Since 2014, we have been focused on improving the female representation in our senior leadership, setting a target of 33% women in senior leadership roles by 31 December 2016. As a result of sustained focus, we have exceeded our desired diversity target. Female leaders now comprise 37% of our senior leaders, up from 32.4%, and 37.5% of the Caltex Leadership team, an increase from zero in 2015. Our BabyCare package, now in its fourth year, continued to deliver practical support and flexibility for parents returning to the Caltex workforce. In 2016, 24 mothers and one father accessed parental leave, with 100% of parents returning to work in 2016. 18 CALTEX AUSTRALIA The Caltex Indigenous Employment Strategy was launched in 2016, with a dedicated working group established. The strategy aims to make a meaningful difference to the lives of Indigenous Australians through employment and development. The working group has raised the awareness of our Indigenous Employment Strategy throughout the year by introducing protocols for welcome and acknowledgement of country, developing a guideline for managers of Indigenous employees, supporting sponsorship events including The Ross Kelly Cup and developing an approach to school based trainees in partnership with the Endeavour School. In 2016, seven Indigenous interns were engaged through CareerTracker, an increase from five in 2015. Initiatives like BabyCare, the WGEA EOCGE citation and our continued focus on diversity and inclusion support the attraction and retention of top talent at Caltex and help us build a great place to work. Employee recognition A highlight of the Caltex year is the annual Stellar Awards – the cornerstone of our Recognising Results program. The awards were specifically designed to celebrate and reward the Caltex values in action. 115 nominations were received for the 2016 Stellar Awards, recognising more than 633 Caltex people. Based on our values, finalists were chosen across six categories, and winners were rewarded at the annual event. During the year, we also recognised more than 740 employees and contractors for their stellar efforts and rewarded them with a variety of cash and non-cash awards. Gender trend at Caltex Proportion of males to females in senior leadership positions Senior leaders Executive team 63% 37 % 62.5% 37.5% Gender pay differential Negligible on a like-for-like basis between men and women 1.1% 19 2016 ANNUAL REPORT SUSTAINABLE OPERATIONS Safety and environment Caltex strives for incident-free operations. We are vigilant about ensuring that our workforce goes home safe at the end of every day and protecting the environments in which we operate. TTIFR Per million hours worked 2.35 Injuries Treated contractor injuries 6 Personal safety In 2016, Caltex’s total treated injury frequency rate (TTIFR) was 2.35 per million hours worked. The result was equal to our performance in 2015, and we recognise this is an area on which we must improve. There were 19 treated injuries during 2016. Of these, nine injuries resulted in lost time and 10 required medical treatment but did not result in lost time. Thirteen of the treated injuries involved employees and six involved our contractors. This is the best-ever safety performance achieved by our contractor workforce. Of the 19 treated injuries, 11 injuries were associated with manual handling or trips, slips and falls, and four had the potential for more severe injuries. In response to the number of manual handling injuries, we have stepped up our manual handling training and implemented a “Nurse led, phone Triage” service to improve the quality of early injury advice provided to our people all around the country. We remain focused on prevention and management of low severity injuries, while also ensuring that different strategies are implemented to prevent incidents which have the potential for high severity outcomes. In 2017, we will transition our reporting from TTIFR (total treated injury frequency rate) to TRIFR (total recorded injury frequency rate) to more effectively report injury cases which impact our employees and contractors. We will also improve our reporting on incidents and near misses with the potential to cause serious harm. 20 CALTEX AUSTRALIA The safe transportation of fuels is of utmost importance to us. We recorded three tanker incidents in 2016, which is an improvement on the five recorded in 2015. Distressingly, one of these incidents was serious involving a vehicle roll-over, diesel spill and a significant personal injury to our driver. No member of the public was involved and no harm to the environment occurred. We will continue to focus on tanker driver safety in 2017. Pleasingly, we recorded zero significant light motor vehicle accidents again in 2016. The last recorded light motor vehicle accident was in August 2014. Process safety In 2016, one Tier 1 process safety event, as assessed using the criteria defined in the American Petroleum Institute (API) standard, API 754, and three Tier 2 process safety events were recorded. Process safety focuses on the safe manufacture, distribution and transportation of products, and the safe operation of all Caltex facilities. None of the recorded process safety events had any material impact on the environment. The Lytton refinery also achieved strong process safety results, with no Tier 1 process safety events for the second year in a row. In 2016, the refinery had three reportable spills, compared with one reportable spill in 2015 and eight reportable spills in 2014. Health and wellbeing Investing in the health and wellbeing of our employees increases their effectiveness and engagement. Caltex supports the emotional wellness of our employees with the Caltex Employee Assistance Program. This program provides employees and their immediate families with access to information and professional, totally confidential counsellors to assist with workplace and personal issues. In 2016, Caltex supported a record 385 employees to participate in the Global Corporate Challenge, a 16 week, team based program aimed at promoting and increasing physical activity. Lytton refinery conducted additional health initiatives focusing on personal lifestyle, healthy eating and giving up smoking. Caltex’s Drug and Alcohol Policy stipulates that employees must not use illegal drugs or misuse legal drugs, alcohol or other substances which adversely affect the health and safety of our work environment. Consistent with others in our industry, Caltex believes that testing is a deterrent. In 2016, more than 2,750 drug and 3,000 alcohol tests on employees and contractors were conducted at safety critical sites across the business. This included an extensive testing program during the Lytton refinery maintenance shutdown and the Newport Terminal Expansion Project. 21 2016 ANNUAL REPORT SUSTAINABLE OPERATIONS Occupational health In 2016, we continued to strengthen occupational health and hygiene programs across the business. This included implementation of comprehensive exposure risk assessments across all workgroups in the business covering key occupational risks such as fatigue, noise and chemical exposure. Our Lytton refinery commenced an improvement program focusing on task assessments and exposure monitoring in the workplace. Caltex has effectively transitioned to the Globally Harmonised System (GHS) for Classification and Labelling of Chemicals over the last five years. As a result, all of Caltex’s product Safety Data Sheets and product labels were GHS-compliant prior to the mandatory 1 January 2017 deadline. Caltex has been a leader in this space, producing an online webinar to support small-to-medium sized businesses in making this transition. Contractor safety Contractors perform extensive work across our facilities. Ensuring that this work is undertaken safely is of utmost importance to Caltex. During 2016, further improvements were made to our contractor safety management processes. Improvement areas included our qualification and assessment processes and, even more importantly, how we work with and monitor our contractors. In 2016, six contractors sustained treated injuries. While this is the best-ever safety performance achieved by our contractor workforce, three of these injuries had the potential for more severe consequences, and we remain focused on reducing these incidents. In 2017, we will step up our efforts to reduce incidents and near misses with the potential to cause serious harm. During the year, 203 contract safety reviews were conducted. Risk management The Caltex Risk Management Framework provides a comprehensive, high-level view of the risks faced by Caltex, including strategic risks, business related risk and those risks which potentially may harm our employees or the environment. Workshops are conducted regularly with senior staff to assess risks and consider changes in Caltex’s risk profile. The Caltex Board reviews quarterly governance reports. At an operational level, a comprehensive suite of risk management tools are used to identify, assess and address facility and workplace risks. Environment Caltex is committed to protecting the environments in which we work through full compliance with regulations and standards and robust operational management. We regularly conduct internal and external monitoring to ensure our organisation’s compliance. Caltex’s businesses are subject to a range of environmental laws and regulations as well as project and site-specific environmental licences and approvals issued by both federal and state governments. Our Lytton refinery, six licensed terminals across Australia (Kurnell, Banksmeadow, Mackay, Cairns, Gladstone and Port Hedland) and our Lytton lubricants manufacturing facility are operated in accordance with an ISO-14001 compliant Environment Management System. In 2016, companies in the Caltex Group held 21 environmental protection licences relating to the Lytton refinery, 12 terminals, three marketing facilities, three aviation refuelling facilities, our lubricants manufacturing facility and a bulk shipping facility. 22 CALTEX AUSTRALIA Any instances of non-compliance against these licences are reported to the environmental regulator. All significant spills and environmental incidents were recorded and reported as required to government authorities. Regular internal audits are carried out to assess the efficacy of management systems to prevent environmental incidents, as well as to control other operational risks. The Board’s Occupational Health, Safety & Environmental Risk Committee and senior management review improvement actions which the audit process identifies. 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. The business had no environmental infringements in 2016. The NSW Land and Environment Court handed down its judgment on 20 February 2017 convicting Caltex of an offence in relation to a fuel spill at its Banksmeadow Terminal on 12 July 2013. Further details of this incident and the decision are provided in the Directors Report forming part of this Annual Report. Edison Award In April, Caltex received international recognition with a Gold award for innovation at the prestigious Edison Awards in New York. The award, in the “Energy and Sustainability – Re-use and Reclamation” category was for the Caltex Soil Remediation Facility (CSRF) at the company’s site. The facility is now operational and has the capacity to divert up to 80,000 tonnes of hydrocarbon contaminated soil per annum from New South Wales landfills. Caltex Operational Excellence Management System Caltex’s Operational Excellence Management System (OEMS) supports the systematic management of process safety, personal safety and health, environment, reliability and efficiency to achieve world-class performance. Leadership accountability and effective monitoring and governance of the processes are the key to the success of Caltex’s OEMS. A whole-of-system governance process, known as the Management System Process, is applied to ensure that the system’s health is assessed and improved on a continuous cycle. This ensures that Caltex operates to the highest standards across our business. Climate change The safeguard mechanism, implemented by the Clean Energy Regulator (CER) on 1 July 2016, encourages large businesses to not increase their emissions above historical levels. On 23 May 2016, the CER issued Caltex Refineries (QLD) Pty Ltd with a reported-emissions baseline determination of 697,406 tonnes of CO2. Future emissions performance will be measured against this reference point. Caltex Refineries (QLD) Pty Ltd will take up the option to submit an initial calculated baseline for the Lytton refinery in 2017. Caltex continues to support greenhouse gas reduction policies which maintain the international competitiveness of Australian industries such as petroleum refining. 23 2016 ANNUAL REPORT Tank replacement Number of sites where Caltex is responsible for the underground fuel system which underwent tank replacement in 2016 as part of our ongoing underground tank replacement and monitoring program 13 Australian packaging covenant Compliance among Caltex product suppliers 100% SUSTAINABLE OPERATIONS Total Scope 1 and Scope 2 emissions Historical greenhouse emissions data for Caltex Australia 2012–2013 to 2015–2016 Metric Tonnes of CO2 equivalent 1,800,000 1,350,000 900,000 450,000 0 12–13 13–14 14–15 15–16 12–13 13–14 14–15 15–16 Years SCOPE 1 SCOPE 2 Energy efficiency and greenhouse gas emissions In 2016, Caltex continued to implement greenhouse gas emissions reduction activities to improve energy efficiency within our operations, including ongoing installation of lower energy usage light fittings in new service station canopy designs. These activities have reduced energy usage as well as operational and maintenance costs at current service station locations. In 2016, Lytton refinery’s site Energy Intensity Index (EII) was 96.3, with average site flaring 47% lower than in 2015. Reporting under the National Greenhouse and Energy Reporting Scheme continued in 2016. Scope 1 emissions are from energy sources owned and controlled by Caltex, and Scope 2 are purchased energy from electricity, heat or steam. Caltex’s Scope 1 and Scope 2 emissions reduced by approximately 20% in 2015–2016, the result of the first full year of reporting with Kurnell operations as a fuel import terminal. Infrastructure, integrity and product responsibility Keystones of Caltex’s ability to meet Australia’s transport fuels needs include reliable, quality supply and a strong infrastructure network. Underground tank replacement and monitoring Caltex reduces potential environmental risks through actively monitoring our Underground Petroleum Storage Systems (UPSS). Used at both service stations and depots, the 2016 program prioritised the replacement of underground tanks at 13 sites. Since the program’s inception in 2007, underground tanks at 134 sites have been replaced. Product stewardship and waste management The product stewardship team at Caltex oversees the integrity of our fuel storage and delivery systems and ensures that our customers receive high quality products, our legal and regulatory obligations are met and performance is consistently high. The team frequently trials improvements in how we manage products and waste throughout their lifecycles. In 2016, we made improvements to our waste water management at Lytton. The Australian Packaging Covenant (APC) is a sustainable packaging initiative which aims to change the culture of business to design more sustainable packaging, increase recycling rates and reduce packaging litter. As a signatory to the APC, Caltex is pleased to report 100% compliance among our product suppliers. 24 CALTEX AUSTRALIA Caltex in the community Our corporate sponsorship program partners with a select group of Australian organisations that share our values, providing financial support and leveraging our networks to make a real difference across Australia. Social responsibility Focusing on road safety Caltex has been a proud sponsor of the Australian Road Safety Foundation and its Fatality Free Friday program since it was founded. 2016 marked the 10th year of the program, which is Australia’s largest community-based road safety day to raise awareness of the human cost of careless driving by calling for extra vigilance behind the wheel. Fatality Free Friday saw more than 300 events held across the country, with major events featuring Caltex senior staff and ambassadors, including popular drivers Craig Lowndes OAM and Renee Gracie. In 2016, Caltex promoted the Fatality Free Friday message at various employee and public events, through Caltex sites nationwide with instore and onsite marketing assets and radio activity, as well as through social media channels. Around 1,000 “Take the Pledge” Fatality Free Friday key rings were handed out to our employees to remind them to promise themselves, their family, friends and workmates to consciously exercise road safety and arrive home safe every day. Caltex also sponsors the Australian Road Safety Foundation Awards, the only national road safety recognition program. The ongoing monitoring of speed, fatigue and harsh braking with on-board monitoring is a continuing requirement for both our company-owned and our contracted fleet nationally. This is a priority for Caltex, with investment also undertaken in tanker driver safety through in-house classroom sessions and expanding our in-cab driver training process. In 2016, Caltex continued with Motorvation, an organisation which works with groups of young drivers aged 15 to 20 years to decrease risk taking and collision risk. Fatality Free Friday Fatality Free Friday online pledges 185,749 Make-A-Wish® Amount raised by Caltex across Australia $166,188 Charity partners Amount raised through Caltex’s employee donation matching program $47,680 25 2016 ANNUAL REPORT SUSTAINABLE OPERATIONS Closely aligned with Caltex’s focus on safety and driver training, Motorvation is a unique method of changing young driver attitudes and behaviour. Motorvation helps young people understand their driving personality, leading them to change their behaviour to reduce overconfidence and risk taking. The program uses training modules, such as the Motorvation bus with in-built motion simulators, innovative online exercises, entertaining discussion sessions, and time driving real cars, to engage and equip young drivers. Delivering our united best for sick children Caltex is a diamond partner of the Make-A-Wish® Foundation. Make-A-Wish® grants the wishes of children with life-threatening medical conditions to enrich the human experience with hope, strength and joy. In November and December, we ran a Wish Drive campaign to support Make-A-Wish® with in-store activities to help raise funds for seriously ill children. The month long campaign saw the majority of Star Mart stores get behind the charity with donation tins at the counter and supporting in-store advertising. Business development meetings across the country also supported the charity with videos, raffles, auctions and guest speakers at their events. Investing in the future The Clontarf Foundation aims to improve the education, discipline, life skills, self-esteem and employment prospects of young Aboriginal men. In addition to financial support over the last six years, many Caltex employees also have hands-on involvement in the Foundation’s effort through volunteering at football carnivals, participating in remote adventures to Jabiru, Kununurra, Broome and Yirrkala, supporting Academy students to visit Sydney and Perth and participating in career exhibitions. A highlight of 2016 was the Ross Kelly Cup, a Junior Rugby League Carnival for all New South Wales Academies. At this event, 20 employees volunteered as water carriers, lines people and photographers to help make the event a great success. Staff also participated in the inaugural Fox Sport and Clontarf OzTag Challenge, with Clontarf students from across New South Wales teaming up with Caltex staff on the field. Caltex staff worked closely with Clontarf to deliver the 2nd Annual Clontarf Cricket Carnival in Brisbane in November, a great success, with 90 students participating. Recognising Australia’s leaders of the future In its 31st year, the Caltex Best All Rounder program is a fixture in more than 75% of high schools across Australia. Presented to thousands of final-year students around the country, the Caltex Best All Rounder program seeks to acknowledge the rounded contribution each student makes to their school and community, their leadership abilities and the good example they set for others. Caltex representatives proudly presented these awards in schools all over Australia. 26 Fuelling Change Caltex employees are passionate about Fuelling Change, our workplace giving program, which matches pre-tax dollars donated to Caltex’s nominated community partners. These donations are then matched dollar for dollar by Caltex. In 2016, more than $47,680 was raised for our community partners: the Cancer Council of Australia, the Heart Foundation, Oz GREEN, the RSPCA, the Starlight Children’s Foundation, The Smith Family, the Clontarf Foundation, the Australian Road Safety Foundation and the Make A Wish® Foundation. Supporting our communities As a good corporate citizen, Caltex is pleased to support the communities in which we work and live. In 2016, financial and in-kind assistance was provided for a range of educational, environmental, sporting, cultural and local initiatives in the communities around our facilities. In and around Lytton, the refinery supported local schools, Indigenous groups and kindergartens, environmental and science initiatives, mentoring programs at local high schools, local and national charities, and local sporting organisations through both monetary contributions and employee time. We have partnered with the Australian Red Cross to donate blood and plasma to help others across the country, and we have worked hard to assist local homeless organisations in their work to help those less fortunate. We continue to focus on engaging with our communities to inform them about our operations through regular email and letter notifications and by attending various community activities and meetings to ensure open, two-way communication. The refinery encourages feedback from our community via our 24-hour, free call line and our formal process for reporting and addressing community concerns. The Caltex Code of Conduct A critically important document, Caltex’s Code of Conduct guides how all Caltex employees and contractors must work. The Code provides our business with a framework for decision making and business behaviour which shapes and upholds our corporate values, reputation and achievements. The Code works in parallel with complementary policies and programs, including the Fraud and Corruption Control Policy, the Ethical Business Practices Policy, the Harassment and Bullying Prevention Policy and the Competition and Consumer Act Compliance Policy. A confidential hotline is available for all employees to report any perceived breaches of the Code or our workplace policies. Caltex and public policy During 2016, Caltex engaged with governments and stakeholders about a number of state and federal public policy issues affecting our industry. We regularly meet with government and industry stakeholders to share information about the benefits provided by the downstream petroleum industry and convenience retailing and the challenges confronting the industry. CALTEX AUSTRALIA 2016 FINANCIAL REPORT FOR CALTEX AUSTRALIA LIMITED ACN 004 201 307 Contents Directors’ Report Financial Statements 28 75 Comparative financial information 119 Replacement cost of sales operating profit basis of accounting Shareholder information Statistical information Directory 120 121 123 124 The 2016 Financial Report for Caltex Australia Limited includes: • Directors’ Report • Lead Auditor’s Independence Declaration • Directors’ Declaration • Independent Auditor’s Report to the Shareholders of Caltex Australia Limited • 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 2016 Caltex Group For the purposes of this report, the “Caltex Group” refers to: • Caltex Australia Limited (Caltex), the parent company of the Caltex Group listed on the Australian Securities Exchange (ASX) • Major operating companies, including Caltex Australia Petroleum Pty Ltd • Wholly owned entities and other entities that are controlled by the Caltex Group 2016 ANNUAL REPORT 27 DIRECTORS’ REPORT The Board of Caltex Australia Limited presents the 2016 Directors’ Report (including the Remuneration Report) and the 2016 Financial Report for Caltex Australia Limited (Caltex) and its controlled entities (Caltex Group) for the year ended 31 December 2016 to shareholders. An Independent Audit Report from KPMG, as external auditor, is also provided. Board of directors The Board of Caltex Australia Limited comprises Greig Gailey (Chairman), Julian Segal (Managing Director & CEO), Trevor Bourne, Steven Gregg, Bruce Morgan, Barbara Ward AM and Penny Winn. Subsequent to year end, Ms Melinda Conrad was appointed to the Board as an Independent, Non-executive Director effective 1 March 2017. As a result, there have been changes to the committee composition. 28 Greig Gailey Chairman and Independent, Non-executive Director Trevor Bourne Independent, Non-executive Director Date of appointment: 2 March 2006 Board committees: OHS & Environmental Risk Committee (Chairman), 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 Chairman of Senex Energy Limited (appointed 10 March 2015) and a director of Sydney Water Corporation (appointed February 2014). He was previously a director of Origin Energy Limited (from February 2000 to November 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, and is a Fellow of the Australian Institute of Company Directors. Date of appointment (Director): 11 December 2007 Date of appointment (Chairman): 10 December 2015 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. 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 Mr Gailey 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 and the Australian Advisory Board of Canada Steamships, and Deputy Chairman of the Victorian Opera. Mr Gailey was President of the Business Council of Australia from 2007 to 2009. Mr Gailey holds a Bachelor of Economics from the University of Queensland. Steven Gregg Independent, Non-executive Director Date of appointment: 9 October 2015 Board committees: Audit Committee, OHS & Environmental Risk Committee and Nomination Committee Mr Gregg has over 25 years of investment banking experience in Australia and internationally and brings to the Board extensive executive, corporate finance, strategy, and mergers and acquisitions experience. Mr Gregg has held various roles with ABN AMRO, most recently as Global Head of Investment Banking and the CEO of the United Kingdom. Following this, Steven was a Partner in the Strategy and Financial Institutions practice at McKinsey & Company in Sydney and internationally. Mr Gregg is a director of Challenger Limited, Challenger Life Company Limited, Lorna Hodgkinson Foundation, Tabcorp Holdings Limited and William Inglis & Son Limited. He is the Chairman of The Lorna Hodgkinson Sunshine Homes, a trustee of the Australian Museum and a member of the Grant Samuel non-executive advisory board. He has previously served as Chairman of Goodman Fielder Limited and Austock Group Limited. Mr Gregg holds a Bachelor of Commerce from the University of New South Wales. 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. CALTEX AUSTRALIA Bruce Morgan Independent, Non-executive Director Penny Winn Independent, Non-executive Director Date of appointment: 29 June 2013 Board committees: Audit Committee (Chairman), Nomination Committee and OHS & Environmental Risk Committee Mr Morgan brings to the Board expertise in financial management, business advisory services, risk and general management. He is the Chairman of Sydney Water Corporation and Redkite, and a director of Origin Energy Limited (appointed November 2012), the University of New South Wales Foundation and the European Australian Business Council. Prior to this, Mr Morgan 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. Mr Morgan was previously Chairman of the PwC Board and a member of the PwC International Board. Prior to that, he was managing partner of PwC’s Sydney and Brisbane offices. 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 New South Wales. Date of appointment: 1 November 2015 Board committees: Human Resources Committee and Nomination Committee Ms Winn brings to the Board Australian and international strategic, major transformation and business integration, technology and retail marketing experience. Prior to her appointment to the Caltex Board, Ms Winn was Director Group Retail Services with Woolworths Limited, and she has over 30 years of experience in retail with senior management roles in Australia and internationally. Ms Winn is Chairman and Non-Executive Director of Port Waratah Coal Services Ltd, a director of CSR Limited and a member of the University of Technology, Sydney (UTS) Business School’s Advisory Board and the Australian Institute of Company Directors. She has previously served as a director of a Woolworths business, Greengrocer.com, a Myer business, Sass & Bide, and Quantium Group, and was a member of the Australian Payments Clearing Association’s CECS Advisory Council. Ms Winn holds a Bachelor of Commerce from the Australian National University and a Master of Business Administration from the University of Technology, Sydney. Barbara Ward AM Independent, Non-executive Director Date of appointment: 1 April 2015 Board committees: Human Resources Committee (Chairman), Audit Committee and Nomination Committee Ms Ward brings to the Caltex Board strategic and financial expertise in senior management roles, including as Chief Executive Officer of Ansett Worldwide Aviation Services and General Manager Finance at TNT Limited. Ms Ward also served as a Senior Ministerial Adviser to the Honourable Paul Keating. Ms Ward is a director of various Brookfield companies, Qantas Airways Limited and the Sydney Children’s Hospital Foundation. An experienced director, she has previously served on the boards of various public companies including the Commonwealth Bank of Australia, Lion Nathan Limited and Multiplex Limited, and public sector entities, including as Chairman of Country Energy. Ms Ward is a member of the Australian Institute of Company Directors and holds a Bachelor of Economics and a Master of Political Economy from the University of Queensland. 29 2016 ANNUAL REPORT DIRECTORS’ REPORT CONTINUED Leadership team Andrew Brewer Executive General Manager, Supply Chain Operations Andrew was appointed to this position in April 2014. He is an experienced senior executive in the energy and resources sector. Commencing his career as a professional electrical engineer, Andrew has held leadership roles in engineering, project management, maintenance, reliability, operations, business strategy, planning and general management. This has spanned the minerals processing, resources and energy industries across Australia and in Canada, where he was Downstream Country Chair and General Manager of the Burnaby oil refinery for Chevron Canada. Andrew also previously managed the Kurnell refinery. Viv Da Ros Chief Information Officer Viv was appointed to this position in December 2016 and is responsible for leading the technology transformation program at Caltex. He is a commercially-driven senior technology executive focused on customer-centric, innovative solutions which deliver operational efficiencies and engagement. His nearly 30 years of experience include senior leadership positions in Australia, Asia and Europe, predominantly in the retail sector with the ASW Group, Tesco, KPMG and Dairy Farm International. Viv holds a Master of Business Administration from Manchester Business School and a Master of Project Management from The University of Technology, Sydney. Simon Hepworth Chief Financial Officer Simon was appointed to this position in 1999. He joined Ampol in 1996, after 10 years with Arthur Andersen. He is responsible for finance, accounting and decision support, treasury, taxation, investor relations, information technology and procurement. Simon holds a Bachelor of Arts and a Master of Applied Finance. He is a member of the Institute of Chartered Accountants in England and Wales. He is also a member of the Australian Institute of Company Directors. 30 CALTEX AUSTRALIA Lyndall Stoyles Executive General Manager, Legal and Corporate Affairs Lyndall was appointed to this position in October 2016 when she joined Caltex. Lyndall manages Caltex’s legal, secretariat, internal audit, compliance and corporate affairs teams. As General Counsel, she is responsible for providing legal advice to Caltex’s Board, CEO and broader leadership team. She is also a Company Secretary to the Board. Prior to joining Caltex, Lyndall was Group General Counsel and Company Secretary for former logistics business Asciano and spent more than a decade with Clayton Utz advising on competition, commercial and corporate law issues in a broad range of industries. Lyndall holds a Diploma of Law/Masters of Law from the University of Sydney. Lyndall is also a member of the Australian Institute of Company Directors. Louise Warner Executive General Manager, Supply Louise was appointed to this position in October 2016, and is responsible for ensuring competitive reliable fuel supply for our customers. Louise joined Caltex in 1999, and her career has spanned a range of roles within the company, starting with her role as a process engineer at the Kurnell refinery. She gained commercial and trading experience through her secondment to Chevron UK. Recently, she was responsible for successfully establishing Caltex Australia’s first overseas operations, Ampol Singapore, which includes the company’s global trading and shipping function. Louise holds a Bachelor of Engineering (Chemical) from the University of New South Wales. Joanne Taylor Executive General Manager, Human Resources Joanne was appointed to this position in February 2016 when she joined Caltex. She is an accomplished Human Resources leader and has had an 11 year career with McDonald’s Australia. Her last role at McDonald’s was Senior Vice President Human Resources, Corporate Communications and Supply Chain. Prior to this, her roles included leading the franchise operations across New South Wales and the Australian Capital Territory for approximately 290 retail stores. Joanne holds a Bachelor of Commerce from the University of New South Wales. 31 2016 ANNUAL REPORT 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 75 to 118. Group strategy Over the past five years, Caltex has transformed key elements of its business to place the company on a stronger footing to navigate the evolving marketplace and successfully deliver top quartile total shareholder returns. Critical components of this transformation include: • the closure of the Kurnell refinery and its conversion to a major import terminal • the establishment of the Ampol Singapore business, to directly manage sourcing and associated shipping of petroleum products to Australia • implementation of “Tabula Rasa”, a company-wide cost and efficiency program • a major maintenance program at Lytton refinery, to underpin cost and performance improvements • investment in further building out our retail network. To date, our strategy has delivered strong results for the business and continues to position us to retain leadership in transport fuels in Australia, with a stronger retail convenience platform. Our 2016 review of strategy builds on Caltex’s core competitive advantage provided by the strength of our integrated fuel value chain across supply, infrastructure, network and the retail and business-to-business channels. It also looks to continue to adapt the business to drive growth in a changing industry and consumer environment. The “Protect and Grow” aspect of the strategy outlined below is focused on capturing the many opportunities that exist to continue to enhance and expand the core fuel business. In the “Extend” aspect of the strategy, Caltex will build on its current assets, capabilities and customer base to develop the business in both existing and new adjacent markets. 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. The head office is based in Sydney, and Caltex has approximately 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. There were no significant changes in the nature of Caltex’s principal activities or in the state of affairs during the financial year. Caltex operates one oil refinery, the Lytton refinery in Brisbane. This refinery produces petrol, diesel and jet fuel, along with small amounts of fuel oil and specialty products, liquid petroleum gas (LPG) and other gases. 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. Chevron previously held a 50% shareholding in Caltex, which was sold in March 2015. 32 CALTEX AUSTRALIADIRECTORS’ REPORTCONTINUED Caltex’s strategy – overview FREEDOM OF CONVENIENCE To be the market leader in complex supply chains and the evolving convenience marketplace, by delivering the fuel and other everyday needs of our diverse customers through our networks. Optimise infrastructure position Build trading and shipping capability Top quartile shareholder returns for investors Work with customers to protect and grow the supply base Enhance the fuel retail customer offering Create new customer solutions in the convenience marketplace Safety Efficiency People One Caltex PROTECT AND GROW Optimise, enhance and expand core integrated fuel value chains and fuel retail offer EXTEND Invest in capabilities and businesses that leverage our existing consumer and mobility assets Enhance capabilities and competitiveness Assessing each element in turn Optimise infrastructure position Maintain a relentless focus on a cost-competitive supply chain through excellence in infrastructure and refinery management and being proactive in adapting to changing market dynamics and pursuing new infrastructure opportunities. Build trading and shipping capability Continue to develop and expand the capabilities and operations of Ampol to capture opportunities for value creation in sourcing and delivering product. Protect and grow supply base Execute organic and inorganic strategies to increase marketing volumes in target regions to support long term infrastructure investment and competitive supply. Enhance the fuel retail customer offering Continue to develop elements of the fuel site retail offer which will attract more customers to Caltex sites and increase their spend while there. Create new customer solutions in the convenience marketplace Leverage Caltex’s existing strong consumer facing business, including our network of over 800 retail sites and over three million weekly customer visits, to build a new and differentiated convenience offer for customers across multiple formats, products, locations and channels. All of these elements of strategy are underpinned by a strong focus on continually enhancing Caltex’s capabilities and competitiveness through: • Safety – systematically managing both personal and process safety across the business to drive towards zero injuries and environmental harm. • Efficiency – continuing to drive down costs and utilise assets more efficiently to ensure an industry-leading cost structure. • People – continuing to invest in our people to strengthen organisational capability and agility. • One Caltex – embedding a culture of delivering the best outcome for Caltex, through active collaboration across the business and a focus on optimal organisational, rather than business unit, outcomes. 33 ANNUAL REPORT 2016 Operating and financial review continued Group strategy continued Through the strategies outlined above, Caltex is committed to growing earnings by capturing opportunities across all elements of its existing business, as well as through extending into adjacent areas. In pursuing this clear growth agenda in both the “Protect and Grow” and “Extend” aspects of the business strategy, Caltex will continue to assess potential acquisitions. These will only be pursued, however, where the strategic rationale is compelling and they deliver appropriate risk adjusted returns for shareholders. Caltex’s measure of success continues to be to safely and reliably deliver top quartile total shareholder returns. Caltex Group results 31 December 2016 On an historical cost profit basis, Caltex recorded an after-tax profit of $610 million for the 2016 full year. This compares with the 2015 full year profit of $522 million, which included a gain relating to significant items of $29 million after tax. The 2016 result includes a product and crude oil inventory gain of $86 million after tax. The 2016 total inventory gain of $86 million compares with an inventory loss of $135 million after tax in 2015. A reconciliation of the underlying result to the statutory result is set out in the following table: Reconciliation of the underlying result to the statutory result Net profit attributable to equity holders of the parent entity Deduct/add: Significant items (gain)/loss Deduct/add: Inventory (gain)/loss RCOP NPAT (excluding significant items) 2016 $m (after tax) 2015 $m (after tax) 610 – (86) 524 522 (29) 135 628 On an RCOP1 basis, Caltex recorded an after-tax profit for the 2016 full year of $524 million. This compares with an RCOP after-tax profit of $628 million for the 2015 full year, excluding significant items. $m 700 600 500 400 300 200 100 0 Caltex RCOP NPAT* 377 320 270 261 161 197 171 173 251 254 2012 2013 2014 2015 2016 * RCOP Net profit after tax, excluding significant items. ■ RCOP NPAT 1H ■ RCOP NPAT 2H The overall result reflects a strong Supply and Marketing profit, and excellent operational performance by the Lytton refinery. The strong operational performance at Lytton continued to deliver outstanding production results, despite refiner margins being down on 2015 (but in line with the 10 year average). 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, and is consistent with the basis of reporting commonly used within the global refineries industry. This is unaudited. RCOP excludes the unintended impact of the fall or rise in oil and product prices (a key external factor). 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. 34 CALTEX AUSTRALIADIRECTORS’ REPORTCONTINUED Dividend The Board has declared a final dividend of 52 cents per share (fully franked) for the second half of 2016. Combined with the interim dividend of 50 cents per share for the first half, paid in September 2016, this equates to a total dividend of 102 cents per share for 2016, fully franked. This compares with a total dividend payout of 117 cents per share (fully franked) for 2015. This is in line with a target dividend payout ratio of 40-60% of RCOP NPAT. Income statement For the year ended 31 December 2016 1. Total revenue1 2. Total expenses Replacement cost earnings before interest and tax Finance income Finance expenses 3. Net finance costs Income tax expense2 Replacement cost of sales operating profit (RCOP) 4. Significant items gain/(loss) after tax 5. Inventory gain/(loss) 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) 2016 $m 17,935 (17,122) 813 7 (80) (73) (216) 524 – 86 610 50c 52c 199c 232c 2015 $m 19,918 (18,941) 977 5 (82) (77) (272) 628 29 (135) 522 47c 70c 233c 193c 1. Includes other income of $2 million (2015: $24 million) less the significant item gain of nil (2015: $32 million gain). 2. Excludes tax payable on inventory gain of $37 million (2015: $58 million tax benefit) and excludes tax cost on significant items of nil million (2015: $3 million tax cost). DISCUSSION AND ANALYSIS – INCOME STATEMENT 1. Total revenue ▼ 10% Total revenue decreased primarily due to the impact of the significant fall in world petroleum product prices, which reflects the fall in world crude oil prices, and the impact of lower refiner margins (a component of refined product prices). Product prices are denominated in US dollars. This decline was partly offset by the fall in the Australian dollar. The weighted average Brent crude oil price in 2016 was US$44/bbl, compared to US$51/bbl in 2015. 2. Total expenses – replacement cost basis Total expenses also decreased primarily as a result of lower replacement cost of goods sold due to the lower price of refined product. ▼ 10% 35 ANNUAL REPORT 2016 Operating and financial review continued DISCUSSION AND ANALYSIS – INCOME STATEMENT CONTINUED RCOP EBIT BREAKDOWN1 Caltex Refiner Margin (CRM) $543m 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 lower in 2016 at US$10.50/bbl, compared with US$16.46/bbl for 2015. In AUD terms, the CRM was 8.88 Australian cents per litre in 2016, compared with 13.85 Australian cents per litre in 2015. Total refinery production in 2016 of all products was 6.4 billion litres, compared with 5.6 billion litres in 2015, reflecting the closure for turnaround and inspection (T&I) maintenance work that occurred in May and June 2015. Transport fuels margin $1,066m Transport fuels comprise petrol, diesel and jet. The transport fuels margin consists of the earnings on these products within the Supply and Marketing segment and represents the integrated sourcing, distribution and sales margin. Premium fuel sales were 4.4 billion litres in 2016, compared with 4.3 billion litres in 2015. Caltex’s overall transport fuel sales volumes are in line with the prior year. Total retail diesel margins have continued to grow strongly, driven by increased sales of the premium diesel product, Vortex Diesel, and as a result of growth in the diesel vehicle market. The steady transport fuel sales volumes reflected a decrease in base grade fuel sales and jet sales. However, premium petrol sales volumes continue to grow, with Vortex Premium Unleaded petrol sales volumes increasing 2%. The ongoing decline in regular unleaded petrol sales is due to the continued increase in sales of vehicles requiring diesel or premium grades of petrol. Jet volumes increased 5%, driven by increased domestic capacity and a high win rate of new business. This follows the shedding of unprofitable volume in 2015. Diesel fuel volumes are in line with prior period; the decline in base grade volumes has been offset by 16% volume growth on Vortex Premium diesel sales. Lubricants and specialties products include finished lubricants, base oils, liquefied petroleum gas, petrochemicals, wax and marine fuels. 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 is $6 million higher than prior year due to increased merchant service fees. Lubricants and specialties margin $70m Non-fuel income $177m Operating expenses ($1,013m) Operating expenses in this category include Supply Chain, Marketing and Corporate operating expenditure. There has been an increase of $35 million from 2015 due to: • higher depreciation and amortisation of $17 million • increased major project costs (including M&A and franchisee review), and • additional advertising with sponsorship of V8 Supercars and Socceroos, • partly offset by good cost control and a low inflationary environment. Other ($30m) 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. There was a net foreign exchange loss of $4 million (after hedging) in 2016. RCOP EBIT excluding significant items $813m 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. 36 CALTEX AUSTRALIADIRECTORS’ REPORTCONTINUED DISCUSSION AND ANALYSIS – INCOME STATEMENT CONTINUED 3. Net finance costs ▼ 5% Net finance costs decreased by $4 million compared with 2015, reflecting the lower cost of funding as a result of the composition of borrowings and lower average net debt for the period (despite the $270 million share buy-back undertaken in April 2016). 4. Significant items after tax During 2016, the Group has recognised no significant items. ▼ $29m 5. Inventory gains after tax ▲ $221m During 2015, the Group recognised a significant item gain of $32 million ($29 million after tax) on the sale of a surplus property in Western Australia. Inventory gains in 2016 were driven by the significant increase in crude oil prices in 2016, with crude oil rising from US$38/bbl in December 2015 to US$54/bbl in December 2016. This increase resulted in a net inventory gain of $86 million after tax, compared to inventory losses of $102 million after tax in 2015. Whilst the average crude oil price was lower during 2016 compared with 2015, the actual crude price rose during the period between 31 December 2015 and 31 December 2016. The inventory gain of $122 million ($86 million after tax) is driven by the increase in the crude price, partially offset by an increase in the Australian dollar, from the end of December 2015 to December 2016. This resulted in an increase in the cost of crude on an Australian dollar basis during the period. Business unit performance Supply and Marketing Supply and Marketing delivered a headline EBIT of $709 million. This result includes a realised loss on US dollar denominated product payables of $4 million (2015 loss of $26 million) and a price timing lag loss of $25 million (versus a 2015 price timing lag gain of $23 million). Excluding these net externalities (net $29 million unfavourable), the underlying Supply and Marketing EBIT of $738 million is up 9.3% on the 2015 result. The underlying result reflects a strong and resilient retail business, continued growth in premium fuels and Ampol Singapore sourcing and supply benefits. The company continues to focus on operational efficiencies via the Tabula Rasa program, helping to offset the impact of highly competitive commercial and wholesale markets. Total sales volumes of transport fuels were 16.0 BL, broadly in line with prior year (2015:16.1 BL). From a product mix perspective, sales of premium fuels sales continue to grow, up 3% on 2015. Higher sales of premium grades of petrol (Vortex 98 in particular) and Vortex diesel continue to offset the long term decline in demand for unleaded petrol, including E10. Total petrol volumes declined 2% to 5.9 BL. This is despite the increased penetration of premium Vortex products that has been underpinned by targeted investment in growth, including new retail service stations and increased marketing spend. Total diesel volumes are flat year on year at 7.2 BL. Double- digit volume growth in premium Vortex diesel product (sales up 12% to 2.2 BL) across Caltex’s retail segment has largely offset lower commercial base grade diesel volumes (down 6%). This is a function of completed LNG related infrastructure projects and subdued transport, industrial and SME sectors. Pleasingly, Caltex is increasing sales volumes (albeit still small) of Caltex’s differentiated diesel to mining and transport customers. Jet volumes grew by 4.8% to 2.6 BL. Lytton Refinery The Lytton Refinery has delivered a solid 2016 EBIT contribution of $205 million. This compares with an EBIT contribution of $406 million for 2015 and a 2016 first half EBIT of $92 million. Less favourable externalities have impacted EBIT, with refiner margins down on 2015 (but in line with the 10 year average). The operating performance continued to deliver outstanding production results. Sales from production increased 14% to 6.2 BL, including a record second half sales from production performance (3.3 BL). The realised Caltex Refiner Margin (CRM) averaged US$10.29/bbl for the 2016 full year. This compares to the first half 2016 average of US$10.10/bbl and the 2015 full year (US$16.46/bbl). Improved yield loss and higher quality premium was more than offset by a lower Singapore Weighted Average Margin (US$10.94/bbl, down US$4.01/bbl), higher crude premium and lower net freight costs, year on year. Corporate Corporate costs of $101 million are comparable to prior year ($102 million). Corporate costs include continued investment relating to ongoing IT expenditures, major project costs (including M&A and franchisee review) and further building capabilities that will better position Caltex longer term. Balance sheet remains strong Net debt at 31 December 2016 was $454 million, compared with $693 million at 30 June 2016 and $432 million at 31 December 2015. The net debt level includes the impact of the first half off-market buy-back, but does not include the cost of the two recently announced acquisitions (Milemaker $95 million, Gull New Zealand approx. A$325 million). Both of these transactions are expected to complete in the first half of 2017 following regulatory approvals. 37 ANNUAL REPORT 2016 Operating and financial review continued Business unit performance continued Capital Management – Off-Market Buy-Back Caltex has previously indicated that it was focusing on the efficient allocation of capital. The successful closure of the Kurnell refinery in 2014 and the company’s continued evolution into an integrated transport fuels value chain business, enhanced by the company’s ongoing cost and efficiency program, has resulted in significantly improved cash flows. In April 2016, the Group repurchased 9,189,481 shares at a total cost of $270 million as part of the Group’s capital management program. The company’s overarching objective is to deliver top quartile Total Shareholder Returns. The company’s capital management framework is therefore designed to provide a balanced approach to the allocation of capital between maintenance to ensure a safe and sustainable business, investing for growth and returning capital to shareholders. The size of the buy-back enabled the return of surplus capital relative to the company’s target BBB+ credit rating, and maintenance of financial flexibility to take advantage of growth opportunities as they arise. Management continues to actively pursue options to grow the business based on the company’s core capabilities including management of complex supply chains, infrastructure services and leveraging its convenience and mobility base. The company’s priority remains growth, but over time, both investment in growth opportunities and capital management are expected to play a role in delivering top quartile shareholder returns. Merger and Acquisition Activity Milemaker Petroleum On 4 November 2016, Caltex entered into an agreement to purchase Milemaker Petroleum’s retail fuel business assets in Victoria for $95 million. The final consideration will be adjusted for working capital and other ancillary items at completion. The acquisition will secure Caltex’s existing network in Victoria and provide a stronger platform from which to provide new and improved customer offerings in the convenience marketplace. Completion of the transaction is scheduled for the first half of 2017, allowing time for regulatory review and execution of various operational agreements. Gull New Zealand On 22 December 2016, Caltex entered into an agreement to purchase Gull New Zealand for NZ$340 million (approximately A$325 million). The final consideration will be adjusted for working capital. The transaction will see Caltex acquire Gull’s Mount Maunganui import fuel terminal and retail operating assets. The acquisition delivers on Caltex’s strategic plan as it optimises Caltex’s infrastructure position, builds trading and shipping capability, grows the supply base and enhances Caltex’s retail fuel offering through low risk entry into a new market. Subject to New Zealand regulatory approval (New Zealand Overseas Investment Office), completion of the transaction is scheduled for the second quarter of 2017. Balance sheet As at 31 December 2016 1. Working capital 2. Property, plant and equipment 3. Intangibles 4. Net debt 5. Other non-current assets and liabilities Total equity 2016 $m 396 2,691 195 (454) (18) 2,810 2015 $m 524 2,603 183 (432) (90) 2,788 Change $m (128) 88 12 (22) 72 22 38 CALTEX AUSTRALIADIRECTORS’ REPORTCONTINUED DISCUSSION AND ANALYSIS – BALANCE SHEET 1. Working capital ▼ $128m 2. Property, plant and equipment ▲ $88m 3. Intangibles ▲ $12m 4. Net debt ▲ $22m The decrease in working capital is primarily due to timing of tax payments, with an increase to current tax liabilities driven by current year profits, and higher payables driven by rises in crude oil. The decrease is partially offset by: • higher receivables also due to the rises in crude oil and product prices in 2016, net of the impact of the lower Australian dollar, and • a portion of non-current environmental liabilities becoming current as remediation works at Kurnell increase. The increase in property, plant and equipment is due to capital expenditure and accruals, including major cyclical maintenance, of $323 million and capitalised interest of $2 million. This is partly offset by depreciation of $192 million and disposals of $47 million. The increase in intangibles is primarily due to investments in software of $30 million, partially offset by depreciation of $18 million and disposals of $5 million. Net debt increased by $22 million to $454 million at 31 December 2016. Caltex’s gearing at 31 December 2016 (net debt to net debt plus equity) was 13.9%, increasing from 13.4% at 31 December 2015. On a lease-adjusted basis, gearing at 31 December 2016 was 28.4%, compared with 27.8% at 31 December 2015. CURRENT SOURCES OF FUNDING DEBT MATURITY PROFILE A$ notes A$m 150 Bank facilities 850 Inventory finance facility Hybrid 250 550 $1,800 Source Australian and Asian institutional Australian and global banks Australian bank Australian and Asian retail and institutional investors 825 550 150 250 0 0 100 2017 2018 2019 2020 2021 Beyond 2021 Bank Loans (undrawn) Inventory Finance (undrawn) Hybrid AUD Notes 5. Other non-current assets and liabilities ▼ $72m Other net non-current liabilities have decreased primarily due to a portion of non-current environmental liabilities becoming current as remediation works at Kurnell increase. Deferred tax assets have also been partially utilised, resulting from timing differences between the accounting and tax basis of inventory, provisions, and property, plant and equipment. 39 ANNUAL REPORT 2016 Operating and financial review continued Cash flows For the year ended 31 December 2016 1. Net operating cash inflows 2. Net investing cash outflows 3. Net financing cash outflows Net increase/(decrease) in cash held DISCUSSION AND ANALYSIS – CASH FLOWS 2016 $m 928 (357) (590) (19) 2015 $m 885 (411) (263) 211 Change $m 43 54 (327) (230) 1. Net operating cash inflows ▲ $43m 2. Net investing cash outflows ▼ $54m 3. Net financing cash outflows ▲ $327m While receipts from customers are lower in 2016, this was largely offset by lower payments to employees, suppliers and governments as both are driven by current product prices. The decrease in net investing cash outflows is due to lower T&I payments following the major T&I event at Lytton in 2015 and lower payments for property, plant and equipment. The net financing outflow in 2016 arose from dividend payments and the execution of the $270 million share buy-back. Net proceeds/repayment of borrowing was nil, as there were no drawdowns or repayment of fixed borrowings in the period. The net financing outflow in 2015 arose from dividend payments. Net proceeds/repayment of borrowing was nil, as there were also no drawdowns or repayment of fixed borrowings in 2015. 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 is to maintain a leading position within the transport fuels industry and convenience retailing regionally. In support of this, priorities include the optimisation of the entire value chain from product sourcing to customer, underpinned by the company’s product sourcing requirements via Ampol Singapore. The Lytton refinery will continue to focus on capturing further operational and margin improvements. Capital expenditure Capital expenditure in 2016 totalled $353 million. Excluding major T&I spending at Lytton refinery of $33 million, capital expenditure was $320 million. Excluding the proposed acquisition of Gull New Zealand which is subject to New Zealand Overseas Investment Office approval, capital expenditure in 2017 is expected to range between $395 million and $895 million. Caltex capital expenditure 568 503 454 420 403 353 2011 2012 2013 2014 2015 2016 ■ Capital expenditure (incl. T&I) $m 600 500 400 300 200 100 0 40 CALTEX AUSTRALIADIRECTORS’ REPORTCONTINUED Caltex Refiner Margin The Caltex Refiner Margin (CRM) is a key metric which drives the profitability of Caltex’s refinery. The CRM represents the difference between the cost of importing a standard Caltex basket of products to eastern Australia and the cost of importing the crude oil required to make that product basket. A low CRM will adversely impact Caltex’s refining earnings and cash flows. The CRM can be negatively impacted by a range of factors: • a decline in global and regional economic activity, leading to a surplus in refining capacity • increased regional refinery capacity ahead of demand growth • a decrease in product freight rates relative to crude freight rates • an increase in the premium paid for light/sweet (e.g. Brent) crudes used by Caltex compared with the heavy/sour crudes used by major refineries in the region (the light/heavy spread), and • the strengthening of the AUD/USD exchange rate (as the CRM components are US$ based, strengthening of the AUD/USD exchange rate reduces the A$ revenue earned by Caltex). Commodity price risk Caltex is exposed to the risk of price movements in both crude and finished product through its purchase and sales transactions, as these impact Caltex’s earnings and cash flows. Through its Group Treasury Policy, Caltex seeks to manage this exposure by utilising both crude and finished product swap contracts. Caltex’s policy has been not to hedge refiner margins. Foreign exchange risk Caltex is exposed to the effect of changes in foreign exchange rates. Caltex purchases crude and products in USD and sells predominantly in AUD with pricing formulas reflecting changes in the AUD/USD exchange rate. Due to timing differences between payments for purchases and pricing of sales, a change in the foreign exchange rate may negatively impact Caltex’s earnings and cash flow. Additionally, the CRM is determined principally with reference to the USD Singapore spot product price relative to the US dollar Brent crude price. An increase in the AUD/USD exchange rate will adversely impact Caltex’s Australian dollar refiner margin, and therefore refining earnings and cash flows. The Group implemented a foreign exchange risk management policy in August 2014 of hedging 80% of the Group’s US dollar denominated crude and products payable. From December 2016, this policy was amended to increase the hedging percentage to 100% of the Group’s net exposure to US dollar payables and receivables. The instruments used to manage foreign exchange risk expose Caltex to fair value foreign exchange rate risk and counterparty credit risks. Exposure limits are set for each counterparty to ensure that Caltex is not exposed to excess counterparty credit risk. Supply and 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 convenience retailing, supply chain management and infrastructure services. The company’s 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. Lytton The 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. 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 the company’s activities so that: • risks in relation to the effective delivery of the company’s 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. 41 ANNUAL REPORT 2016 Operating and financial review continued Business risks and management continued 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 a capital structure that supports its activities and centrally monitoring cash flow forecasts and the degree of access to debt and equity markets. A key element of its funding strategy is the use of committed undrawn debt 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 Late in 2016, Caltex announced the proposed acquisition of Milemaker Petroleum and Gull New Zealand. Additionally, Woolworths announced the sale of its fuel business to BP, subject to regulatory approval. Caltex’s 3.5 billion litre fuel supply arrangement with Woolworths is linked to Woolworths’ continued ownership of the business. These three separate announcements did not impact the 2016 financial result for Caltex. They are, however, expected to have an impact in future periods. 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 2016. 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 Executive 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. 42 CALTEX AUSTRALIADIRECTORS’ REPORTCONTINUED In 2016, Caltex made its eighth 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 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 21 environmental protection licences were held by companies in the Caltex Group in 2016 in respect of a refinery, 12 terminals, three marketing facilities, three aviation refuelling facilities, a lubricants manufacturing facility and a bulk shipping facility. 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. Regular internal audits are carried out to assess the efficacy of management systems to prevent environmental incidents, as well as to 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. The business had no environmental infringements in 2016. Caltex convicted of offence in relation to fuel spill at Banksmeadow in 2013 On 20 February 2017, Caltex Australia Petroleum Pty Limited (Caltex) was convicted in the Land and Environment Court of NSW of an offence under the Protection of the Environment Operations Act 1997 for negligently contributing to conditions that gave rise to a contractor causing a fuel spill. On 12 July 2013, while carrying out new procedures put in place to manage a fuel quality issue at its terminal located at Penrhyn Road, Banksmeadow (Terminal), a contractor failed to correctly fit a temporary hose to a fuel storage tank. When Caltex began transferring fuel from the storage tank the temporary hose disconnected from the tank. As a result, fuel escaped from the tank into a purpose built containment bund. Two workers involved in the transfer were doused in fuel. The workers were taken to hospital and discharged shortly afterwards. Emergency services were called to manage the risk of fire and local roads were closed. The leak continued for around 1 hour and 20 minutes until a NSW Fire and Rescue officer entered the bund containing the fuel and manually closed the valve on the storage tank. During this period, approximately 157,000 litres of petrol escaped into the bund which contained all of the fuel as designed. The petrol was later safely removed. Caltex was found to be negligent, both in its assessment of the risks posed by new procedures put in place to deal with the fuel quality issue at its Terminal; and the way it carried out those procedures. The prosecution was brought by the NSW Environment Protection Authority (EPA). Caltex cooperated with the EPA in relation to all aspects of the investigation and entered a plea of guilty to the offence. As a responsible local employer and business, Caltex is sorry for the disturbance caused to the Botany community immediately following the incident. Caltex has been fined a total of $400,000, to be paid to the City of Botany Bay (or its successor) and the Department of Primary Industries to fund projects aimed at restoring and enhancing the environment for the benefit of neighbouring communities. Caltex also agreed to pay the EPA’s legal costs of $450,000. This notice was placed by order of the Land and Environment Court of NSW and was paid for by Caltex. Lead auditor’s independence declaration The lead auditor’s independence declaration is set out on page 70 and forms part of the Directors’ Report for the financial year ended 31 December 2016. 43 ANNUAL REPORT 2016 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 2016. 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 Greig Gailey Trevor Bourne Steven Gregg Bruce Morgan Barbara Ward Penny Winn Current Senior Executives Julian Segal Andrew Brewer Viv Da Ros Chairman and Independent, Non-executive Director Independent, Non-executive Director Independent, Non-executive Director Independent, Non-executive Director Independent, Non-executive Director Independent, Non-executive Director MD & CEO Executive General Manager, Supply Chain Operations Chief Information Officer (appointed 12 December 2016) Simon Hepworth Chief Financial Officer Bruce Rosengarten Executive General Manager, Commercial Lyndall Stoyles Joanne Taylor Louise Warner Former Senior Executives Peter Lim Adam Ritchie Simon Willshire Executive General Manager, Legal & Corporate Affairs (appointed 24 October 2016) Executive General Manager, Human Resources (appointed 5 February 2016) Executive General Manager, Fuels (appointed 3 October 2016) (i) Executive General Manager, Legal & Corporate Affairs (ceased to be a KMP on 7 December 2016) Executive General Manager, Supply (ceased employment 31 December 2016) Executive General Manager, Human Resources (retired effective 30 April 2016) Note: (i) Ms Warner was previously President Ampol and General Manager, Trading and Shipping. Changes to KMP since the end of the financial year The position of Executive General Manager, Commercial will be made redundant from 1 April 2017 and Mr Rosengarten will cease employment from this date. 44 CALTEX AUSTRALIADIRECTORS’ REPORTCONTINUED 1b. Summary of 2016 remuneration arrangements for Senior Executives VISION Freedom of Convenience: To be the market leader in complex supply chains and the evolving convenience marketplace, by delivering the fuel and other everyday needs of our diverse customers through our networks Protect and Grow Optimise, enhance and expand core integrated fuel value chains and fuel retail offer Extend Invest in capabilities and businesses that leverage our existing consumer and mobility assets STRATEGY KEY MEASURE OF SUCCESS Top quartile shareholder returns for investors Alignment with shareholders’ interests Performance focused and differentiated Market competitive REMUNERATION PRINCIPLES 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 3a 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. See section 3c 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%) and a strategic growth measure (40%). • All participants are required to hold 25% of vested shares for an additional four years if their Caltex shareholding is below 100% of their base salary. • Clawback applies to unvested LTI awards. See sections 3d and 3e for further detail. 45 ANNUAL REPORT 2016 Remuneration Report continued 1. Remuneration snapshot continued 1c. Senior Executive remuneration outcomes in 2016 REMUNERATION ELEMENT OUTCOME MD & CEO remuneration increase Other Senior Executive remuneration increase STI LTI The Board determined to freeze the fixed remuneration of the MD & CEO in 2016 and instead to direct his pay increase into the STI, which is subject to the achievement of rigorous performance conditions. The MD & CEO’s target STI opportunity increased from 50% to 60% of base salary and his stretch STI opportunity increased from 100% to 120% of base salary. The Board determined that this was appropriate given: • advice from Aon Hewitt, the Human Resources Committee’s independent remuneration adviser, indicated that target STI opportunities for MD & CEOs in our peer group were typically around 90-100% of fixed remuneration and were typically higher (in percentage terms) than other members of the leadership team, and • the increase in the STI opportunity brought the MD & CEO’s target STI and total target remuneration closer to the median of the customised peer group that is used for benchmarking purposes. See section 3a for further information on the peer groups used. Base salaries for other Senior Executives (excluding the EGM Supply Chain Operations) increased by an average of 2.3%. This increase was below market movement and below the budgeted salary increase that applied to the majority of Caltex employees. The EGM Supply Chain Operations’ fixed remuneration increased by 13.6%. This restrained level of average base salary increase was below forecast market movement and is below the budgeted salary increase which will apply to the majority of Caltex employees. The larger remuneration increase awarded to the EGM Supply Chain Operations was determined to be appropriate by the Board taking into account his below market positioning, his strong performance and strategic contribution, and internal relativities to his peers. While RCOP NPAT result was lower than 2015 (which was a record profit), the 2016 result is the second highest in the last 10 years and demonstrates a sound performance by the business, reflecting strong growth in the Supply and Marketing areas and a strong Lytton operating performance in the face of substantially lower refiner margins. RCOP NPAT performance in 2016 was 87% of target and the average 2016 STI award for Senior Executives was 95% of target. This outcome demonstrates the strong alignment between STI payments and profit outcomes. 2013: The 2013 LTI grant had a performance period from 1 January 2013 to 31 December 2015 and vested in April 2016. This grant was subject to the achievement of relative TSR against S&P/ASX 100 companies (60%), free cash flow (20%) and a mix of strategic measures (20%). Over the 2013-15 performance period, Caltex’s share price increased from $19.21 to $37.70 and its TSR was 200%. This placed Caltex at the 82nd percentile against S&P/ASX 100 companies. We also achieved 97.9% of our free cash flow target and the Board determined that performance against the strategic measures was almost at stretch performance (allowing 95.75% of this tranche to vest). As a result, 80.49% of the 2013 grant vested on 1 April 2016 and the remaining 19.51% lapsed. 2014: The 2014 LTI grant had a performance period from 1 January 2014 to 31 December 2016 and vests in April 2017. This grant was subject to the achievement of relative TSR against S&P/ASX 100 companies (60%), free cash flow (20%) and a mix of strategic measures (20%). Over the 2014-16 performance period, Caltex’s share price increased from $20.05 to $30.46 and its TSR was 178%. This placed Caltex at the 82nd percentile against S&P/ASX 100 companies. The company also achieved 100% of the free cash flow target and the Board determined that performance against the strategic measures was just above target performance (allowing 74.42% of this tranche to vest). As a result, 84.78% of the 2014 grant will vest on 1 April 2017 and the remaining 15.22% will lapse. No clawback occurred in respect of the LTI in 2016. 1d. Summary of 2016 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, other than the Nomination Committee where no additional fee is paid. In 2016, the Chairman’s fee and Non-executive Director base fees increased by 2.8%. For 2016, superannuation contributions were made at a rate of 9.5%. No additional retirement benefits are paid. Fees paid to Non-executive Directors are subject to a maximum annual Non-executive Director fee pool of $2.5 million (including superannuation). This fee pool was approved by shareholders at the 2016 AGM. See sections 4a and 4b for further detail. 46 CALTEX AUSTRALIADIRECTORS’ REPORTCONTINUED 1e. Outlook for FY17 (unaudited) Key changes to remuneration arrangements in FY17 are outlined below: CHANGE COMMENTARY MD & CEO remuneration Senior Executive remuneration Non-executive Director fees Non-executive Director fee pool The Board determined that it would again freeze the fixed remuneration of the MD & CEO for 2017. Excluding the MD & CEO and the EGM Fuels, Senior Executive remuneration will increase on average by 2.77% in April 2017. As noted above, the MD & CEO’s fixed remuneration was frozen for 2016 and, if he is included, the average increase for all Senior Executives for 2017 will be 1.66% (excluding EGM Fuels). The EGM Fuels will receive a fixed remuneration increase of 10%. This increase reflects a broadening of responsibilities for this role to include responsibility for a new business unit. This level of average base salary increase is below forecast market movement and broadly in line with the budgeted salary increase which will apply to the majority of Caltex employees. These increases were determined by the Board, upon the recommendation of the Human Resources Committee, taking into account the market data, forecast market movements, and the remuneration recommendations made by Aon Hewitt, and the Senior Executive’s performance over the year. Non-executive Director base and committee fees will not increase in 2017. There will be no change to the Non-executive Director fee pool for 2017. 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 to fulfil its corporate governance and oversight responsibilities in relation to Caltex’s remuneration framework, the performance of the MD & CEO, succession planning, and the remuneration, diversity and inclusion disclosures. The Committee also assists the Board in setting the measurable objectives for achieving diversity and inclusion and reviewing progress made toward those objectives. The Human Resources Committee undertakes functions delegated by the Board, including approving Caltex’s annual remuneration program and aspects of its incentive plans. 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. Further information about the role of the Board and the Human Resources Committee is set out in their charters, which are available on the company’s website (www.caltex.com.au). 2b. External advice The Human Resources Committee is independent of management and is authorised to obtain external professional advice as necessary. The use of external specialists to provide advice and recommendations specifically 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 2016, Caltex received “remuneration recommendations” (as defined in the Corporations Act) from Aon Hewitt in relation to Non-executive Director fees and the remuneration for the MD & CEO and other Senior Executives. Aon Hewitt 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. No KMP were involved in the selection and appointment of Aon Hewitt or in the development of any advice or recommendations in relation to their own roles. The fee paid to Aon Hewitt for the above remuneration advice and recommendations was $34,300 excluding GST. Aon Hewitt also provided additional services (Finance and HR related) to Caltex over 2016. The fee for these additional services was $39,300 excluding GST. 47 ANNUAL REPORT 2016 Remuneration Report continued 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 top quartile shareholder returns. The guiding philosophy for how Caltex rewards Senior Executives and all other employees is outlined below: GUIDING PHILOSOPHY Alignment with shareholders’ interests Performance focused and differentiated COMMENTARY 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. The company’s 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. Alignment with strategy Both the short term and long term incentive plan are directly aligned to the company’s 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 incentives are directly aligned to the company’s key measure of success, being to safely and reliably deliver top quartile shareholder returns. The company’s secondary strategic growth measures focus the Senior Executives on the most important initiatives that need to be executed to support top quartile shareholder returns. Further detail on these measures is outlined in section 3d. Market positioning and peer groups In order to be able to attract and retain key talent, and drive strong performance, the company’s remuneration philosophy is to position fixed remuneration at the median of a customised peer group of companies, with total remuneration able to reach the upper quartile for outstanding performance. For 2016, the customised peer group consisted of 19 companies that are broadly of comparable size and complexity and who the Board considers to be leading competitors for capital and people. The peer group was also adjusted to include several additional companies with a retail focus to align with Caltex’s strategy. The Board recognises that external stakeholders often assess pay reasonableness against a pure market capitalisation peer group. Due to this, in making pay decisions, the Board also considers pay positioning against a secondary peer group. This secondary peer group consists of 20 companies (10 with a market capitalisation directly above, and 10 with a market capitalisation directly below, that of Caltex). Externally managed trusts and overseas domiciled companies are excluded. Remuneration structure Our Senior Executive remuneration structure consists of: 1. Fixed remuneration – this comprises 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 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 remuneration – this comprises a mix of cash and equity based incentives awarded upon the achievement of financial and non-financial performance measures. Superannuation is also paid on any short term incentive payments. The remuneration structure (including the remuneration mix) is reviewed annually by the Board. 48 CALTEX AUSTRALIADIRECTORS’ REPORTCONTINUED 3b. Remuneration mix 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, and within the variable pay components, the mix is skewed towards the long term incentive. Research undertaken by Caltex, and confirmed by external advisers, shows that Caltex has a more stretching relative TSR vesting schedule than most ASX 100 companies. See section 3d for further information on the relative TSR vesting schedule. 2016 Remuneration mix “at target” MD & CEO Other Senior Executives 38.5% 23% 48% 24% 38.5% 28% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% ■ Base Salary ■ At Risk – STI Cash ■ At Risk – Equity Notes: (i) “At target” performance in the remuneration mix for “Other Senior Executives” reflects a STI target of 50% of base salary for Mr Brewer, Mr Hepworth, Mr Rosengarten and Ms Warner. Ms Stoyles, Ms Taylor and Mr Da Ros have a STI target of 46% of base salary. (ii) LTI Equity comprises performance rights granted under the Caltex Equity Incentive Plan (CEIP). It assumes that the relative TSR measure is achieved at the 75th percentile, with the free cash flow and the strategic growth measure achieved 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 that vests is based on meeting service and performance conditions. The below diagram shows the payout profile of the various remuneration elements: Fixed remuneration STI (cash) LTI (equity) 4 year share retention period Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Note: (i) For LTI awards made in 2014 and 2015, 25% of vested equity needs to be held by the Senior Executive up until Year 7. For awards made from 2016 onwards, this requirement only applies if the Senior Executive does not hold at least 100% of their base salary in Caltex shares. 49 ANNUAL REPORT 2016 Remuneration Report continued 3. Senior Executive remuneration continued 3c. Performance based “at risk” remuneration – 2016 STI Plan Plan STI awards are made under the Rewarding Results Plan. Plan rationale The Plan 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 and employees on executing the most critical objectives aligned to the annual business plan. Performance period The performance period is for 12 months ending 31 December 2016. 2016 target and maximum stretch opportunity levels MD & CEO – the target STI opportunity is 60% of base salary and the maximum stretch STI opportunity is 120% of base salary. Other Senior Executives – the target STI opportunity is between 46% and 50% of base salary and the maximum stretch STI opportunity is between 92% and 100% of base salary depending upon role. Financial gateway RCOP NPAT performance, including the cost of incentives, needs to be at least at 80% of target before any short term incentives are payable. Use of discretion 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. During 2016, no discretion was exercised by the Board to include or exclude any significant items in respect of Rewarding Results outcomes. Payment vehicle STI awards are delivered in cash. STI deferral was removed for STI awards made to Senior Executives from payments made in 2016 onwards because the long term incentive share retention arrangements came into place at this time. See section 3d for further detail. Payment frequency STI awards are paid annually. Payments are made in April following the end of the performance period. Setting and evaluating the performance of executives in 2016 Performance measures for 2016 were derived from the business plan in line with the company direction set by the Board. The Board approved the 2016 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. Senior Executive performance objectives and outcomes The table below outlines the common performance objectives that applied to the Senior Executives over 2016. These measures accounted for between 60% and 65% of the Senior Executive’s scorecard depending upon their role. The remaining 35-40% of performance objectives were customised to the executive’s remit. Such objectives include delivery of specific strategic growth projects, delivery of capability build in critical business areas, achievement of divisional EBIT targets, achievement of specific transport fuel market targets and achieving specific refinery production targets. Actual performance against the common objectives has been provided. 50 CALTEX AUSTRALIADIRECTORS’ REPORTCONTINUED MEASURE DESCRIPTOR OF MEASURE WEIGHTING ACTUAL PERFORMANCE RANGE COMMENTARY ON PERFORMANCE l B e o w T h r e s h o d l T a r g e t S t r e t c h T a r g e t t o S t r e t c h T h r e s h o d t o l T a r g e t Personal safety (assessed at company or business unit level) 5-7.5% Performance is measured based on the total treatable injury frequency rate (TTIFR) Process safety (assessed at company or business unit level) Performance is measured based on the number of spills 5-7.5% RCOP NPAT See explanation of RCOP NPAT below 40% Tabula Rasa 10-15% Key business improvement program focusing on revenue generation and cost efficiency Personal safety results were disappointing with 19 employees suffering injuries resulting in lost time or medical treatment during FY16. Process safety results were above threshold (11 spills > 1 bbl and marine) but as there were 3 Tier 2 process safety incidents the process safety gateway for payment was not met. RCOP NPAT was below target at $524m due to pressure on refiner margins, a tight competitive market and other external factors in 2016. This highly successful program has continued to exceed expectations and achieved above target results in terms of revenue generation and costs saved. If business objectives are achieved at threshold level, 60% of the target STI opportunity would be payable. If 100% of the target is achieved, 100% of the STI target opportunity would be payable. If business objectives are achieved at the maximum level, 200% of the STI target opportunity would be payable. Payments are pro-rated between threshold and target, and between target and maximum. This payout schedule deliberately incentivises over-plan performance. 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. 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 cost of goods sold due to fluctuations in the AUD price of crude and product prices (which are impacted by both the USD price and the foreign exchange rate) constitute a major external influence on Caltex’s profits. RCOP NPAT restates profit to remove these unintended 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 30 to 45 days of inventory, revenues reflect current prices in Singapore whereas FIFO costing reflects costs some 30 to 45 days earlier. The timing difference creates these inventory gains and losses. 51 ANNUAL REPORT 2016 Remuneration Report continued 3. Senior Executive remuneration continued 3c. Performance based “at risk” remuneration – 2016 STI Plan continued 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. The Board may exclude any exceptional events from RCOP NPAT that management and the Board consider to be outside the scope of usual business. Exclusions may be made to give a clearer reflection of underlying financial performance from one period to the next. 3d. Performance based “at risk” remuneration – 2016 LTI Plan Plan LTI awards are granted under the CEIP. Plan rationale The Plan aligns executive rewards with the shareholder experience. This is done through the use of relative TSR as the primary performance measure, and through the use of strategic growth measures which contribute towards the delivery of top quartile shareholder returns as the secondary measure. The Plan has also been designed to act as a retention mechanism and to encourage Senior Executives to build and retain Caltex shares over the long term. LTI instrument 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. 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 The number of performance rights granted is determined by dividing the maximum opportunity level by the five day volume weighted average share price up to the first day of the performance period, discounted by the value of the annual dividend to which the performance rights are not entitled. No discount is applied for the probability of achieving the performance measures. Performance period The performance period is three years commencing on 1 January in the year the awards are made. For the 2016 awards, this is the three year period from 1 January 2016 to 31 December 2018. 2016 target and maximum stretch opportunity levels The MD & CEO received a grant of performance rights based on a maximum stretch LTI value of 150% of base salary. The target LTI value is 100% of base salary. Other Senior Executive grants were based on a maximum stretch LTI value of 90% of base salary. The target LTI value is 60% of base salary. 52 CALTEX AUSTRALIADIRECTORS’ REPORTCONTINUED Performance measures For 2016, the LTI performance measures were relative TSR (weighted at 60%) and a strategic growth measure (weighted at 40%). Relative TSR Relative TSR is assessed against a comparator group of S&P/ASX 100 companies. The vesting schedule 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 Strategic growth measure In 2016, a financial gateway applies to the strategic growth measure, being return on average funds employed (RoAFE). The RoAFE gateway is measured as Profit Before Interest and Tax/Average Funds Employed excluding refining over the prior 12 month period (including intangibles but excluding debt). The RoAFE gateway has been included in the strategic growth measure to ensure that executives are only rewarded when Caltex has invested in the right projects and created shareholder value. Once the RoAFE gateway has been met, the strategic growth measure that will apply is a three year earnings growth measure from mergers and acquisitions (core and non-core) and step-out ventures (new products/ services/geographies). This measure was chosen as it reflects the importance of growth in achieving our key success measure of top quartile shareholder returns. Disclosure of performance outcomes Specific details of the RoAFE gateway and the strategic measures have not been disclosed due to commercial sensitivity. However, in the 2018 Remuneration Report, the Board will set out how Caltex performed against these measures. See section 3h for the Board’s rationale for the performance outcomes of the LTI awards that were granted in 2014 and that vest in April 2017. Shares to satisfy vested performance rights are usually purchased on market. Shares allocated upon vesting of performance rights will carry the same rights as other ordinary shares (including dividends and voting rights). 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. These shares are unable to be sold for a further period of four years (until 1 April 2023 for the 2016 LTI awards). This effectively extends the life of the LTI plan from three years to seven years. For the 2016 LTI awards and future awards, these retention arrangements will be waived if the executive can demonstrate he or she holds the equivalent of 100% of their base salary in shares prior to vesting. Based on this policy, if it is assumed that the LTI awards vest at target levels over a period of four years, the MD & CEO and Senior Executives would have theoretical shareholdings of 100% and 60% of their base salary respectively. 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 3e 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 LTI plan 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 measures at the usual time. Any unvested performance rights may vest at the Board’s discretion, having regard to pro-rated performance. Change of control provisions 53 ANNUAL REPORT 2016 Remuneration Report continued 3. Senior Executive remuneration continued 3d. Performance based “at risk” remuneration – 2016 LTI Plan continued Legacy LTI awards The 2014 and 2015 LTI awards will vest in April 2017 and April 2018 respectively. The operation of these awards is consistent with the 2016 awards, except for the weighting and nature of the performance measures. The performance measures for the 2014 awards were relative TSR (weighted at 60%), free cash flow (weighted at 20%) and strategic measures (weighted at 20%). The performance measures for the 2015 awards were relative TSR (75%) and strategic measures (25%). Performance measure Commentary Relative TSR – 2014 and 2015 grant Free cash flow (FCF) – 2014 grant only Strategic measures The operation of the relative TSR measure is the same as that outlined above under the 2016 awards. FCF measures performance against the cumulative FCF threshold, target and stretch levels set by the Board for the three year periods ending 31 December 2016 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 delivered. 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. The FCF targets have not been disclosed due to commercial sensitivity. See section 3h for Caltex’s performance against the cumulative FCF target applicable for the 2014 awards. Performance measures 2014: The 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. 2015: The strategic measure is based on a profit growth target at the end of 2017 (in reference to 2014) attributable to M&A (core and non-core) and step-out ventures (new products/services/geographies). Disclosure and performance assessment 2014: See section 3h for Caltex’s performance against the strategic measures applicable for the 2014 awards. 2015: The Board will set out in the 2017 Remuneration Report how Caltex performed against the 2015 measures, including the Board’s rationale for the relevant vesting percentage. 3e. 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 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. 54 CALTEX AUSTRALIADIRECTORS’ REPORTCONTINUED 3f. Hedging and margin lending policies The Caltex Securities Trading Policy prohibits Designated Caltex Personnel, which includes Senior Executives, from entering into any arrangements that would have the effect of limiting their exposure relating to Caltex securities, including vested Caltex securities or unvested entitlements to Caltex securities under a Caltex employee incentive scheme. Designated Caltex Personnel, including Senior Executives, must not enter into any margin lending arrangements in respect of Caltex securities. Designated Caltex Personnel, including Senior Executives are required to undertake online training periodically to ensure that they are aware of and understand their obligations and responsibilities under the Securities Trading Policy and are required to certify on an annual basis that they have complied with the Securities Trading Policy. A contravention is a serious matter and may lead to disciplinary action, including termination of employment. 3g. Senior Executive remuneration and service agreements MD & CEO The MD & CEO’s remuneration is determined by the Board following receipt of a recommendation from the Human Resources Committee. In making its 2016 remuneration recommendation, the Human Resources Committee considered the performance of the MD & CEO and advice provided by Aon Hewitt, which took into account remuneration levels provided by companies of a similar size and complexity. The split between the MD & CEO’s 2016 total target and maximum stretch remuneration is outlined below. TOTAL TARGET AND MAXIMUM STRETCH REMUNERATION Fixed remuneration including superannuation STI “At target” “At risk” – performance based remuneration LTI (ii) “At target”– when TSR is at the 75th percentile of peer companies, and the strategic growth measure has been met at target. $2,248,500 (i) $1,289,100 (60% of base salary) $2,148,500 (100% of base salary) “Stretch” “Stretch” – when TSR is at the 90th percentile of peer companies and the strategic growth measure has been met at stretch. $2,578,200 (120% of base salary) $3,222,750 (150% of base salary) Notes: (i) The MD & CEO’s remuneration was frozen during the 2016 remuneration review. (ii) Share retention arrangements have been implemented to encourage share retention and promote alignment with shareholders over the longer term. For the 2014 and 2015 LTI awards, all Senior Executives are required to hold 25% of the shares awarded when the performance rights vest for an additional four years. For 2016 LTI awards, this requirement will only apply if the Senior Executive does not hold at least 100% of their base salary in Caltex shares in the month prior to the vesting date. 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 55 ANNUAL REPORT 2016 Remuneration Report continued 3. Senior Executive remuneration continued 3g. Senior Executive remuneration and service agreements continued Other Senior Executives 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 other 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 three 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. 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 Andrew Brewer Viv Da Ros Simon Hepworth Bruce Rosengarten Lyndall Stoyles Joanne Taylor Louise Warner Termination on notice (by the company) Resignation (by the Senior Executive) 6 months 6 months 3 months 6 months 6 months 6 months 6 months 6 months 6 months 3 months 6 months 6 months 6 months 6 months If a Senior Executive was to resign, their entitlement to unvested shares payable through the LTI 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. Executive General Manager, Human Resources Mr Simon Willshire retired effective 30 April 2016. On retirement, his unvested long term incentive awards were pro-rated based on the portion of the vesting period he was employed. The portion of LTI awards he retains will remain subject to the applicable performance hurdles and will vest, if applicable, in accordance with original terms of offer in April 2017 and April 2018. In addition, as he had satisfied the service condition in relation to the STI Deferral shares awarded in April 2015 (awarded in respect of the deferred portion of his 2014 STI), his STI Deferral shares were released upon the cessation of employment (although the shares remain subject to clawback in the event of a material misstatement or omission in any Group Company’s financial accounts prior to 1 April 2017). Executive General Manager, Supply Mr Adam Ritchie ceased employment with Caltex on 31 December 2016 after a very successful period in the EGM Supply role, which, among a number of accomplishments, has seen the establishment of our standalone trading and shipping capability through our Ampol subsidiary in Singapore. On ceasing employment, Mr Ritchie’s unvested long term incentive awards were pro-rated based on the portion of the vesting period he was employed. The portion of LTI awards he retains will remain subject to the applicable performance hurdles and will vest, if applicable, in accordance with original terms of offer in April 2018 and April 2019. As notice was provided on 1 September 2016, the remaining two months’ notice were paid on cessation of employment. He also received a payment for past service equivalent to six months’ salary as compensation for an additional six month post-employment restraint until 30 September 2017. Mr Ritchie’s unvested restricted shares (awarded in lieu of LTI awards forgone at his prior employer) will continue to vest on his second and third anniversary of his commencement date. Mr Ritchie retains these shares on ceasing employment as, under the terms of his contract, the shares only lapse on resignation, serious misconduct or negligence. The award of restricted shares is outlined in table 6. 56 CALTEX AUSTRALIADIRECTORS’ REPORTCONTINUED Chief Information Officer Mr Viv Da Ros was appointed on 12 December 2016 as Chief Information Officer. Mr Da Ros’ contract included relocation and accommodation support to assist him to relocate from Hong Kong, where he was previously employed. If Mr Da Ros’ employment ceases due to resignation, serious and wilful misconduct or negligent behaviour within 12 months of commencement, the entire cost of relocation assistance must be repaid, with a pro-rated portion repayable if employment ceases for these reasons between 12 and 24 months. Mr Da Ros also received an award of restricted shares to compensate him for forgone STI and LTI at his prior employer. Thirty three and one-third percent (33.33%) of the restricted share grant will vest after six months’ employment, with an additional 33% and 34% of the grant vesting on each of Mr Da Ros’ second and third anniversary of his commencement date. Each unvested tranche will lapse if his employment ceases due to resignation, serious and wilful misconduct, negligent behaviour or unsatisfactory performance prior to each respective vesting date. The award of restricted shares is outlined in table 6. 3h. 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 2016 remuneration outcomes are provided, and section 3 where the STI and LTI performance measures are explained, including why the measures have been chosen and how they relate to the performance of the company. Table 3 below outlines Caltex’s TSR, dividend, share price, earnings per share, RCOP NPAT results and safety performance each year from 2012 to 2016 together with the linkage to actual STI and LTI outcomes. Table 3. Link between company performance and executive remuneration (unaudited) Summary of performance over 2012-16 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 2016 -16.5 102c $30.46 $2.01 $524 2.35 1.11 87% 99% 2015 13.6 117c $37.70 $2.33 $628 2.35 0.62 134% 141% Year of grant Percentage of grant vesting 2014 84.78% 2013 80.49% 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% 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 of each financial year. (ii) The price quoted is the trading price for the last day of trading (31 December) in each calendar year. The share price for the last day of trading in 2011 was $11.77. (iii) Measured using the RCOP method which excludes the impact of the rise or fall in oil and product 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. 57 ANNUAL REPORT 2016 Remuneration Report continued 3. Senior Executive remuneration continued 3h. Link between company performance and executive remuneration continued Alignment between STI outcomes and RCOP NPAT The strong alignment between STI outcomes and company profitability as measured by RCOP NPAT is shown below. 160% 140% 120% 100% 80% 60% 40% 20% 0% ■ % of business plan RCOP NPAT achieved ■ Size of STI pool (relative to target) 2012 2013 2014 2015 2016 2014 LTI vesting outcomes and the link to company performance Relative TSR (60%) The chart below provides a comparison of Caltex’s three year TSR performance compared to S&P/ASX 100 companies over the period from 1 January 2014 to 31 December 2016. This reflects the final status of the tranche of the 2014 LTI grant that is subject to the relative TSR performance measure. Caltex’s TSR over this period was 178%, placing it at the 82nd percentile. This will lead to 83.16% of the performance rights subject to the relative TSR performance measure vesting on 1 April 2017. Caltex Australia Limited and the Constituents of the S&P/ASX 100 Index Total Shareholders Return Performance 1 January 2014 – 31 December 2016 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 220 210 200 190 180 170 160 150 140 130 120 110 100 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 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 5 1 N A J 1 0 5 1 B E F 1 0 5 1 R A M 1 0 5 1 R P A 1 0 5 1 Y A M 1 0 5 1 N U J 1 0 5 1 L U J 1 0 5 1 G U A 1 0 5 1 P E S 1 0 5 1 T C O 1 0 5 1 V O N 1 0 5 1 C E D 1 0 6 1 N A J 1 0 6 1 B E F 1 0 6 1 R A M 1 0 6 1 R P A 1 0 6 1 Y A M 1 0 6 1 N U J 1 0 6 1 L U J 1 0 6 1 G U A 1 0 6 1 P E S 1 0 6 1 T C O 1 0 6 1 V O N 1 0 6 1 C E D 1 0 Date 2016 Copyright. All Rights Reserved. Egan Associates. Indices based on a value of 100 at 1 January 2014. Three month 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 58 CALTEX AUSTRALIADIRECTORS’ REPORTCONTINUED Free cash flow (FCF) (20%) The level of vesting against the FCF measure was determined by aggregating Caltex’s actual FCF performance over the three year performance period and comparing this to the aggregate of the three year stretch targets determined in 2014. Actual FCF performance over the 2014-16 period was extremely strong (140% of the aggregate target for this period), with the stretch vesting level achieved and 100% of the FCF hurdled performance rights vesting on 1 April 2017. No adjustments were made by the Board to the FCF figures when determining the level of vesting against the FCF performance measure. Strategic measures (20%) The table below provides an overview of performance against the applicable 2014 strategic measures, each designed to support top quartile shareholder returns through the transformation of the company into a competitively efficient organisation with innovation and growth capabilities. Strategic measures Actual vesting (%) Performance commentary The Board’s qualitative assessment of performance against: • A competitively efficient organisation • The development and demonstration of end-to-end value chain optimisation (VCO) capability • The development and demonstration of competitive supply capability • The development and 74.42% demonstration of innovation and growth capabilities. The Board determined that 74.42% of this tranche would vest, which is equivalent to an on target performance level. This was based on an overall assessment of management’s achievements against each of the four nominated criteria. Key factors taken into account by the Board are as follows: • Competitively efficient organisation: Significant progress has been made in embedding continuous business improvement processes throughout the company over the three year period, with key savings and efficiency targets via the company’s Tabula Rasa program being met at a stretch or near stretch level (between target to stretch performance) • End-to-end value chain optimisation capability: This is an area which has seen significant improvements in understanding the end-to-end value chain in certain key Australian markets (e.g. to optimise shipping scheduling, thereby minimising demurrage and working capital costs). The Board however believes there is additional room for improvement across the organisation (between threshold to target performance) • Competitive supply capability: The establishment of our Ampol Singapore operations as the primary supply operation for the company has been an outstanding success for the company in terms of capability development and financial returns over the performance period. Our Singapore supply operations have significantly exceeded budget over this period and successfully established a standalone trading and shipping capability which has created significant value to the company. We have also expanded our crude sourcing and feedstock trading capabilities, east coast optimisation strategy (e.g. make or buy decisions around premium gasolines with our Lytton refinery) and embedded appropriate commodity risk management practices (stretch performance) • Innovation and growth: The last three years have seen significant development in innovation and growth. New businesses have been established in areas outside our core transport fuels business – in soil remediation and developing a sophisticated test area looking into the sale of software analytics to road-freight transport customers (i.e. telematics). We have created an ideas platform to capture innovative employee ideas, developing a pipeline of future opportunities to explore, together with the greater use of data analytics across our pricing optimisation and property decisions. The current innovation and growth focus of the organisation is now strongly on the Future of Convenience with the establishment of new convenience retail solutions which will continue to be rolled out in future years (target performance). 59 ANNUAL REPORT 2016 Remuneration Report continued 3. Senior Executive remuneration continued 3i. Remuneration tables Table 4a. Total remuneration earned by Senior Executives in 2016 (unaudited, non-statutory disclosures) The following table sets out the actual remuneration earned by Senior Executives in 2016. The value of remuneration includes the equity grants where the Senior Executive received control of the shares in 2016. The purpose of this table is to provide a summary of the “past” and “present” remuneration outcomes received in either cash or equity. Due to this, 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 LTI grants which may or may not vest in future years, whereas this table discloses the value of LTI grants from previous years which vested in 2016. Dollars Salary and Other fees (i) remuneration (ii) Bonus (STI) Deferred STI vested in the year LTI vested during the year(iii) Remuneration “earned” for 2016 (iv) Julian Segal (Managing Director & CEO)(v) 2016 Andrew Brewer (Executive General Manager, Supply Chain Operations)(v) 2016 Viv Da Ros (Chief Information Officer)(vi) 2016 2,223,500 134,205 772,556 89,207 32,386 3,638 593,199 827,429 1,452,953 Simon Hepworth (Chief Financial Officer) 2016 242,807 Peter Lim (Executive General Manager, Legal & Corporate Affairs)(v)(vii) 62,472 2016 Adam Ritchie (Executive General Manager, Supply) (v)(viii) 2016 Bruce Rosengarten (Executive General Manager, Commercial) (v) 2016 Lyndall Stoyles (Executive General Manager, Legal & Corporate Affairs)(ix) 2016 Joanne Taylor (Executive General Manager, Human Resources)(v)(x) 464,339 2016 Louise Warner (Executive General Manager, Fuels)(v)(xi) 2016 55,138 167,559 Simon Willshire (Executive General Manager, Human Resources)(v)(xii) 16,414 2016 897,063 104,762 201,310 49,746 62,539 16,037 45,092 1,063,792 343,692 – 470,506 196,603 – – – – – 4,384,357 7,805,854 433,606 1,639,061 – 36,024 964,276 2,505,018 622,660 1,474,934 370,057 – 98,506 1,971,262 303,601 – 242,963 80,656 – – – – – – – 521,336 1,784,539 – – – 120,799 752,394 303,353 635,343 853,067 7,660,084 19,246,305 Total remuneration: Senior Executives 2016 7,737,056 777,295 3,071,870 Notes: (i) Salary and fees comprises base salary and cash payments in lieu of employer superannuation (on 2016 base salary and/or on STI payments made in respect of the 2015 performance year paid in 2016). (ii) Other remuneration includes the cash value of non-monetary benefits, superannuation, annual leave and long service leave entitlements, and any fringe benefits tax payable on non-monetary benefits. (iii) This refers to equity based plans from prior years that have vested in the current year. The value is calculated using the closing share price of Company shares on the vesting date. The 2016 figures reflect the strong performance in respect of the LTI that was granted in 2013 and that operated over the performance period from 1 January 2013 to 31 December 2015. Over this period, Caltex’s TSR was 200% and the Caltex share price increased from $19.21 to $37.70. At the time of vesting, the Caltex share price was $33.82. For Mr Rosengarten, this is the value of the third tranche of sign-on restricted shares granted in 2013 which vested in November 2016. For Mr Ritchie, this is the value of the first tranche of sign-on restricted shares granted in 2015 which vested in April 2016. (iv) This refers to the total value of remuneration earned during 2016, being the sum of the prior columns. (v) 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. (vi) Mr Da Ros commenced employment on 12 December 2016 and his remuneration is disclosed from this date. (vii) Mr Lim ceased to be a KMP on 7 December 2016, but remains an employee, utilising annual and long service leave. (viii) Mr Ritchie ceased employment on 31 December 2016. The ‘salary and fees’ figure includes the value of his notice paid in lieu, and a payment for past service made in respect of an additional six month employment restraint period. (ix) Ms Stoyles commenced employment on 24 October 2016 and her remuneration is disclosed from this date. (x) Ms Taylor commenced employment on 5 February 2016 and her remuneration is disclosed from this date. (xi) Ms Warner’s remuneration relates to the period from 3 October 2016 when she was appointed Executive General Manager, Fuels and became a KMP. (xii) Mr Willshire ceased employment on 30 April 2016 and his remuneration is disclosed up to this date. 60 CALTEX AUSTRALIADIRECTORS’ REPORTCONTINUED Table 4b. Total remuneration for Senior Executives in 2016 (statutory disclosures) The following table sets out the audited total remuneration for Senior Executives in 2015 and 2016, calculated in accordance with statutory accounting requirements: PRIMARY POST EMPLOYMENT OTHER LONG TERM EQUITY TOTAL Dollars Salary and fees (i) Bonus (STI) Non- monetary benefits (ii) Super- annuation Other (iii) Share benefits (iv) Rights benefits (v) 2,267,804 2,137,659 1,063,792 1,568,405 Julian Segal (Managing Director & CEO)(vi) 2016 2015 Andrew Brewer (Executive General Manager, Supply Chain Operations)(vi) 2016 2015 Viv Da Ros (Chief Information Officer)(vii) 2016 2015 343,692 491,330 791,097 715,473 13,695 13,331 17,696 23,308 32,694 – 253 – – – 25,000 25,000 19,462 24,354 3,077 – 139,294 110,459 24,808 30,000 20,635 30,858 30,400 30,400 21,642 17,021 21,079 16,892 20,982 143,037 470,506 673,560 852,336 834,865 370,057 667,890 196,603 380,400 599,020 551,113 Simon Hepworth (Chief Financial Officer) 2016 2015 Peter Lim (Executive General Manager, Legal & Corporate Affairs)(vi)(viii) 2016 2015 Adam Ritchie (Executive General Manager, Supply)(vi)(ix) 1,456,969 2016 2015 625,900 Bruce Rosengarten (Executive General Manager, Commercial)(vi) 905,819 2016 2015 838,952 Lyndall Stoyles (Executive General Manager, Legal & Corporate Affairs)(x) 2016 2015 Joanne Taylor (Executive General Manager, Human Resources)(vi)(xi) 2016 2015 Louise Warner (Executive General Manager, Fuels)(vi)(xii) 176,165 2016 2015 – Simon Willshire (Executive General Manager, Human Resources)(vi)(xiii) 2016 2015 105,787 – 467,554 – 242,963 – 303,601 574,241 201,310 559,943 – 383,945 15,604 13,899 11,693 – 80,656 – 10,435 – 1,914 14,195 4,725 – – – 9,952 – 28,845 – 7,912 – 14,500 26,446 51,206 75,950 – 215,878 2,193,138 2,345,131 5,614,635 6,381,354 33,508 38,771 – 58,770 381,191 325,401 1,586,646 1,677,407 – – 5,466 – – – 41,490 – 56,964 62,929 10,764 21,113 – 79,901 518,398 526,003 2,059,140 2,304,738 – 46,295 326,084 331,591 1,178,358 1,377,404 4,112 – 100,180 74,998 262,198 107,306 2,235,133 1,649,989 7,778 25,486 89,328 309,814 445,854 290,461 1,798,384 2,083,253 334 – 1,338 – 28,184 – – 15,526 – – – – – – – – 120,799 – 71,327 – 823,720 – 40,154 – 343,507 – – 49,463 151,019 338,474 368,743 1,387,992 Total remuneration: Senior Executives 2016 7,856,555 3,071,870 2015 6,263,905 4,739,771 139,718 241,683 323,886 277,517 194,188 239,775 194,974 4,389,363 16,170,554 835,119 4,264,367 16,862,137 61 ANNUAL REPORT 2016 Remuneration Report continued 3. Senior Executive remuneration continued 3i. Remuneration tables continued Table 4b. Total remuneration for Senior Executives in 2016 (statutory disclosures) continued Notes: (i) Salary and fees includes base salary and cash payments in lieu of employer superannuation. For 2016, the cash payments in lieu of employer superannuation are on 2016 base salary and/or on STI payments made in respect of the 2015 performance year paid in 2016. (ii) 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 fringe benefits tax payments made by Caltex. For Mr Ritchie, it also includes the value of relocation (including rental and tax) assistance associated with his relocation from the United States (2015 figures only). (iii) Other long term remuneration represents the long service leave for all Senior Executives. (iv) For the 2015 values, Share benefits includes the deferred unrestricted component of the 2014 STI that vested in October 2015, but where the shares are still subject to clawback and a mandatory two year dealing restriction from grant date. For Messrs Da Ros, Ritchie and Rosengarten, this also includes the value of the restricted shares (calculated under the accounting standards) granted to each Senior Executive in 2016, 2015 and 2013. (v) These values have been calculated under accounting standards. The values may not represent the future value that the Senior Executive will receive, as the vesting of the performance rights is subject to Caltex achieving pre-defined performance measures. (vi) 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. (vii) Mr Da Ros commenced employment on 12 December 2016 and his remuneration is disclosed from this date. (viii) Mr Lim ceased to be a KMP on 7 December 2016, but remains an employee, utilising annual and long service leave. (ix) Mr Ritchie ceased employment on 31 December 2016. This figure includes the value of his notice paid in lieu, and a payment for past service of $403,500 made in respect of an additional six month employment restraint period. (x) Ms Stoyles commenced employment on 24 October 2016 and her remuneration is disclosed from this date. (xi) Ms Taylor commenced employment on 5 February 2016 and her remuneration is disclosed from this date. (xii) Ms Warner’s remuneration relates to the period from 3 October 2016 when she was appointed Executive General Manager Fuels and became a KMP. (xiii) Mr Willshire ceased employment on 30 April 2016 and his remuneration is disclosed up to this date. Table 5. Unvested shareholdings of Senior Executives during 2016 Adam Ritchie (i) Bruce Rosengarten (ii) Unvested shares at 31 Dec 2015 Restricted shares granted Shares vested from prior performance years 8,741 16,932 – – (2,914) (16,932) Unvested shares at 31 Dec 2016 5,827 – Forfeited – – Notes: (i) The restricted shares awarded to Mr Ritchie represent the grant received on commencement with Caltex in lieu of the LTI forgone with his previous employer (refer to section 3g for further detail). One third of this award vested in April 2016, one third will vest in April 2017 and the final third will vest in April 2018. (ii) For Mr Rosengarten, the unvested shares as at 31 December 2015 represent the unvested portion of the sign-on restricted shares awarded to Mr Rosengarten on commencement with Caltex in lieu of the LTI forgone with his previous employer. Fifty percent (50%) of this award vested in November 2015, and the remaining 50% of the award vested in November 2016. Mr Da Ros will receive unvested shares in 2017 in lieu of STI and LTI forgone with his previous employer (refer to section 3g for further detail). These shares were to have been awarded on commencement of employment in December 2016, but share purchases were not permitted at this time under the Caltex Securities Trading Policy. Table 6. 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. One new award of restricted shares will be made in respect of the 2016 Financial Year to the Chief Information Officer on commencement of employment in lieu of the unvested STI and LTI which lapsed upon his resignation with his prior employer. One award was made previously to the Executive General Manager, Supply in 2015 also in respect of unvested LTI which lapsed upon his resignation with his prior employer. The estimated future cost of the unvested shares has been supplied below. Adam Ritchie Viv Da Ros (i) Type of award Sign on Year of award 2015 Sign on 2016 Vested (% of shares vested) Future years when shares will vest 58% 0% 2017 (33%) 2018 (9%) 2017 (33%) 2018 (33%) 2019 (34%) Future cost to Caltex of unvested shares ($) 124,814 315,000 Note: (i) Mr Da Ros will receive unvested sign-on restricted shares in 2017 in lieu of STI and LTI forgone with his previous employer (refer to section 3g for further detail). 62 CALTEX AUSTRALIADIRECTORS’ REPORTCONTINUED Table 7. 2016 Senior Executive performance rights Long term incentives for Senior Executives are awarded as performance rights under the CEIP as explained in section 3d. 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. Julian Segal Andrew Brewer Simon Hepworth Peter Lim Adam Ritchie Bruce Rosengarten Joanne Taylor Louise Warner Simon Willshire Performance rights at 1 Jan 2016 (i) Granted in 2016 (ii) Vested in 2016 (iii) Lapsed in 2016 (iv) Balance at 31 Dec 2016 424,187 101,505 (129,638) (31,422) 364,632 60,303 95,329 60,456 22,208 56,373 – 16,186 61,163 20,000 24,295 15,250 22,875 22,875 14,175 7,980 (12,821) (28,512) (18,411) – – – – (3,109) (6,913) (4,494) (26,465) – – – – (18,786) (20,936) 64,373 84,199 52,831 18,618 79,248 14,175 24,166 21,441 Notes: (i) This relates to the 2013, 2014 and 2015 performance rights. If the service based and performance based vesting conditions are achieved, the 2014 and 2015 performance rights will vest in 2017 and 2018 respectively. (ii) This relates to the 2016 performance rights. If the service based and performance based vesting conditions are achieved, these performance rights will vest in 2019. (iii) This relates to the 2013 performance rights of which 80.49% vested. Senior Executives received one Caltex share for each right that vested. (iv) This relates to the 2013 performance rights of which 19.51% lapsed. 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. Grant date Vesting date Exercise price Volatility 2016 GRANT (i)(ii) 2015 GRANT(i) 2014 GRANT(i) Relative TSR against S&P/ASX 100 Strategic measure Relative TSR against S&P/ASX 100 FCF and strategic measure Relative TSR against S&P/ASX 100 FCF and strategic measures 4 April 2016/ 13 May 2016 4 April 2016/ 13 May 2016 7 April 2015 7 April 2015 7 April 2014 7 April 2014 1 April 2019 1 April 2019 1 April 2018 1 April 2018 1 April 2017 1 April 2017 Nil 26% Nil 26% Risk free interest rate 1.88%/1.58% 1.88%/1.58% Dividend yield 3.3%/2.8% 3.3%/2.8% Expected life (years) 3.0/2.9 years 3.0/2.9 years Share price at grant date $33.86/$34.20 $33.86/$34.20 Valuation per right $13.34/$12.43 $30.68/$31.55 Nil 30% 1.75% 3.2% 3.0 $34.94 $15.69 Nil 30% 1.75% 3.2% 3.0 $34.94 $31.76 Nil 35% 3.02% 2.7% 3.0 $21.85 $12.57 Nil 35% 3.02% 2.7% 3.0 $21.85 $20.16 Notes: (i) 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 of the number of equity instruments that will vest based on progress against the performance measures. These values will be reflected in table 4b. In 2016, two separate CEIP performance grants were made. All Senior Executive awards, excluding the MD & CEO, were made on 4 April 2016. The MD & CEO’s award was made on 13 May 2016 after shareholder approval for the award was obtained at the 2016 AGM held on 5 May 2016. The terms of the awards, including all performance hurdles and vesting conditions are the same. (ii) 63 ANNUAL REPORT 2016 Remuneration Report continued 3. Senior Executive remuneration continued 3i. Remuneration tables continued Table 9. Mix of fixed and variable remuneration based on 2016 statutory remuneration table The proportion of each Senior Executive’s remuneration for 2016 that was fixed, and the proportion that was subject to a performance measure, is outlined below. The percentages are based on the 2016 statutory remuneration disclosures in table 4b (including the LTI values which are determined in accordance with accounting standards), and do not correspond to the target remuneration percentages outlined earlier in this report in section 3b. Variable (including short and long term incentive payments) 58% 46% 13% 48% 44% 33% 47% 0% 38% 41% 35% 2015 73% 72% 74% 72% 78% 67% – n/a 76% 73% Julian Segal Andrew Brewer Viv Da Ros Simon Hepworth Peter Lim Adam Ritchie Bruce Rosengarten Lyndall Stoyles Joanne Taylor Simon Wilshire Louise Warner Fixed 42% 54% 87% 52% 56% 67% 53% 100% 62% 59% 65% Table 10. FY16 STI outcomes The table below sets out the actual STI outcome for each Senior Executive as a percentage of their maximum STI opportunity. Senior Executives (i) Julian Segal Andrew Brewer Simon Hepworth Peter Lim Adam Ritchie Bruce Rosengarten Joanne Taylor(ii) Louise Warner(iii) Simon Willshire Average (iv) 2016 41% 49% 55% 40% 46% 38% 58% 52% n/a 47% Notes: (i) Mr Da Ros and Ms Stoyles commenced in December and October 2016 respectively and were not eligible to receive an STI for the 2016 performance year. (ii) Ms Taylor commenced employment in February 2016. (iii) Ms Warner was not a KMP during the 2015 financial year. (iv) This is the average for those KMP who were eligible to receive an STI payment in this year. 64 CALTEX AUSTRALIADIRECTORS’ REPORTCONTINUED 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 expertise and diversity. 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 and 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 2016 The current maximum annual fee pool for Non-executive Directors is $2.5 million, including statutory entitlements. This amount was approved by shareholders at the 2016 Annual General Meeting. Table 11. 2016 Non-executive Director fees The table below outlines the 2016 Non-executive Director fees. As outlined in the 2015 Remuneration Report, the base fees for the Chairman and Non-executive Directors increased from 1 January 2016 by 2.8%. All other Committee fees remained unchanged from 2015. 2016 fee (ii) BOARD COMMITTEES(i) Chairman Member Committee Chairman $492,360 $164,120 $36,000 Member $18,000 Notes: (i) Comprising the Audit Committee, Human Resources Committee, and OHS & Environmental Risk Committee. No fees are paid to the Chairman or Members of the Nomination Committee. (ii) Caltex pays superannuation of 9.5% for Non-executive Directors in addition to the above fees. 65 ANNUAL REPORT 2016 Remuneration Report continued 4. Non-executive Director fees continued 4c. Remuneration table Table 12. Non-executive Director fees in 2016 (statutory disclosures) The following table sets out the audited Non-executive Director fees in 2015 and 2016 calculated in accordance with statutory accounting requirements and which reflects the actual remuneration received during the financial year. Non-executive Directors are not eligible to receive any cash based or equity based incentives. PRIMARY POST EMPLOYMENT OTHER LONG TERM TOTAL Salary and fees Non- monetary benefits Super- annuation (i) Other Dollars Current Non-executive Directors Greig Gailey (Chairman) 2016 2015 Trevor Bourne 2016 2015 Steven Gregg 2016 2015 Bruce Morgan 2016 2015 Barbara Ward 2016 2015 Penny Winn 2016 2015 Former Non-executive Directors Elizabeth Bryan (Chairman) 2016 2015 Richard Brown 2016 2015 Barbara Burger 2016 2015 Ryan Krogmeier 2016 2015 507,017 249,160 220,551 231,650 195,258 36,284 220,551 231,650 218,120 155,738 179,689 26,608 – 501,057 – 40,241 – 44,778 – 44,778 430 558 761 914 – – 791 1,082 197 79 – – – 278 – – – – – – 48,167 23,415 20,952 22,007 18,549 3,447 20,952 22,007 20,721 14,368 17,070 2,528 – 17,926 – – – – – – – – – – – – – – – – – – – – – – – – – – – – 555,614 273,133 242,264 254,571 213,807 39,731 242,294 254,739 239,038 170,185 196,759 29,136 – 519,261 – 40,241 – 44,778 – 44,778 1,689,776 1,670,553 Total: Non-executive Directors 2016 2015 1,541,186 1,561,944 2,179 2,911 146,411 105,698 Note: (i) Superannuation contributions are made on behalf of Non-executive Directors to satisfy Caltex’s obligations under the Superannuation Guarantee legislation. Fees paid to 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. 66 CALTEX AUSTRALIADIRECTORS’ REPORTCONTINUED 5. Shareholdings of Key Management Personnel Table 13: 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: The table does not include unvested shareholdings which are disclosed in Tables 5 and 6 in section 3(i). Directors Greig Gailey Trevor Bourne Steven Gregg Bruce Morgan Barbara Ward Penny Winn Senior Executives Julian Segal Andrew Brewer Simon Hepworth Peter Lim Adam Ritchie Bruce Rosengarten Simon Willshire Louise Warner Joanne Taylor Lyndall Stoyles Viv Da Ros Directors Greig Gailey Trevor Bourne Steven Gregg Bruce Morgan Barbara Ward Penny Winn Elizabeth Bryan Ryan Krogmeier Richard Brown Barbara Burger Senior Executives Julian Segal Andrew Brewer Simon Hepworth Peter Lim Adam Ritchie Bruce Rosengarten Simon Willshire Held at 31 Dec 2015 Purchased Vested Sold Held at 31 Dec 2016 5,000 5,395 – 10,500 – 1,261 141,906 25,073 23,681 8,332 220 4,389 3,179 451 – – – – – – – 5,000 3,650 – – – – – – – – – – – – – – – – – 129,638 12,821 28,512 18,411 – 16,932 18,786 – – – – – – – – – – (48,614) (30,911) (35,000) (15,000) – – (16,965) – – – – 5,000 5,395 – 10,500 5,000 4,911 222,930 6,983 17,193 11,743 220 21,321 5,000 451 – – – Held at 31 Dec 2014 Purchased Vested Sold Held at 31 Dec 2015 5,000 5,395 – 10,500 – – 14,946 – – – 148,550 25,012 11,839 15,424 – – 5,157 – – – – – 1,261 – – – – – – – – 220 – – – – – – – – – – – – – – – – – – – – – – 269,356 27,763 61,342 35,908 2,913 21,321 40,207 (276,000) (27,702) (49,500) (43,000) (2,913) (16,932) (42,185) 5,000 5,395 – 10,500 – 1,261 14,946 – – – 141,906 25,073 23,681 8,332 220 4,389 3,179 67 ANNUAL REPORT 2016 Remuneration Report continued 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 2016 (2015: nil). Directors’ interests The directors’ relevant interests in the shares of Caltex Australia Limited at 31 December 2016 are set out in the following table. Director Greig Gailey Julian Segal Trevor Bourne Steven Gregg Bruce Morgan Barbara Ward Penny Winn Shareholding Nature of interest 5,000 222,930 5,395 Nil 10,500 5,000 4,911 Indirect interest Direct interest (176,695 shares) Indirect interest (46,235 shares) Mr Segal also has a direct interest in 364,632 performance rights Direct interest (2,395 shares) Indirect interest (3,000 shares) N/A Indirect interest Direct interest Direct interest Note: No director has acquired or disposed of any relevant interests in the company’s shares in the period from 1 January 2017 to the date of this Annual Report. Board and Committee meetings The Caltex Board met 17 times during the year ended 31 December 2016. In addition, directors attended Board strategy sessions and workshops, site visits and special purpose committee meetings during the year. In 2016, the Board convened the following standing committees: • Audit Committee • Human Resources Committee • Nomination Committee • OHS & Environmental Risk Committee. Special purpose committees were convened on six occasions in 2016. The number of Board and Committee meetings attended by each director during 2016 is set out in the following table: DIRECTOR BOARD (i) AUDIT COMMITTEE HUMAN RESOURCES COMMITTEE NOMINATION COMMITTEE OHS & ENVIRONMENTAL RISK COMMITTEE OTHER (iii) Current directors A (ii) Greig Gailey Julian Segal Trevor Bourne Steven Gregg Bruce Morgan Barbara Ward AM Penny Winn 17 17 17 17 17 17 17 B 16 17 15 17 16 17 17 A – – – 4 4 4 – B – – – 4 4 4 – A – – 4 – – 4 4 B – – 4 – – 4 4 A 4 – 4 4 4 4 4 B 4 – 4 4 4 4 4 A – – 4 4 4 – – B – – 4 4 4 – – A 6 6 – 6 6 – – B 6 6 – 5 5 – – Notes: A: Number of meetings required to attend. B: Number of meetings attended. (i) (ii) All directors are invited to and regularly attend Committee meetings; this table lists attendance only where a director is a member of the relevant Committee. (iii) Includes special purpose Committee meetings. Includes out of session meetings. Excludes strategy workshops and briefings. 68 CALTEX AUSTRALIADIRECTORS’ REPORTCONTINUED Shares and interests The total number of ordinary shares on issue at the date of this report and during 2016 is 261 million shares (2015: 270 million shares). The total number of performance rights on issue at the date of this report is 1,296,263 (2015: 1,482,001). 460,515 performance rights were issued during 2016 (2015: 434,972). 646,253 performance rights vested or lapsed during the year (2015: 971,082). On vesting, Caltex is required to allocate one ordinary share for each performance right. For each right that vests, Caltex intends to purchase a share on market following vesting. No new shares were issued as a result of the vesting of performance rights during 2016. Non-audit services KPMG is the external auditor of Caltex Australia Limited and the Caltex Australia Group. In 2016, 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 2016: • for non-audit services – total fees of $247,300 (2015: $299,000); these services included taxation services ($173,200) and other assurance services ($74,100), and • for audit services – total fees of $1,082,700 (2015: $1,000,500). The Board has received a written advice from the Audit Committee in relation to the independence of KPMG, as external auditor, for 2016. 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 2016 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 2016 by KPMG did not compromise the auditor independence requirements of the Corporations Act for the following reasons: – the provision of non-audit services in 2016 was consistent with the Board’s policy on the provision of services by the external auditor – the non-audit services provided in 2016 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 2016 that would impair the impartial and objective judgement of KPMG as external auditor. Company secretaries The following persons are current company secretaries of Caltex and the Caltex Group as at the date of this report. Lyndall Stoyles Ms Stoyles was appointed to this position in October 2016 when she joined Caltex. Ms Stoyles manages Caltex’s legal, secretariat, internal audit, compliance and corporate affairs teams. As General Counsel, she is responsible for providing legal advice to Caltex’s Board, CEO and broader leadership team. She is also a Company Secretary to the Board. Prior to joining Caltex, Ms Stoyles was Group General Counsel and Company Secretary for former logistics business Asciano and spent more than a decade with Clayton Utz advising on competition, commercial and corporate law issues in a broad range of industries. Lyndall holds a Diploma of Law/Masters of Law from the University of Sydney. Kara Nicholls Ms Nicholls has nearly 20 years’ experience across global equity capital markets including wide-ranging commercial and corporate compliance involvement. She brings extensive knowledge of the Australian Securities Exchange listing rules, corporate governance and company compliance and administration to the Board. Prior to joining Caltex, she has held roles with Woolworths Limited, Arrium Limited, Macquarie Group Limited and the Australian Securities Exchange Limited. She is a Non-executive Director and Company Secretary of the Gidget Foundation Australia, member of the Advisory Board of Macquarie University’s Department of Accounting and Corporate Governance (DAB) and Chair of the DAB’s Nomination Committee. She is a Chartered Secretary, JP, Fellow of the Governance Institute of Australia, Member of the Australian Institute of Company Directors and holds a Bachelor of Business and Master of Legal Studies from the University of Technology Sydney. Indemnity and insurance Caltex has paid insurance premiums for directors’ and officers’ liability for current and former directors and officers of the company, its subsidiaries and related entities. The insurance policies prohibit disclosure of the nature of the liabilities insured against and the amount of the premiums. The Constitution provides that each officer of the company and, if the Board considers it appropriate, any officer of a subsidiary of the company out of the assets of the company to the relevant extent against any liability incurred by the officer in or arising out of the conduct of the business of the company or the subsidiary (as the case may be) or in or arising out of the discharge of the duties of the officer, unless incurred in circumstances that the Board resolves do not justify indemnification. Where the Board considers it appropriate, the company may execute a documentary indemnity in any form in favour of any officer of the company or a subsidiary of the company, provided that such terms are not inconsistent with the Constitution. For more information, refer to the Constitution which is located on our website. 69 ANNUAL REPORT 2016 LEAD AUDITOR’S INDEPENDENCE DECLARATION UNDER SECTION 307C OF THE CORPORATIONS ACT 2001 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 2016 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, 21 February 2017 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. Rounding of amounts Caltex is an entity to which Australian Securities and Investments Commission (ASIC) Class Order 98/100 (CO98/100) applies. Amounts in the 2016 Directors’ Report and the 2016 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 Caltex Board. G Gailey Chairman Sydney, 21 February 2017 J Segal Managing Director & CEO 70 CALTEX AUSTRALIA DIRECTORS’ DECLARATION The Caltex Board 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 2016 (b) in the directors’ opinion, the financial statements and notes for the year ended 31 December 2016, 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 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 A to the financial statements for the year ended 31 December 2016, 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 F1 to the financial statements for the year ended 31 December 2016, 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. G Gailey Chairman Sydney, 21 February 2017 J Segal Managing Director & CEO 71 ANNUAL REPORT 2016 INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF CALTEX AUSTRALIA LIMITED Report on the audit of the Financial Report Opinion We have audited the Financial Report of the Group. In our opinion, the accompanying Financial Report of Caltex Australia Limited is in accordance with the Corporations Act 2001, including • giving a true and fair view of the Group’s financial position as at 31 December 2016 and of its financial performance for the year ended on that date; and • complying with Australian Accounting Standards and the Corporations Regulations 2001. The Group consists of Caltex Australia Limited (the Company) and the entities it controlled at the year end and from time to time during the financial year. The Financial Report comprises the: • consolidated statement of financial position as at 31 December 2016; • consolidated statement of comprehensive income, consolidated statement of changes in equity, and consolidated statement of cash flows for the year then ended; • notes, including a summary of significant accounting policies; and • Directors’ Declaration. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the Financial Report section of our report. We are independent of the Group in accordance with the Corporations Act 2001 and the relevant ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code). We have fulfilled our other ethical responsibilities in accordance with the Code. Key Audit Matters The Key Audit Matters we identified are: • Site remediation and dismantling provisions, and • Taxation of Singaporean entities. Key Audit Matters are those matters that, in our professional judgment, were of most significance in our audit of the Financial Report of the current period. These matters were addressed in the context of our audit of the Financial Report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. 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. 72 CALTEX AUSTRALIA SITE REMEDIATION AND DISMANTLING PROVISIONS (A$385,519K) Refer to Note C6 to the Financial Report The key audit matter How the matter was addressed in our audit The determination of site remediation and dismantling provisions relating to oil refining, distribution and marketing sites, including the Kurnell refinery, following its conversion to an import terminal is considered a key audit matter. This is due to the inherent complexity in estimating future environmental remediation costs, particularly those that are forecast to be incurred several years in the future. This is influenced by: • Current environmental and regulatory requirements, and the impact to the completeness of environmental remediation activities incorporated into the provision estimate; • The expected environmental management strategy, and the nature of costs incorporated into the provision estimate; • Third party expert advice sought by management regarding their obligations and estimates of future costs; • Historical experience, and whether this is a reasonable predictor when evaluating forecast costs; and • The expected timing of the expenditure. Our audit procedures to critically appraise management’s determination of site remediation and dismantling provisions included: • Comparing the basis for recognition and measurement of remediation provisions for consistency with environmental and regulatory requirements; • Obtaining third party expert reports as well as internal and external underlying documentation for management’s determination of future required activities, their timing, and associated cost estimations and comparing them to the nature and quantum of costs contained in the provision balance; • Assessing the competence, capability and objectivity of the Group’s internal and external experts used in the determination of the provision estimate; • Testing the accuracy of historical remediation provisions by comparing to actual expenditure. We used this knowledge to challenge management’s current cost estimations; and • Evaluating the completeness of the provisions through examination of the Group’s operating locations, regulatory correspondence and responses from our independent request of the Group’s external lawyers for confirmation of relevant matters. TAXATION OF SINGAPOREAN ENTITIES Refer to Note E1 to the Financial Report The key audit matter The determination as to whether the earnings from the Group’s Singaporean entities are subject to income tax in Australia under the regime for the taxation of controlled foreign company income is considered a key audit matter. This is due to the judgment required in assessing management’s current estimate of taxation, which required senior audit team member and tax specialist involvement. The critical elements of this were: • The significant uncertainty surrounding the timing of resolution of the matter with the Australian Taxation Office (ATO) and the final tax rate that will be levied in respect of the Group’s Singaporean entities’ earnings; and • The judgment in management’s current estimate of taxation by applying the Australian income tax rate of 30% to the Singaporean entities’ earnings, which may exceed the actual tax that applies if the income is deemed to be non-assessable or only partially assessable in Australia. How the matter was addressed in our audit Our audit procedures included: • Working with our tax specialists to evaluate documentation prepared by the Group’s internal and external advisors based on our specialists’ experience and our understanding of the issue, including the current status of discussions with the ATO, expected timing for resolution and the extent of any potential changes to the estimate; and • Evaluating the disclosures of the Group by comparing them to our understanding of the matter and potential adjustments to future period income tax expense. 73 ANNUAL REPORT 2016 INDEPENDENT AUDITOR’S REPORT CONTINUED Other Information Other Information is financial and non-financial information in Caltex Australia Limited’s annual reporting which is provided in addition to the Financial Report and the Auditor’s Report. The Directors are responsible for the Other Information. Our opinion on the Financial Report does not cover the Other Information and, accordingly, we do not express an audit opinion or any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In connection with our audit of the Financial Report, our responsibility is to read the Other Information. In doing so, we consider whether the Other Information is materially inconsistent with the Financial Report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the work we have performed on the Other Information that we obtained prior to the date of this Auditor’s Report we have nothing to report. Responsibilities of Directors for the Financial Report The Directors are responsible for: • preparing the Financial Report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001; • implementing necessary internal control to enable the preparation of a Financial Report that gives a true and fair view and is free from material misstatement, whether due to fraud or error; and • assessing the Group’s ability to continue as a going concern. This includes disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the Financial Report Our objective is: • to obtain reasonable assurance about whether the Financial Report as a whole is free from material misstatement, whether due to fraud or error; and • to issue an Auditor’s Report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error. They are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this Financial Report. A further description of our responsibilities for the Audit of the Financial Report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_files/ar2.pdf. This description forms part of our Auditor’s Report. REPORT ON THE REMUNERATION REPORT Opinion We have audited the Remuneration Report included in the Directors’ report for the year ended 31 December 2016. In our opinion, the Remuneration Report of Caltex Australia Limited for the year ended 31 December 2016, complies with Section 300A of the Corporations Act 2001. Director’s responsibilities 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 responsibilities Our responsibility is to express an opinion on the Remuneration Report, based on our Audit conducted in accordance with Australian Auditing Standards. KPMG Sydney, 21 February 2017 Greg Boydell Partner 74 CALTEX AUSTRALIA FINANCIAL STATEMENTS Contents Primary statements 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 A Basis of preparation B Results for the year B1 Revenue and other income B2 Costs and expenses B3 Segment reporting B4 Earnings per share B5 Dividends C Operating assets and liabilities C1 Receivables C2 Inventories C3 Intangibles C4 Property, plant and equipment C5 Payables C6 Provisions C7 Employee benefits D Capital, funding and risk management D1 Interest bearing liabilities D2 Risk management D3 Capital management D4 Fair value of financial assets and liabilities D5 Issued capital E Taxation E1 Income tax expense E2 Deferred tax F Group structure F1 Controlled entities F2 Business combinations F3 Equity accounted investees F4 Joint venture operations F5 Parent entity disclosures G Other information G1 Commitments G2 Contingent liabilities G3 Related party disclosures G4 Key management personnel G5 Notes to the cash flow statement G6 Auditor remuneration G7 Net tangible assets per share G8 New standards and interpretations not yet adopted G9 Events subsequent to the end of the year 75 ANNUAL REPORT 2016 CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2016 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 Selling and distribution expenses General and administration 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 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 2016 2015 B1 17,933,201 19,926,546 (11,154,208) (4,908,353) 122,329 (12,903,682) (4,941,311) (193,418) (15,940,232) (18,038,411) 1,992,969 1,888,135 B1 B2 F3.4 E1 1,805 (3,955) (923,800) (132,066) 934,953 (79,623) 7,051 (72,572) 1,382 863,763 (253,283) 610,480 609,940 540 610,480 23,641 (26,616) (938,501) (135,309) 811,350 (82,202) 5,490 (76,712) 5,008 739,646 (217,025) 522,621 521,507 1,114 522,621 B4 231.6 193.2 There are no significant items before tax included in the consolidated income statement for the year ended 31 December 2016. Detail of the prior year gain (2015: $31,924,000 gain before tax) is disclosed in note B1. The consolidated income statement is to be read in conjunction with the notes to the financial statements. 76 CALTEX AUSTRALIA CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2016 Thousands of dollars Profit for the period Other comprehensive income Items that will not be reclassified to profit or loss: Actuarial gain/(loss) 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 2016 2015 610,480 522,621 (220) 66 (154) 6,698 (595) 893 (89) 6,907 6,753 1,507 (452) 1,055 7,716 23,690 (22,905) (234) 8,267 9,322 Total comprehensive income for the period 617,233 531,943 Attributable to: Equity holders of the parent entity Non-controlling interest Total comprehensive income for the period 616,693 540 617,233 530,829 1,114 531,943 The consolidated statement of comprehensive income is to be read in conjunction with the notes to the financial statements. 77 ANNUAL REPORT 2016 CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2016 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 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 2016 2015 C1 C2 C1 F3 C3 C4 E2 C7 C5 D1 C7 C6 C5 D1 C7 C6 D5 244,857 747,585 1,080,920 9,524 60,769 2,143,655 2,555 10,394 195,335 2,690,865 238,083 432 21,415 3,159,079 5,302,734 1,079,389 134 167,569 96,379 158,985 1,502,456 8,356 698,340 38,637 244,730 990,063 2,492,519 2,810,215 263,764 681,542 969,885 51,167 38,881 2,005,239 2,824 9,412 182,626 2,602,865 298,158 1,411 2,206 3,099,502 5,104,741 966,806 122 30,478 109,993 110,350 1,217,749 9,743 695,238 50,669 343,537 1,099,187 2,316,936 2,787,805 524,944 (344) (7,955) 2,280,754 2,797,399 12,816 2,810,215 543,415 (644) (9,223) 2,241,981 2,775,529 12,276 2,787,805 The consolidated balance sheet is to be read in conjunction with the notes to the financial statements. 78 CALTEX AUSTRALIA CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2016 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 2015 543,415 (607) 1,206 (2,027) (2,677) 1,981,319 2,520,629 11,962 2,532,591 Total comprehensive income for the year Profit for the year Total other comprehensive income Total comprehensive income for the year Own shares acquired, net of tax Shares vested to employees Expense on equity settled transactions Dividends to shareholders – – – – – – – – – – (29,304) 29,267 – – – 7,716 7,716 – – – – – 551 551 – – – – – – 521,507 521,507 1,114 522,621 1,055 9,322 – 9,322 – 5,999 (29,267) 522,562 – – 530,829 (23,305) – 1,114 – – 531,943 (23,305) – 9,276 9,276 – – (261,900) (261,900) – 9,276 (800) (262,700) Balance at 31 December 2015 543,415 (644) 8,922 (1,476) (16,669) 2,241,981 2,775,529 12,276 2,787,805 Balance at 1 January 2016 543,415 (644) 8,922 (1,476) (16,669) 2,241,981 2,775,529 12,276 2,787,805 Total comprehensive income for the year Profit for the year Total other comprehensive income Total comprehensive income for the year Own shares acquired, net of tax Shares vested to employees Expense on equity settled transactions Shares bought back (i) Dividends to shareholders – – – – – – – – (10,952) 11,252 – (18,471) – – – – – 6,698 6,698 – – – – – – 209 209 – – – – – – – 609,940 609,940 540 610,480 (154) 6,753 – 6,753 – 902 (11,252) 609,786 – – 616,693 (10,050) – 540 – – 617,233 (10,050) – 4,711 4,711 – – (251,608) (270,079) – (319,405) (319,405) – 4,711 – (270,079) – (319,405) Balance at 31 December 2016 524,944 (344) 15,620 (1,267) (22,308) 2,280,754 2,797,399 12,816 2,810,215 The consolidated statement of changes in equity is to be read in conjunction with the notes to the financial statements. (i) 9,189,481 shares were bought back and cancelled during the year ended 31 December 2016. 79 ANNUAL REPORT 2016 CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2016 Thousands of dollars Note 2016 2015 Cash flows from operating activities Receipts from customers Payments to suppliers, employees and governments Shares acquired for vesting employee benefits 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 investment 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 Payments for shares bought back Dividends paid Net financing cash outflows 20,025,940 (19,014,981) (10,952) 400 7,077 (65,687) (13,595) 22,794,731 (21,795,935) (29,304) 3,014 5,561 (61,729) (31,672) G5.2 928,202 884,666 (17,686) (290,288) (32,933) (30,241) 13,865 (357,283) (7,268) (340,096) (91,422) (15,414) 43,095 (411,105) 6,630,000 (6,630,000) (342) – (270,079) (319,405) 7,676,000 (7,676,000) (219) (800) – (261,900) (589,826) (262,919) (18,907) 263,764 244,857 210,642 53,122 263,764 Net (decrease)/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 G5.1 The consolidated cash flow statement is to be read in conjunction with the notes to the financial statements. 80 CALTEX AUSTRALIA NOTES TO THE FINANCIAL STATEMENTS A BASIS OF PREPARATION FOR THE YEAR ENDED 31 DECEMBER 2016 Caltex Australia Limited (Caltex or company) is a company limited by shares, incorporated and domiciled in Australia. The shares of Caltex are publicly traded on the Australian Securities Exchange (ASX: CTX). The consolidated financial statements for the year ended 31 December 2016 comprise the company and its controlled entities (together referred to as the Caltex Group) and the Caltex Group’s interest in associates and jointly controlled entities. The Caltex 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 Caltex Board on 21 February 2017. 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 also 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 derivative financial instruments which are measured at fair value, and the defined benefit liability which 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 Caltex Group’s functional currency. The company is of a kind referred to in ASIC Class Order 2016/191 dated 24 March 2016. 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 Caltex Group has adopted all the mandatory amended Accounting Standards issued that are relevant to its operations and effective for the current reporting period. A number of new standards, amendments to standards and interpretations effective for annual periods beginning after 1 January 2017 have not been applied in preparing these consolidated financial statements. Refer to note G8. 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 Caltex 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 future financial years are found in the following notes: • information about the assumptions and the risk factors relating to impairment is described in notes C1 (receivables), C3 (intangibles) and C4 (property, plant and equipment) • note D2 provides an explanation 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 • note C6 provides key sources of estimation, uncertainty and assumptions used in regard to estimation of provisions and • note E1 provides information around the extent to which earnings from the Group’s Singaporean entities would be subject to income tax in Australia. 81 ANNUAL REPORT 2016 This section highlights the performance of the Group for the year, including revenue and other income, costs and expenses, results by operating segment, earnings per share and dividends. B1 Revenue and other income 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 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. Dividend income is recognised at the date the right to receive payment is established. Other income Net profit on disposal of property, plant and equipment The profit on disposal of property, plant and equipment 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, plant and equipment 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. 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 2016 2015 17,618,637 19,591,372 72,766 115,890 96,280 29,628 314,564 70,777 113,841 100,886 49,670 335,174 17,933,201 19,926,546 Net gain on sale of property, plant and equipment 1,805 23,641 During the current period, it was determined that $113 million (2015: $101 million) of selling and distribution expenses should be reclassified and presented net in Revenue to better reflect the substance of the underlying transactions, being rebates offered to customers. Significant items During 2016, the Group did not incur any significant item gains. During 2015, the Group recognised a significant gain before tax totalling $31,924,000 in the income statement. This related to the sale of surplus property in Western Australia and is included in net gain on sale of property, plant and equipment. 82 CALTEX AUSTRALIANOTES TO THE FINANCIAL STATEMENTSB RESULTS FOR THE YEARFOR THE YEAR ENDED 31 DECEMBER 2016 B2 Costs and expenses 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 borrowings are not specific to an asset, finance costs are capitalised using an average rate based on the general borrowings of the Group. Thousands of dollars Finance costs Interest expense Finance charges on capitalised leases Unwinding of discount on provisions Less: capitalised finance costs Finance costs Finance income Net finance costs Depreciation and amortisation Depreciation of: Buildings Plant and equipment Amortisation of: Leasehold property Intangibles Total depreciation and amortisation Selected expenses Total personnel expenses 2016 2015 61,083 220 19,880 (1,560) 79,623 (7,051) 72,572 10,941 172,468 183,409 8,279 17,608 25,887 64,367 109 21,428 (3,702) 82,202 (5,490) 76,712 13,113 155,016 168,129 10,237 14,183 24,420 209,296 192,549 344,381 313,478 Significant items During 2015 and 2016, the Group did not incur any significant item losses. B3 Segment reporting B3.1 Segment disclosures 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 costs 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. This measurement base excludes the impact of the rise or fall in oil or product prices (key external factors) and presents 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, interest and income tax is also used to assess the performance of each business unit against internal performance measures. 83 ANNUAL REPORT 2016 B3 Segment reporting continued B3.1 Segment disclosures continued 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 product prices, 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. Types of products and services The following summary describes the operations in each of the Group’s reportable segments: Supply and Marketing The Supply and Marketing function is an integrated transport fuel supply chain which sources crude oil and refined products on the international market 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. The Group’s broad distribution capabilities encompass pipelines, terminals, depots and both an owned and contracted transportation fleet. Lytton Lytton refinery in Brisbane refines crude oil into petrol, diesel, jet fuel and many specialty products such as liquid petroleum gas. B3.2 Information about reportable segments SUPPLY AND MARKETING LYTTON TOTAL OPERATING SEGMENTS Thousands of dollars 2016 2015 2016 2015 2016 2015 Gross segment revenue Product duties and taxes External segment revenue Inter-segment revenue Total segment revenue 17,142,594 (4,908,353) 19,029,324 (4,941,309) 12,234,241 14,088,015 48,542 – 48,542 88,870 – 17,191,136 (4,908,353) 19,118,194 (4,941,309) 88,870 12,282,783 14,176,885 – – 3,561,988 3,723,888 3,561,988 3,723,888 12,234,241 14,088,015 3,610,530 3,812,758 15,844,771 17,900,773 Share of profit of associates and joint ventures Depreciation and amortisation 1,382 (147,540) 5,008 (138,893) – (56,192) – (47,743) 1,382 (203,732) 5,008 (186,636) 709,435 666,310 205,474 406,000 914,909 1,072,310 122,329 (193,418) (353,879) – – 122,329 (43,158) (99,722) (344,314) (193,418) (453,601) Replacement Cost of Sales Operating Profit (RCOP) before interest and income tax Other material items: Inventory gains/(losses) Capital expenditure (including acquisitions) (301,156) 84 CALTEX AUSTRALIANOTES TO THE FINANCIAL STATEMENTSB RESULTS FOR THE YEARFOR THE YEAR ENDED 31 DECEMBER 2016 B3.3 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 RCOP before interest and income tax, excluding significant items Other expenses RCOP before interest and income tax, excluding significant items Significant items excluded from profit or loss reported to the chief operating decision maker: Net gain on sale of property in WA RCOP 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 2016 2015 15,844,771 4,908,353 (3,561,988) 17,191,136 427,501 314,564 17,900,773 4,941,309 (3,723,888) 19,118,194 473,178 335,174 17,933,201 19,926,546 914,909 (101,443) 813,466 1,072,310 (95,572) 976,738 – 813,466 122,329 935,795 (72,572) 540 863,763 31,924 1,008,662 (193,418) 815,244 (76,712) 1,114 739,646 Thousands of dollars Other material items 2016 Depreciation and amortisation Inventory gains Capital expenditure Other material items 2015 Depreciation and amortisation Inventory losses Capital expenditure Reportable segment totals Other Consolidated totals (203,732) 122,329 (344,314) (186,636) (193,418) (453,601) (5,564) – (10,708) (209,296) 122,329 (355,022) (5,913) – (4,033) (192,549) (193,418) (457,634) B3.4 Geographical segments The Group operates in Australia and Singapore. Revenue is predominantly generated in Australia. All of the Groups non-financial non-current assets are located in the Group’s country of domicile, Australia. B3.5 Major customer Revenues from one customer of the Group’s Supply and Marketing segment represent approximately $3,100,000,000 (2015: $3,600,000,000) of the Group’s total gross sales revenue (excluding product duties and taxes). 85 ANNUAL REPORT 2016 B3 Segment reporting continued B3.6 Revenue from products and services Thousands of dollars Petrol Diesel Jet Lubricants Specialty and other products Crude Non-fuel income and rebates Product duties and taxes Other revenue B4 Earnings per share Cents per share Historical cost RCOP excluding significant items 2016 2015 4,958,773 5,155,048 1,367,969 201,133 193,681 406,179 427,501 4,908,353 314,564 5,827,805 6,187,424 1,622,921 225,019 246,209 67,507 473,178 4,941,309 335,174 17,933,201 19,926,546 2016 231.6 199.0 2015 193.2 232.7 The calculation of historical cost basic earnings per share for the year ended 31 December 2016 was based on the net profit attributable to ordinary shareholders of the parent entity of $609,940,000 (2015: $521,507,000) and a weighted average number of ordinary shares outstanding during the year ended 31 December 2016 of 263 million shares (2015: 270 million shares). The calculation of RCOP excluding significant items basic earnings per share for the year ended 31 December 2016 was based on the net RCOP profit attributable to ordinary shareholders of the parent entity of $524,310,000 (2015: $628,400,000) and a weighted average number of ordinary shares outstanding as disclosed during the year ended 31 December 2016 of 263 million shares (2015: 270 million shares). RCOP is calculated by adjusting the statutory profit for significant items and inventory gains and losses as follows: Thousands of dollars Net profit after tax attributable to equity holders of the parent entity Adjust: Significant items gains after tax Adjust: Inventory (gains)/losses after tax RCOP excluding significant items after tax 2016 2015 609,940 – (85,630) 524,310 521,507 (28,500) 135,393 628,400 There are no dilutive potential ordinary shares, and therefore diluted earnings per share equals basic earnings per share. 86 CALTEX AUSTRALIANOTES TO THE FINANCIAL STATEMENTSB RESULTS FOR THE YEARFOR THE YEAR ENDED 31 DECEMBER 2016 B5 Dividends B5.1 Dividends declared or paid Dividends recognised in the current year by the company are: 2016 Interim 2016 Final 2015 Total amount 2015 Interim 2015 Final 2014 Total amount Date of payment Franked/ unfranked Cents per share 30 September 2016 4 April 2016 Franked Franked 30 September 2015 2 April 2015 Franked Franked 50 70 120 47 50 97 Total amount $’000 130,405 189,000 319,405 126,900 135,000 261,900 Subsequent events Since 31 December 2016, 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 2016. Final 2016 31 March 2017 Franked 52 135,621 B5.2 Dividend franking account Thousands of dollars 30% franking credits available to shareholders of Caltex Australia Limited for subsequent financial years 2016 2015 820,375 1,102,168 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 $58,123,487 (2015: $81,000,000). 87 ANNUAL REPORT 2016 This section provides information on the assets used to generate the Group’s trading performance and the liabilities incurred as a result. C1 Receivables The following balances are amounts due from the Group’s customers and others. Thousands of dollars Current Trade debtors Allowance for impairment Associated entities Other related entities Other debtors Non-current Other loans 2016 2015 659,115 (6,550) 652,565 11,129 1,217 82,674 747,585 639,943 (8,235) 631,708 11,418 1,061 37,355 681,542 2,555 2,824 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 when an event, occurring after the impairment loss was recognised, objectively indicates an increase in the recoverable amount. Impaired receivables As at 31 December 2016, current trade receivables of the Group with a nominal value of $6,550,000 (2015: $8,235,000) 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 2016, trade receivables of $34,457,000 (2015: $27,997,000) 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 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 2016 2015 32,289 2,168 – 34,457 25,430 2,514 53 27,997 2016 2015 8,235 2,266 (3,951) 6,550 5,951 7,984 (5,700) 8,235 The creation and release of the provision for impaired receivables has been included in general and administration expenses in the income statement. Amounts charged to the allowance account are 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. 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 D2.4 for further details. 88 CALTEX AUSTRALIANOTES TO THE FINANCIAL STATEMENTSC OPERATING ASSETS AND LIABILITIESFOR THE YEAR ENDED 31 DECEMBER 2016 C2 Inventories Thousands of dollars Crude oil and raw materials Inventory in process Finished goods Materials and supplies At 31 December 2016 2015 172,997 36,225 856,253 15,445 1,080,920 177,954 65,137 709,426 17,368 969,885 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. There was no inventory written down to net realisable value at 31 December 2016. Inventories held at 31 December 2015 were written down to their net realisable value. The amount of the write-down at 31 December 2015 was $48,100,000 and is included in inventory losses in the income statement. C3 Intangibles Thousands of dollars Cost At 1 January 2016 Additions Impairment Disposals Reclassification Balance at 31 December 2016 Cost At 1 January 2015 Acquisitions through business combinations Additions Impairment Disposals Balance at 31 December 2015 Amortisation At 1 January 2016 Amortisation for the year Disposals Reclassification Balance at 31 December 2016 Amortisation At 1 January 2015 Amortisation for the year Disposals Balance at 31 December 2015 Note Goodwill Rights and licences Software Total F2 147,638 – – (1,178) – 146,460 143,126 4,512 – – – 147,638 (16,391) – – – (16,391) (16,391) – – (16,391) 32,100 778 – – – 32,878 31,321 779 – – – 32,100 (14,895) (4,606) – – (19,501) (10,186) (4,709) – (14,895) 103,007 29,463 – (4,491) 36,498 164,477 99,925 – 15,414 (12,000) (332) 103,007 (68,833) (13,002) 1,058 (31,811) (112,588) (59,607) (9,474) 248 (68,833) 282,745 30,241 – (5,669) 36,498 343,815 274,372 5,291 15,414 (12,000) (332) 282,745 (100,119) (17,608) 1,058 (31,811) (148,480) (86,184) (14,183) 248 (100,119) 89 ANNUAL REPORT 2016 C3 Intangibles continued Thousands of dollars Carrying amount At 1 January 2016 Balance at 31 December 2016 Carrying amount At 1 January 2015 Balance at 31 December 2015 Goodwill Rights and licences Software Total 131,247 130,069 17,205 13,377 34,174 51,889 182,626 195,335 126,735 131,247 21,135 17,205 40,318 34,174 188,188 182,626 The amortisation charge of $17,608,000 (2015: $14,183,000) is recognised in selling and distribution expenses and general and administration expenses in the income statement. 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. 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. Other intangible assets Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and impairment losses. Amortisation Amortisation is charged to the consolidated income statement on a straight-line basis over the estimated useful lives of intangible assets. 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: Software development Software not integrated with hardware Rights and licences 7 – 17% 7 – 18% 4 – 33% Impairment The carrying amounts of intangible assets are reviewed to determine if there is any indication of impairment. If any such indication exists, the assets’ recoverable amounts are estimated and, if required, an impairment is recognised in the income statement. Impairment tests for cash-generating units containing goodwill Goodwill has historically been attached to distributor businesses. Following the reorganisation of Caltex’s business model in 2015, the distributor businesses have been integrated within Caltex’s Supply and Marketing business. Goodwill has been reallocated to a cash-generating unit containing all the assets in the integrated value chain (inclusive of retail sites, depots, pipelines and terminals) on a state by state basis. The recoverable amount of goodwill 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 goodwill impairment losses recognised during the year ended 31 December 2016 (2015: nil). Key assumptions used in value in use calculations Key assumption Cash flow Estimated long term average growth rate Discount period Discount rate Basis for determining value in use assigned to key assumption Earnings before interest, tax, depreciation and amortisation 2.5% 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. 90 CALTEX AUSTRALIANOTES TO THE FINANCIAL STATEMENTSC OPERATING ASSETS AND LIABILITIESFOR THE YEAR ENDED 31 DECEMBER 2016 C4 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 Capital projects in progress At cost Accumulated impairment losses Net carrying amount Total net carrying amount 2016 2015 376,079 (37,284) 338,795 661,591 (253,591) 408,000 186,977 (101,228) 85,749 405,908 (37,284) 368,624 596,410 (242,650) 353,760 169,347 (92,924) 76,423 5,464,093 (3,918,669) 5,227,943 (3,785,157) 1,545,424 1,442,786 319,127 (6,230) 312,897 377,392 (16,120) 361,272 2,690,865 2,602,865 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 C6. Assessment of impairment is made in accordance with the impairment policy noted below. 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. 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. 91 ANNUAL REPORT 2016 C4 Property, plant and equipment continued 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. Impairment The carrying amounts of assets are reviewed to determine if there is any indication of impairment. If any such indication exists, these assets’ recoverable amounts are estimated and, if required, an impairment is recognised in the income statement. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. In assessing the carrying value of property, plant and equipment, management considers long term assumptions relating to key external factors including Singapore refiner margins, foreign exchange rates and crude oil prices; any changes in these assumptions can have a material impact on the carrying value. Reconciliations of the carrying amounts for each class of property, plant and equipment are set out below: Thousands of dollars 2016 2015 Freehold land Carrying amount at the beginning of the year Additions Acquisition through business combination Disposals Reclassification 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 92 368,624 29,362 – (4,913) (54,278) 338,795 353,760 3,392 – (6,160) 67,949 (10,941) 408,000 76,423 3,704 (4,057) 17,958 (8,279) 85,749 346,992 22,537 380 (1,285) – 368,624 326,480 2,654 – (2,340) 40,079 (13,113) 353,760 74,762 2,604 (605) 9,899 (10,237) 76,423 CALTEX AUSTRALIANOTES TO THE FINANCIAL STATEMENTSC OPERATING ASSETS AND LIABILITIESFOR THE YEAR ENDED 31 DECEMBER 2016 Thousands of dollars Plant and equipment Carrying amount at the beginning of the year Additions Acquisition through business combination Disposals Transfers from capital projects in progress Depreciation Reclassification 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 C5 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 2016 2015 1,442,786 75,254 – (31,595) 175,537 (172,468) 55,910 1,060,470 349,971 1,329 (15,140) 201,172 (155,016) – 1,545,424 1,442,786 361,272 211,509 1,560 (261,444) 312,897 554,968 53,752 3,702 (251,150) 361,272 2016 2015 – 774,633 304,756 1,079,389 – 673,072 293,734 966,806 8,356 9,743 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 on between 30 and 60 day terms. Payables are initially recognised at fair value plus any directly attributable transaction costs and subsequently measured at amortised cost. C6 Provisions Thousands of dollars Balance at 1 January 2016 Provisions made during the year Provisions used during the year Discounting movement Balance at 31 December 2016 Current Non-current Site remediation and dismantling Other Total 428,772 11,689 (71,140) 16,198 385,519 144,110 241,409 385,519 25,115 8,080 (14,999) – 18,196 14,875 3,321 18,196 453,887 19,769 (86,139) 16,198 403,715 158,985 244,730 403,715 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. 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 financing cost. 93 ANNUAL REPORT 2016 C6 Provisions continued 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. Site remediation and dismantling Provisions relating to current and future 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 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. 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. Dividends A provision for dividends payable is recognised in the reporting period in which the dividends are declared, for the entire undistributed amount. Other Other includes legal, insurance and other provisions. C7 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 Total current liability for employee benefits Non-current liabilities Liability for long service leave Liability for termination benefits Defined benefit superannuation obligation Total non-current liability for employee benefits Total liability for employee benefits 94 2016 2015 432 432 32,091 9,219 16,114 38,955 96,379 35,479 – 3,158 38,637 1,411 1,411 32,743 8,028 16,503 52,719 109,993 37,781 9,898 2,990 50,669 134,584 159,251 CALTEX AUSTRALIANOTES TO THE FINANCIAL STATEMENTSC OPERATING ASSETS AND LIABILITIESFOR THE YEAR ENDED 31 DECEMBER 2016 NOTES TO THE FINANCIAL STATEMENTS D CAPITAL, FUNDING AND RISK MANAGEMENT FOR THE YEAR ENDED 31 DECEMBER 2016 This section focuses on the Group’s capital structure and related financing costs. This section also describes how the Group manages the capital and the financial risks it is exposed to as a result of its operating and financing activities. D1 Interest bearing liabilities Thousands of dollars Current Lease liabilities Non-current Domestic medium term notes Subordinated note Lease liabilities 2016 2015 134 134 122 122 149,836 547,728 776 698,340 149,750 544,578 910 695,238 G1 G1 Domestic medium term and subordinated notes These notes are initially recognised when issued at fair value, less transaction costs. These costs are subsequently accounted for using the amortised cost method. Any difference between the fair value and the principal value is recognised in the consolidated income statement over the period of the interest bearing liability on an effective interest basis. D2 Risk management 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 enters into derivative transactions, principally interest rate swaps, foreign currency exchange contracts (forwards, swaps and options), and crude and finished product swap contracts. The purpose is to manage the market risks arising from the Group’s operations and its sources of finance. 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. It is the Group’s policy that no speculative trading in financial instruments shall be undertaken. Group Treasury centrally manages market risk, liquidity risk, financial institutional credit risk, funding 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 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 in notes D2.1 to D2.5 below. Cash flow hedges Interest rate swaps and foreign currency exchange contracts (forwards, swaps and options) are classified as cash flow hedges. The effective portion of changes in fair value of these derivative financial instruments is recognised directly in equity. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are transferred to the income statement in the period when the hedged item affects profit or loss. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at the time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. 95 ANNUAL REPORT 2016 D2 Risk management continued D2.1 Interest rate risk Interest rate instruments The Group enters into fixed interest rate instruments to manage cash flow risks associated with the interest rate volatility 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 four years. At 31 December 2016, the fixed rates under these swap contracts varied from 2.5% p.a. to 3.4% p.a. (2015: 3.4% p.a. to 5.3% p.a.), a weighted average rate of 2.7% p.a. (2015: 4.6% p.a.). The net fair value of interest rate swap contracts at 31 December 2016 was a $556,000 loss (2015: $1,640,000 loss). Interest rate sensitivity analysis At 31 December 2016, if interest rates had changed by -/+1% from the year end rates, with all other variables held constant, the impact on post-tax profit for the year for the Group and equity would have been: Thousands of dollars Interest rates decrease by 1% Interest rates increase by 1% 2016 2015 Post-tax profit 2,100 (2,100) Hedge reserve (4,400) 4,200 Post-tax profit 2,000 (2,000) Hedge reserve (700) 600 Interest rate risk exposure The Group’s exposure to interest rate risk (after hedging) for classes of financial assets and liabilities are set out as follows: Thousands of dollars Financial assets Cash at bank and on hand Financial liabilities Variable rate borrowings Subordinated note Fixed interest rate – repricing dates: Twelve months or less One to five years 2016 2015 244,857 244,857 263,764 263,764 D1 D1 D1 417,728 394,578 50,134 230,612 698,474 100,122 200,660 695,360 96 CALTEX AUSTRALIANOTES TO THE FINANCIAL STATEMENTSD CAPITAL, FUNDING AND RISK MANAGEMENTFOR THE YEAR ENDED 31 DECEMBER 2016 D2.2 Foreign exchange risk 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 at the dates the fair value was determined. The Group is exposed to the effect of changes in exchange rates on its operations. Forward foreign exchange contracts (forwards, swaps and options) are used to hedge foreign currency payables in accordance with Group Treasury Policy. The Group implemented a foreign exchange risk management policy in August 2014 of hedging 80% of the Group’s US dollar denominated crude and products payable. From December 2016, this policy was amended to increase the hedging percentage to 100% 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 2016, the total fair value of all outstanding foreign currency exchange contracts (forwards, swaps and options) amounted to a $9,415,000 gain (2015: $476,000 gain). Foreign exchange rate sensitivity analysis At 31 December 2016, had the Australian dollar strengthened/weakened by 10% against the US dollar with all other variables held constant, the impact on post-tax profit for the year for the Group and equity would have been: 2016 2015 Post-tax profit (20,500) 30,400 Hedge reserve Post-tax profit Hedge reserve (300) 300 8,000 5,700 (20) 30 Thousands of dollars AUD strengthens against USD 10% AUD weakens against USD 10% Exposure to foreign exchange risk Thousands of dollars (Australian dollar equivalent amounts) Cash and cash equivalents Trade receivables Trade payables Forward exchange contracts Foreign currency option contracts US dollar 154,975 141,762 (668,847) 7,424 1,991 2016 Australian dollar Total US dollar 89,882 608,378 (428,313) – – 244,857 750,140 (1,097,160) 7,424 1,991 43,266 92,398 (556,484) (475) 951 8,829 Crude and finished product swap contracts 7,800 – 7,800 2015 Australian dollar 220,498 591,968 (429,370) – – – Total 263,764 684,366 (985,854) (475) 951 8,829 97 ANNUAL REPORT 2016 D2 Risk management continued D2.3 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 movements. The enterprise commodity risk management policy seeks to minimise adverse price timing risks and basis exposures brought about by purchase and sales transactions. In 2016, Caltex’s policy has been not to hedge refiner margins. As at 31 December 2016, the total fair value of all outstanding crude and finished product swap contracts amounted to a $7,800,000 gain (2015: $8,829,000 gain). Commodity price sensitivity analysis At 31 December 2016, if commodity prices had changed by -/+10% from the year end prices, with all other variables held constant, the impact on post-tax profit for the year for the Group and equity would have been: Thousands of dollars Commodity prices increase 10% Commodity prices decrease 10% 2016 2015 Post-tax profit Hedge reserve Post-tax profit Hedge reserve (9,500) 9,500 – – (930) 930 – – D2.4 Credit risk 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 C1). 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. Caltex also minimises concentrations of credit risk by undertaking transactions with a large number of customers across a variety of industries and networks. Security is required to be supplied by certain groups of Caltex customers to minimise risk. The security could be in the form of a registered personal property security interest over the customer’s business and mortgages over the business property. Bank guarantees or insurance bonds are also provided in some cases, as are mortgages taken over directors’ property such as residential houses or rural properties. 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. Interest rate swaps, foreign currency exchange contracts (forwards, swaps and options) and crude and finished products swap contracts are subject to credit risk in relation to the relevant counterparties, which are principally large relationship banks. The maximum credit risk exposure on foreign currency exchange contracts and crude and finished products swap contracts is the fair value amount of the foreign currency that Caltex receives when settlement occurs, should the counterparty fail to pay the amount which it is committed to pay the Group. The credit risk on interest rate swaps is limited to the positive mark to market amount to be received from counterparties over the life of contracts that are favourable to the Group. As at 31 December 2016, the total fair value of outstanding foreign exchange contracts (forwards, swaps and options), crude and finished product swap contracts and positive mark to market value of interest rate swaps is $17,265,000 (2015: $9,305,000). D2.5 Liquidity risk management Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. Due to the dynamic nature of the underlying business, the liquidity risk policy requires maintaining sufficient cash and an adequate amount of committed credit facilities to be held above the forecast requirements of the business. The Group manages liquidity risk centrally by monitoring cash flow forecasts, maintaining adequate cash reserves and debt facilities. The debt portfolio is periodically reviewed to ensure there is funding flexibility across an appropriate maturity profile. 98 CALTEX AUSTRALIANOTES TO THE FINANCIAL STATEMENTSD CAPITAL, FUNDING AND RISK MANAGEMENTFOR THE YEAR ENDED 31 DECEMBER 2016 The tables below set out the contractual timing of cash flows on derivative and non-derivative financial assets and liabilities at the reporting date, including drawn borrowings and interest. Thousands of dollars Derivative financial instruments Less than one year One to five years 2016 2015 Derivative financial liabilities Derivative financial assets Net derivative financial (liabilities)/ assets Derivative financial liabilities Derivative financial assets Net derivative financial (liabilities)/ assets (796,050) (1,788) 804,215 2,291 8,165 503 8,668 (515,388) (1,287) 512,064 797 (3,324) (490) (3,814) Thousands of dollars Non-derivative financial instruments Less than one year One to five years Over five years 2016 2015 Other financial liabilities Net other financial (liabilities)/ assets Other financial liabilities Net other financial (liabilities)/ assets (1,132,218) (329,119) (1,234,616) (1,132,218) (329,119) (1,234,616) (2,695,953) (1,022,385) (342,439) (1,348,210) (1,022,385) (342,439) (1,348,210) (2,713,034) The Group has the following committed undrawn floating rate borrowing facilities: Thousands of dollars Financing arrangements Expiring beyond one year 2016 2015 1,100,000 1,100,000 850,000 850,000 D3 Capital management The Group’s objectives when managing capital are to safeguard its ability to continue as a going concern, so that it 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 2016, 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 2016 and 31 December 2015 were as follows: Thousands of dollars Total interest bearing liabilities Less: cash and cash equivalents Net debt Total equity Total capital Gearing ratio 2016 2015 698,474 (244,857) 453,617 2,810,215 3,263,832 13.9% 695,360 (263,764) 431,596 2,787,805 3,219,401 13.4% 99 ANNUAL REPORT 2016 D4 Fair value 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 are 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. Fair values of recognised financial assets and liabilities with their carrying amounts shown in the balance sheet are as follows: THOUSANDS OF DOLLARS ASSET/(LIABILITY) Carrying amount Fair value total Quoted market price (Level 1) Observable inputs (Level 2) Non-market observable inputs (Level 3) 31 December 2016 Interest bearing liabilities Domestic medium term notes (i) Subordinated note Lease liabilities (ii) Payables Interest rate swaps (iii) Forward foreign exchange contracts (forwards, swaps) (iii) Foreign currency options (iii) Crude and finished product swap contracts (iii) (149,836) (547,728) (910) (175,950) (562,408) (1,058) – (562,408) – (175,950) – (1,058) (556) (556) 7,424 1,991 7,800 7,424 1,991 7,800 – – – – (556) 7,424 1,991 7,800 Total (681,815) (722,757) (562,408) (160,349) THOUSANDS OF DOLLARS ASSET/(LIABILITY) 31 December 2015 Interest bearing liabilities Domestic medium term notes (i) Subordinated note Lease liabilities (ii) Payables Interest rate swaps (iii) Forward foreign exchange contracts (iii) Foreign currency options (iii) Crude and finished product swap contracts (iii) Total Estimation of fair values (i) Domestic medium term notes Fair value total Quoted market price (Level 1) Observable inputs (Level 2) Non-market observable inputs (Level 3) Carrying amount (149,750) (544,578) (1,032) (1,640) (460) 952 6,422 (200,400) (564,438) (1,242) – (564,438) – (200,400) – (1,242) (1,640) (460) 952 6,422 – – – – (1,640) (460) 952 6,422 (690,086) (760,806) (564,438) (196,368) The fair value of domestic medium term notes is determined by using an independent broker quotation. (ii) Lease liabilities The fair value is estimated as the present value of future cash flows using the Group’s risk free rate. (iii) Derivatives 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 (forwards, swaps and options) The fair value of forward exchange contracts (forwards, swaps) 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. 100 – – – – – – – – – – – – – – – – CALTEX AUSTRALIANOTES TO THE FINANCIAL STATEMENTSD CAPITAL, FUNDING AND RISK MANAGEMENTFOR THE YEAR ENDED 31 DECEMBER 2016 D5 Issued capital Thousands of dollars Ordinary shares Shares on issue at beginning of period – fully paid Shares repurchased for cash Shares on issue at end of period – fully paid 2016 2015 543,415 (18,471) 543,415 – 524,944 543,415 In April 2016, the Group repurchased 9,189,481 shares at a total cost of $270 million as part of the Group’s capital management program. The capital component of the shares repurchased was $18.5 million. 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, 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 Remuneration Report on pages 44 to 68 for further detail). For each right that vests, Caltex purchases a share on-market following vesting. 101 ANNUAL REPORT 2016 This section provides details of the Group’s income tax expense, current tax provision and deferred tax balances and the Group’s tax accounting policies. E1 Income tax expense E1.1 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 Adjustments for prior years Total income tax expense in the income statement E1.2 Reconciliation between income tax expense and profit before income tax expense Thousands of dollars Profit before income tax expense Income tax using the domestic corporate tax rate of 30% (2015: 30%) Effect of tax rates in foreign jurisdictions (Decrease) in income tax expense due to: Share of net profit of associated entities Capital tax losses utilised for which no deferred tax asset was recognised Research and development allowances Deferred tax against equity Other Income tax over provided in prior years 2016 2015 192,753 432 193,185 62,192 (6) (2,088) 60,098 253,283 74,938 (1,252) 73,686 143,339 – – 143,339 217,025 2016 2015 863,763 259,129 – 739,646 221,894 – (415) (3,218) (1,000) (23) (263) (927) (838) (546) (1,000) – (1,233) (1,252) Total income tax expense in the income statement 253,283 217,025 Income tax expense comprises current tax expense and deferred tax expense. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted at the balance sheet date, and any adjustments to tax payable in respect of previous years. Deferred tax expense represents the changes in temporary differences between the carrying amount of an asset or liability in the statement of financial position and its tax base. Taxation of Singaporean Entities At the date of this report, the Australian Taxation Office (ATO) had not determined the extent to which earnings from the Group’s Singaporean entities would be subject to income tax in Australia under the regime for the taxation of controlled foreign company income. Due to the uncertainty of the ATO’s determination, the Group has estimated the income tax rate of 30% for 2015 and 2016, being the Australian corporate income tax rate. The Singaporean corporate income tax rate is 17%; however due to some of the Group’s Singaporean entities’ status as a Global Trader Company, specified income of those entities is subject to a lower tax rate. If the outcome of the ATO’s decision is in Caltex’s favour, an amount of income tax expense recognised to date could be written back in future periods. E2 Deferred tax 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 affects 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. 102 CALTEX AUSTRALIANOTES TO THE FINANCIAL STATEMENTSE TAXATIONFOR THE YEAR ENDED 31 DECEMBER 2016 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. E2.1 Movement in deferred tax Thousands of dollars Asset/(Liability) Balance at 1 Jan 16 Recognised in income Recognised in equity Acquired in business combination Balance at 31 Dec 16 Cash/Receivables Inventories Property, plant and equipment and intangibles Payables Interest bearing liabilities Provisions Tax value of recognised tax losses Other Net deferred tax asset 1,922 14,574 87,058 12,007 2,568 182,342 – (2,313) 298,158 (1,809) (15,855) (21,824) 477 837 (21,351) 6 (579) (60,098) – – – – 89 (66) – – 23 – – – – – – – – – 113 (1,281) 65,234 12,484 3,494 160,925 6 (2,892) 238,083 Thousands of dollars Asset/(Liability) Cash/Receivables Inventories Property, plant and equipment and intangibles Payables Interest bearing liabilities Provisions Tax value of recognised tax losses Other Net deferred tax asset E2.2 Deferred tax recognised directly in equity Thousands of dollars Related to actuarial gains Related to derivatives E2.3 Unrecognised deferred tax assets Thousands of dollars Capital tax losses Balance at 1 Jan 15 Recognised in income Recognised in equity Acquired in business combination Balance at 31 Dec 15 1,853 (1,507) 124,882 13,539 8,257 221,032 76,438 (2,311) 442,183 69 16,081 (37,824) (1,532) (5,455) (38,238) (76,438) (2) (143,339) – – – – (234) (452) – – (686) – – – – – – – – – 2016 (66) 89 23 1,922 14,574 87,058 12,007 2,568 182,342 – (2,313) 298,158 2015 (452) (234) (686) 2016 2015 118,683 129,411 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. These have not been tax effected. E2.4 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). 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. 103 ANNUAL REPORT 2016 This section provides information on the Group’s structure and how this impacts the results of the Group as a whole, including details of joint arrangements, controlled entities, transactions with non-controlling interests and changes made to the Group structure during the year. F1 Controlled entities Controlled entities are those entities controlled by the Caltex Group. Control exists when the Caltex 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 following entities were controlled during 2016: Name Companies Ampol Bendigo Pty Ltd Ampol International Holdings Pte Ltd. Ampol Management Services Pte Ltd. Ampol Procurement Services Pte. Ltd. Ampol Property (Holdings) Pty Ltd Ampol Refineries (Matraville) Pty Ltd Ampol Road Pantry Pty. Limited Ampol Singapore Trading Pte. Ltd. Australian Petroleum Marine Pty Ltd B & S Distributors Pty Ltd Bowen Petroleum Services Pty. Limited Brisbane Airport Fuel Services Pty Limited Calgas Pty Ltd Calstores Pty Ltd Caltex Australia Custodians Pty Limited 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 Circle Petroleum (Q’land) Pty. Limited Cocks Petroleum Pty Ltd Cooper & Dysart Pty Ltd Graham Bailey Pty Ltd Hanietee Pty. Limited Hunter Pipe Line Company Pty Limited Jayvee Petroleum Pty Ltd Jet Fuels Petroleum Distributors Pty. Ltd. Link Energy Pty Ltd Manworth Pty Ltd Newcastle Pipe Line Company Limited Northern Marketing Management Pty Ltd Northern Marketing Pty Ltd Octane Insurance Pte Ltd Pilbara Fuels Pty Ltd R & T Lubricants Pty Ltd 104 % INTEREST Note 2016 2015 (iii) (ii) (ii) (ii) (iii) (ii) (iii) (iv) (iii) (iii) (iii) (iii) (iii) (iii) (iii) (iii) (iii) (iii) (iii) (iii) (iii) (iii) (iii) (iii) (ii) (iii) 100 100 100 100 100 100 100 100 100 50 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 50 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 CALTEX AUSTRALIANOTES TO THE FINANCIAL STATEMENTSF GROUP STRUCTUREFOR THE YEAR ENDED 31 DECEMBER 2016 Name Real FF Pty Ltd Ruzack Nominees Pty. Ltd. Solo Oil Australia Proprietary Limited Solo Oil Corporation Pty. Ltd. Solo Oil Investments Pty. Ltd. Solo Oil Pty Ltd South Coast Oils Pty. Limited 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 Note (v) (iii) (iii) (iv) (iv) (iii) (iv) (vi) (vii) (vii) (viii) % INTEREST 2016 2015 100 100 100 100 100 100 100 100 60 50 100 50 100 100 100 100 – 100 100 100 100 100 100 100 60 50 100 50 100 100 100 100 (i) All companies are incorporated in Australia except those noted in (ii) and all unit trusts were formed in Australia. (ii) These companies are incorporated in Singapore. (iii) These companies are parties to a Deed of Cross Guarantee dated 22 December 1992 with Caltex and each other. No companies have been added to or removed from the Deed of Cross Guarantee during the year ended 31 December 2016 or from 1 January 2017 to the date of signing of this financial report. (iv) These entities have been included as controlled entities in accordance with AASB 10 Consolidated Financial Statements. In each case, control exists because a company within the Caltex 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) This company was incorporated on 20 December 2016. (vi) Caltex Petroleum Services Pty Ltd is the sole unit holder. (vii) Solo Oil Pty Ltd is the sole unit holder. (viii) Caltex Australia Petroleum Pty Ltd and Caltex Petroleum Services Pty Ltd each own half of the units in this trust. F1.1 Deed of cross guarantee 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 Other comprehensive income for the period, net of income tax Total comprehensive income for the period Retained earnings at the beginning of the year Movement in reserves Shares bought back Dividends provided for or paid Retained earnings at the end of the year 2016 2015 17,330,238 (15,542,862) 19,814,461 (18,022,628) 1,787,376 1,791,833 (3,955) (1,020,018) (72,572) 1,382 692,213 (201,291) 490,922 55 490,977 2,102,843 (154) (251,608) (319,405) (26,616) (1,120,756) (76,712) 5,008 572,757 (166,802) 405,955 1,606 407,561 1,957,733 1,055 – (261,900) 2,022,598 2,102,843 105 ANNUAL REPORT 2016 F1 Controlled entities continued 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 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 106 2016 2015 116,606 554,769 787,912 9,524 98,126 232,784 532,124 680,410 81,645 38,032 1,566,937 1,564,995 2,555 10,394 2,598,726 170,182 241,457 432 20,856 3,044,602 4,611,539 707,515 143 138,111 96,379 156,086 1,098,234 8,356 698,340 38,637 244,352 989,685 2,087,919 2,523,620 2,824 9,412 2,549,831 157,473 298,426 1,411 1,760 3,021,137 4,586,132 632,539 19 9,383 109,993 107,911 859,845 9,743 695,238 50,669 343,168 1,098,818 1,958,663 2,627,469 524,944 (344) (23,578) 2,022,598 543,415 (644) (18,145) 2,102,843 2,523,620 2,627,469 CALTEX AUSTRALIANOTES TO THE FINANCIAL STATEMENTSF GROUP STRUCTUREFOR THE YEAR ENDED 31 DECEMBER 2016 F2 Business combinations 2017 – Proposed Milemaker Petroleum On 4 November 2016, Caltex entered into an agreement to purchase Milemaker Petroleum’s retail fuel business assets in Victoria for $95 million. The final consideration will be adjusted for working capital and other ancillary items at completion. The acquisition will secure Caltex’s existing network in Victoria and provide a stronger platform from which to provide new and improved customer offerings in the convenience marketplace. Completion of the transaction is scheduled for the first half of 2017, allowing time for regulatory review and execution of various operational agreements. Gull New Zealand On 22 December 2016, Caltex entered into an agreement to purchase Gull New Zealand for NZ$340 million (approximately A$325 million). The final consideration will be adjusted for working capital. The transaction will see Caltex acquire Gull’s Mount Maunganui import fuel terminal and retail operating assets. The acquisition delivers on Caltex’s strategic plan as it optimises Caltex’s infrastructure position, builds trading and shipping capability, grows the supply base and enhances Caltex’s retail fuel offering through low risk entry into a new market. Subject to New Zealand regulatory approval (New Zealand Overseas Investment Office), completion of the transaction is scheduled for the second quarter of 2017. 2016 There were no material business combinations during the year ended 31 December 2016. 2015 Hawkins Fuels On 23 July 2015, Caltex acquired two Caltex branded truck stops from Hawkins Fuels (Hawkins) for a consideration of $7,268,000 plus incidental acquisition costs. Hawkins is an independent fuel reseller business that operates in Queensland. 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 five months up to 31 December 2015, Hawkins contributed a gross sales revenue of $1,178,000 and a net profit of $160,000 (including acquisition costs) to the consolidated gross sales revenue and net profit for the year. If the acquisition had occurred on 1 January 2015, the Group estimates that gross sales revenue would have been $1,476,000 greater and net profit would have been $804,000 greater. The acquisition had the following effect on the Group’s assets and liabilities: Thousands of dollars Intangibles Property, plant and equipment Inventories Net identifiable assets and liabilities Goodwill on acquisition Consideration paid, satisfied in cash Net cash outflow Recognised values 779 1,709 268 2,756 4,512 7,268 (7,268) The recognised values represent the fair value of assets recorded on acquisition. Intangible assets acquired of $779,000 represents the amount paid to Hawkins 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 $4,512,000 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 2015. 107 ANNUAL REPORT 2016 F3 Equity accounted investees Associates are those entities over whose financial and operating policies the Group has significant influence, but not control. Joint ventures are those entities whose financial and operating policies the Group has joint control over, and where the Group has rights to the net assets of the entity. The consolidated financial statements include the Group’s share of the total recognised gains and losses of associates and joint ventures on an equity accounted basis, from the date that significant influence or joint control commences until the date that it ceases. When the Group’s share of losses exceeds the carrying amount of the associate or joint venture, 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 or joint venture. Other movements in reserves are recognised directly in the consolidated reserves. Unrealised gains arising from transactions with associates and joint ventures are eliminated to the extent of the Group’s interest in the entity. Unrealised losses arising from transactions with associates and joint ventures are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. F3.1 Investments accounted for using the equity method Name Investments in associates and joint ventures Airport Fuel Services Pty. Limited Australasian Lubricants Manufacturing Company Pty Ltd (i) Cairns Airport Refuelling Service Pty Ltd Geraldton Fuel Company Pty Ltd % INTEREST 2016 2015 40 50 25 50 40 50 25 50 (i) Australasian Lubricants Manufacturing Company Pty Ltd ceased joint venture operations on 17 April 2015. The companies listed in the above table were all incorporated in Australia, have a 31 December balance date and are principally concerned with the sale, marketing and/or distribution of fuel products. 108 CALTEX AUSTRALIANOTES TO THE FINANCIAL STATEMENTSF GROUP STRUCTUREFOR THE YEAR ENDED 31 DECEMBER 2016 F3.2 Investments in associates Thousands of dollars 2016 2015 Revenue (100%) 115,287 134,716 Thousands of dollars Share of associates’ net profit recognised 1,382 1,781 Profit (100%) 3,790 5,104 Total assets (100%) 30,167 26,296 Total liabilities (100%) 11,038 8,340 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’ 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 Net assets as reported by associates (100%) Share of associates’ net assets equity accounted 19,129 17,956 9,625 8,642 2016 2015 1,967 (590) 1,377 5 1,382 355 1,773 2,128 958 1,132 2,090 (127) 1,963 2,552 (766) 1,786 (5) 1,781 188 939 1,127 955 1,037 1,992 (106) 1,886 109 ANNUAL REPORT 2016 F3 Equity accounted investees continued F3.3 Investments in joint ventures Thousands of dollars 2016 2015 Revenue (100%) 9,366 325,477 Share of joint ventures’ net profit recognised – 3,227 Profit (100%) – 6,863 Total assets (100%) 3,483 3,501 Total liabilities (100%) Net assets as reported by joint venture (100%) Share of joint ventures’ net assets equity accounted 1,560 1,578 1,923 1,923 769 770 Thousands of dollars 2016 2015 Results of joint ventures Share of joint ventures’ profit/(loss) before income tax expense Share of joint ventures’ income tax (expense)/benefit Share of joint ventures’ net loss Unrealised profit/(loss) in inventories Share of joint ventures’ net profit/(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’ operating lease commitments not provided for in the financial report and payable: Within one year Between one and five years F3.4 Reconciliation to income statement Thousands of dollars Share of net profit of associates accounted for using the equity method Share of net profit of joint ventures accounted for using the equity method F3.5 Reconciliation to balance sheet Thousands of dollars Investment in associates accounted for using the equity method Investment in joint ventures accounted for using the equity method 110 – – – – – 1,759 1,724 3,483 1,560 – 1,560 1,100 456 1,556 2016 1,382 – 1,382 2016 9,625 769 10,394 3,162 (948) 2,214 1,013 3,227 2,725 776 3,501 1,578 – 1,578 1,100 1,559 2,659 2015 1,781 3,227 5,008 2015 8,642 770 9,412 CALTEX AUSTRALIANOTES TO THE FINANCIAL STATEMENTSF GROUP STRUCTUREFOR THE YEAR ENDED 31 DECEMBER 2016 F4 Joint venture operations Joint venture operations are those entities whose financial and operating policies the Group has joint control over, and where the Group has rights to the assets and obligations for the liabilities of the entity. 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. The Group has joint interests in multiple Joint User Hydrant Installations (JUHIs), which are based at airports across Australia. The Group’s interest in the JUHIs ranges from 20% – 50%. The principal activity of the JUHIs is refuelling aircraft at the airports. For the year ended 31 December 2016, the contribution of the JUHIs to the operating profit of the Group was nil (2015: 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 depreciation Total non-current assets Total assets 2016 2015 62,085 (36,649) 25,436 25,436 59,318 (34,769) 24,549 24,549 F5 Parent entity disclosures As at, and throughout, the financial year ended 31 December 2016, 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 2016 2015 719,277 (213) 719,064 234,857 2,437 237,294 35,162 1,964,100 128,952 1,322,507 81,394 2,009,036 – 1,491,363 524,944 (344) (23,490) 140,483 641,593 543,415 5,355 (23,822) (7,275) 517,673 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 F1. 111 ANNUAL REPORT 2016 This section includes other information to assist in understanding the financial performance and position of the Group, or items to be disclosed to comply with accounting standards and other pronouncements. G1 Commitments G1.1 Capital expenditure Thousands of dollars 2016 2015 Capital expenditure contracted but not provided for in the financial report and payable 35,624 25,564 G1.2 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 their useful life. Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge components of lease payments are charged to the consolidated income statement to reflect a constant finance rate on the remaining balance of the liability for each accounting period. Thousands of dollars Within one year Between one and five years 2016 2015 Minimum lease payments 219 889 1,108 Interest Principal 85 113 198 134 776 910 Minimum lease payments 219 1,109 1,328 Interest Principal 97 199 296 122 910 1,032 The Group leases plant and equipment under finance leases expiring from one to four years. No contingent rentals were paid during the year (2015: nil). 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. Thousands of dollars 2016 2015 Non-cancellable operating leases – Group as lessee Future minimum rentals payable: Within one year Between one and five years After five years 127,466 430,119 344,887 902,472 130,117 412,000 350,560 892,677 The Group holds operating leases expiring from one to 36 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 $478,760 were paid during the year (2015: $466,497). The expense recognised in the income statement during the year in respect of operating leases is $167,980,000 (2015: $161,583,000). 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. 112 CALTEX AUSTRALIANOTES TO THE FINANCIAL STATEMENTSG OTHER INFORMATIONFOR THE YEAR ENDED 31 DECEMBER 2016 G1 Commitments continued G1.2 Leases continued Thousands of dollars Non-cancellable operating leases – Group as lessor Future minimum rentals receivable: Within one year Between one and five years After five years 2016 2015 6,557 178,233 5,396 190,186 68,870 128,296 39,052 236,218 The Group has granted operating leases expiring from one to 15 years. Some of the leased properties have been sublet by the Group. The leases and subleases expire between 2017 and 2032. Note B1 shows the rental income recognised in the income statement in respect of operating leases. G2 Contingent liabilities Discussed below are items where either it is not probable that the Group will have to make future payments or the amounts of the future payments are not able to be measured. Legal and other claims In the ordinary course of business, the Group is involved as a plaintiff or 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. Bank guarantees The Group has granted indemnities to banks to cover bank guarantees given on behalf of controlled entities to a maximum exposure of $5,385,000 (2015: $4,671,000). Deed of Cross Guarantee and class order relief Various companies in the Caltex Group are party to a Deed of Cross Guarantee dated 22 December 1992 with Caltex Australia Limited and each other pursuant to ASIC Class Order CO 98/1418 (“Deed”) (see note F1). Under the Deed, each participating company agrees to guarantee in full all of the debts of all of the companies that are party to the Deed subject to, and in accordance with, the terms set out in the Deed. 113 ANNUAL REPORT 2016 G3 Related party disclosures 2016 Since Chevron Global Energy Inc. held a 50% interest in Caltex until 30 March 2015, there have been no related party transactions in the year ended 31 December 2016. 2015 Until 30 March 2015, Chevron Global Energy Inc. held a 50% interest in Caltex. Transactions with the Chevron Group up until that point are summarised below. The Caltex Group paid $1,019,000 to the Chevron Group for technical service fees. The Group received $1,250,000 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 Caltex Group paid $282,000 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 Caltex Group purchased crude, other refinery feedstocks and petroleum products from the Chevron Group of $913,068,000. The Caltex Group sold crude, other refinery feedstocks and petroleum products to the Chevron Group of $73,791,000. These purchases and sales are in the ordinary course of business and on normal commercial terms and conditions. The Chevron Group seconded one employee primarily to provide specialist expertise at Lytton refinery. The total cost borne by Caltex in respect of this secondee was $90,000 for one secondee. This cost includes salary and bonuses, allowances including relocation, and indirect payroll related expenses. Caltex seconded three employees to various roles within the Chevron Group during 2015. The Chevron Group paid the salary and bonuses, allowances including relocation, and indirect payroll related expenses of these Caltex employees. Associates The Group sold petroleum products to associates totalling $98,320,000 (2015: $106,498,000). The Group received income from associates for rental income of $477,000 (2015: $155,000). Details of associates are set out in note F3. Amounts receivable from associates are set out in note C1. Dividend and disbursement income from associates is $400,000 (2015: $800,000). 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 F3. 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 2016 (2015: nil). Details of Caltex’s interests are set out in notes F3 and F4. 114 CALTEX AUSTRALIANOTES TO THE FINANCIAL STATEMENTSG OTHER INFORMATIONFOR THE YEAR ENDED 31 DECEMBER 2016 G4 Key management personnel The key management personnel of the Caltex Group during 2016 and 2015 were: Current directors • Greig Gailey, Chairman and Independent, Non-executive Director • Julian Segal, Managing Director & CEO • Trevor Bourne, Independent, Non-executive Director • Steven Gregg, Independent, Non-executive Director (from 9 October 2015) • Bruce Morgan, Independent, Non-executive Director • Barbara Ward AM, Independent, Non-executive Director (from 1 April 2015) • Penny Winn, Independent, Non-executive Director (from 1 November 2015) Former directors • Elizabeth Bryan, Chairman and Independent, Non-executive Director (to 9 December 2015) • Richard Brown, Non-executive Director (to 2 April 2015) • Barbara Burger, Non-executive Director (to 2 April 2015) • Ryan Krogmeier, Non-executive Director (to 2 April 2015) Senior executives • Julian Segal, Managing Director & CEO • Andrew Brewer, Executive General Manager, Supply Chain Operations • Viv Da Ros, Chief Information Officer (from 12 December 2016) • Simon Hepworth, Chief Financial Officer • Bruce Rosengarten, Executive General Manager, Commercial • Lyndall Stoyles, Executive General Manager, Legal & Corporate Affairs (from 24 October 2016) • Joanne Taylor, Executive General Manager, Human Resources (from 5 February 2016) • Louise Warner, Executive General Manager, Fuels (from 3 October 2016) Former executives • Peter Lim, Executive General Manager, Legal & Corporate Affairs (to 7 December 2016) • Adam Ritchie, Executive General Manager, Supply (from 1 April 2015 to 31 December 2016) • Simon Willshire, Executive General Manager, Human Resources (to 30 April 2016) Key management personnel compensation Dollars Short term benefits Other long term benefits Post-employment benefits Share based payments 2016 2015 12,611,508 194,188 470,297 4,584,337 12,807,344 239,775 383,215 5,099,486 17,860,330 18,529,820 Information regarding directors’ and executives’ compensation and some equity instruments disclosures is provided in the Remuneration Report section of the Directors’ Report on pages 44 to 68. 115 ANNUAL REPORT 2016 OPENING BALANCE Number of performance rights 2016 951,454 426,798 103,749 1,482,001 2015 1,340,033 215,272 462,806 G4 Key management personnel continued Performance rights Since 1 January 2007, Senior Executives may receive performance rights under Caltex’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 a comparator group. GRANTED VESTED DURING THE YEAR LAPSED DURING THE YEAR CLOSING BALANCE Number of performance rights Start date 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 ($) 4 Apr 16 4 Apr 16 276,309 184,206 13.34 30.68 1 Apr 16 (333,821) 460,515 (333,821) 8 Apr 15 8 Apr 15 326,229 108,743 15.69 31.76 9 Jan 15 1 Apr 15 (16,859) (746,052) 33.82 Q1 2016 Q2 2016 Q3 2016 Q4 2016 35.35 Q1 2015 35.13 Q2 2015 Q3 2015 Q4 2015 (3,680) (132,914) (112,290) (63,548) (312,432) (24,350) (116,239) (45,909) (21,673) (208,171) – – – – – – – – 583,894 8,193,885 206,708 4,375,595 505,661 11,300,979 1,296,263 23,870,459 951,454 12,420,390 426,798 8,660,332 103,749 3,295,068 1,482,001 24,375,790 2,018,111 434,972 (762,911) For information regarding the inputs used in the measurement of the fair values at each grant date, please refer to table 8 of the Remuneration Report on page 63 of the Directors’ Report. G5 Notes to the cash flow statement G5.1 Reconciliation of 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. For the purposes of the cash flow statement, cash and cash equivalents includes: Thousands of dollars Cash at bank Total cash and cash equivalents 2016 2015 244,857 244,857 263,764 263,764 116 CALTEX AUSTRALIANOTES TO THE FINANCIAL STATEMENTSG OTHER INFORMATIONFOR THE YEAR ENDED 31 DECEMBER 2016 G5.2 Reconciliation of net profit to net operating cash flows Thousands of dollars Net profit Adjustments for: Net gain on sale of property, plant and equipment Finance charges on finance leases Interest paid capitalised Amortisation of finance costs Depreciation/amortisation of property, plant and equipment Amortisation and impairment of intangibles Treasury stock movements net of expense Share of associates’ and joint ventures’ net (loss)/profit Movements in assets and liabilities: (Increase)/decrease in receivables (Increase)/decrease in inventories (Increase) in other assets Increase/(decrease) in payables Increase in current tax balances Increase in deferred tax assets (Decrease) in provisions Net operating cash inflows G6 Auditor remuneration Dollars Audit services – KPMG Australia Non-audit services – KPMG Australia: Other assurance services Taxation services and Advisory G7 Net tangible assets per share Dollars Net tangible assets per share 2016 2015 610,480 522,621 (1,805) 220 (1,560) 3,235 191,688 17,608 (6,241) (982) (65,774) (111,035) (25,118) 152,857 179,636 60,052 (75,059) 928,202 (23,641) – (3,702) 3,191 178,366 26,183 (14,029) (1,994) 117,281 151,053 (6,328) (144,655) 36,015 143,339 (99,034) 884,666 2016 2015 1,082,700 1,000,500 74,100 173,200 103,400 195,600 1,330,000 1,299,500 2016 9.88 2015 9.60 Net tangible assets are net assets attributable to members of Caltex Australia Limited less intangible assets. The weighted average number of ordinary shares used in the calculation of net tangible assets per share was 263 million (2015: 270 million). 117 ANNUAL REPORT 2016 G8 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 2017, 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. The actual impact of adopting AASB9 on the Group’s consolidated financial statements in 2018 is not known and cannot be reliably estimated because it will be dependent on the financial instruments that the Group holds and economic conditions at the time as well as accounting elections and judgments that it will make in the future. However, the Group has performed a preliminary assessment of the potential impact of adoption of AASB9 based on its positions as 31 December 2016 and hedging relationships designated during 2016 under AASB139 and does not expect the a significant impact on the financial statements as a result of adoption of this standard. • AASB 15 Revenue from Contracts with Customers, which becomes mandatory for the Group’s 2018 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. The Group has performed an initial assessment of the potential impact of the adoption of AASB15 on its consolidated financial statements. Based on this assessment, the Group does not expect significant differences in the timing or amount of revenue recognition. The Group plans to adopt AASB15 in its consolidated financial statements for the year ending 31 December 2018; however, the specific approach and practical expedients to be adopted have not yet been determined. The Group is currently in the process of finalising its detailed assessment of the impact resulting from the application of AASB15. • IFRS 16 Leases, which becomes mandatory for the Group’s 2019 consolidated financial statements and requires that operating leases be recognised on the balance sheet. The Group does not plan to adopt this standard early and the extent of the impact has not been determined. G9 Events subsequent to the end of the year Late in 2016 Caltex announced the proposed acquisition of Milemaker Petroleum and Gull New Zealand. Additionally Woolworths announced the sale of it’s fuel business to BP, subject to regulatory approval. Caltex’s 3.5 billion litre fuel supply arrangement with Woolworths is linked to Woolworths’ continued ownership of the business. These three separate announcements did not impact the 2016 financial result for Caltex. They are however expected to have an impact in future periods. 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 2016. 118 CALTEX AUSTRALIANOTES TO THE FINANCIAL STATEMENTSG OTHER INFORMATIONFOR THE YEAR ENDED 31 DECEMBER 2016 COMPARATIVE FINANCIAL INFORMATION The additional information on pages 119 to 120 is provided for the information of shareholders. The information is based on, but does not form part of, the 2016 Financial Report. Caltex Australia Limited Consolidated Results 2016 2015 2014 2013 2012 Profit and loss ($million) Historical cost operating profit before significant items, interest and income tax expense Interest income Borrowing costs before significant items 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 ($/share) Times covered (excl. significant items) Dividend payout ratio – RCOP basis (excl. significant items) 936 7 (80) (253) 610 – 610 1.02 2.29 51% 783 5 (82) (214) 493 29(i) 522 1.17 1.56 50% 279 8 (120) (56) 132 (112)(ii) 20 0.70 0.70 38% 798 9 (98) (205) 504 26(iii) 530 0.34 5.49 28% 624 2 (99) (161) 366 (309)(iv) 57 0.40 3.39 24% Dividend franking percentage 100% 100% 100% 100% 100% Other data Total revenue ($m) Earnings per share – HCOP (cents per share) Earnings per share – RCOP (cents per share) (excl. significant items)(v) Earnings before interest and tax – historical cost basis ($m) (excl. sig items) Earnings before interest and tax – replacement cost basis ($m) (excl. sig items) Operating cash flow per share ($/share) Interest cover – historical cost basis Interest cover – replacement cost basis (excl. significant items) Return on capital employed – historical cost basis (%)(vi) Return on capital employed – RCOP basis (excl. significant items)(vi) Equity attributable to members of the company ($m) Total equity ($m) Total assets ($m) Net tangible asset backing ($/share) Debt ($m) Net debt ($m) Net debt to net debt plus equity (%) 17,933 20,027 24,231 24,676 23,565 232 199 936 813 3.6 12.9 11.2 18.7 16.1 2,797 2,810 5,303 9.88 698 454 14 193 233 783 977 3.3 10.6 12.7 16.2 19.5 2,776 2,788 5,105 9.60 695 432 13 7 183 279 795 2.5 1.3 7.1 0.6 15.5 2,521 2,533 5,129 8.64 1,176 639 20 196 123 798 551 2.3 9.3 6.2 15.9 9.9 2,588 2,597 6,021 9.05 942 742 22 21 170 624 756 1.5 1.9 7.8 2.0 15.8 2,148 2,160 5,386 7.55 950 740 26 (i) (ii) Includes significant items before tax totalling a gain of $31,924,000, that have been recognised in the income statement. This gain relates to the sale of surplus property in Western Australia 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). (iii) 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. (iv) 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. (v) Dividend payout ratio – replacement cost of sales operating profit basis calculated as follows: Dividends paid and payable in respect of financial year Replacement cost of sales operating profit after income tax (excl. significant items) (vi) Return on capital employed is calculated as follows: Net Profit After Tax Net Debt + Equity 119 ANNUAL REPORT 2016 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 $524 million, compared to a profit of $628 million in 2015. • 2016 net profit before interest, income tax and significant items on a replacement cost of sales operating profit basis was $813 million, a decrease of $164 million over 2015. Five years* 2016 2015 2014 2013 2012 $ Million Historical cost operating profit before significant items, interest and income tax expense Add/(deduct) inventory losses/(gains)(ii) Replacement cost of sales operating net profit before significant items, interest and income tax expense Net borrowing costs 3,420 936 473 (122) 3,893 (426) 813 (73) 783 193 977 (77) Historical cost income tax expense before significant items (889) (253) (214) Add/(deduct) tax effect of inventory gains/(losses) Replacement cost of sales operating profit after income tax(iii) (142) 2,436 37 524 (58) 628 * Note: Totals may not sum due to rounding. 279 516 795 (91) (56) (155) 493 798 (246) 551 (89) 624 132 756 (97) (205) (161) 74 332 (40) 458 (i) The replacement cost of sales operating profit basis (RCOP) removes the unintended 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 differences creates these inventory gains and losses. To remove the unintended 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 form inventory. The cost of these theoretical new purchases is calculated as the average monthly cost of cargoes received during the month of those sales. (ii) Historical cost results include gross inventory gains or losses from the movement in crude oil prices. In 2016, the historical cost result includes $122 million inventory gain (2015: $193 million inventory loss). Net inventory loss is adjusted to reflect impact of revenue lags. (iii) Replacement cost 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: 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); 2015: $32 million gain before tax ($29 million after tax); and 2016: no significant items were recognised. 120 CALTEX AUSTRALIA SHAREHOLDER INFORMATION AS AT 28 FEBRUARY 2017 Share capital There are 260,810,519 ordinary fully paid shares on issue held by 32,296 holders. Holders with less than a marketable parcel 376 shareholders hold less than a marketable parcel of $500 based on a share price of $28.14 per share. Buy-back There is no on-market buy-back in operation. Shares purchased on-market From 1 January 2016, 350,276 fully paid ordinary shares were purchased on-market at an average cost of $32.30 per share for the purposes of the Caltex Australia Limited Equity Incentive Plan. From 1 January 2016, 29,496 fully paid ordinary shares were purchased on-market at an average cost of $32.55 per share for the purposes of the Caltex Australia Limited Employee Share Plan. Substantial shareholders The following shareholders are substantial shareholders of Caltex Australia Limited. Substantial shareholders 1. Westpac Banking Corporation 2. Lazard Asset Management Pacific Co 3. BlackRock Group Shareholder distribution Range 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total Number of shares held % of Issued shares 13,902,131 18,810,624 16,465,153 5.33% 7.21% 6.09% Number of Shareholders Number of shares held % of issued shares 25,103 6,325 542 286 40 9,980,213 13,562,346 3,923,392 7,022,511 226,322,057 3.83 5.20 1.50 2.69 86.78 32,296 260,810,519 100.00 121 ANNUAL REPORT 2016 SHAREHOLDER INFORMATION CONTINUED Top 20 shareholders 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. HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Limited Citicorp Nominees Pty Limited National Nominees Limited BNP Paribas Noms Pty LtdBNP Paribas Nominees Pty Ltd Citicorp Nominees Pty Limited HSBC Custody Nominees (Australia) Limited RBC Investor Services Australia Nominees Pty Limited AMP Life Limited Bainpro Nominees Pty Limited UBS Nominees Pty Ltd HSBC Custody Nominees (Australia) Limited HSBC Custody Nominees (Australia) Limited-Gsco Eca Merrill Lynch (Australia) Nominees Pty Limited UBS Nominees Pty Ltd BNP Paribas Nominees Pty Ltd Australian Foundation Investment Company Limited HSBC Custody Nominees (Australia) Limited – A/C 2 National Nominees Limited Total 104,368,086 55,053,555 18,629,639 17,120,212 5,726,891 5,269,477 3,983,155 3,978,757 2,980,625 679,435 677,358 551,000 508,764 486,521 485,958 449,703 433,000 421,681 365,551 346,626 222,515,994 40.02 21.11 7.14 6.56 2.20 2.02 1.53 1.53 1.14 0.26 0.26 0.21 0.20 0.19 0.19 0.17 0.17 0.16 0.14 0.13 85.32 Voting Rights 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 2001 (Cth) and the ASX Listing Rules. Corporate Governance Statement A copy of the Corporate Governance Statement can be found on our website. Visit https://www.caltex.com.au/our-company/investor-centre/corporate-governance. Australian Securities Exchange The company’s fully paid ordinary shares (ASX:CTX) and Caltex Subordinated Notes (ASX:CTXHA) are listed on the Australian Securities Exchange. Company Secretaries Lyndall Stoyles and Kara Nicholls have been appointed as a Company Secretary of Caltex Australia Limited. 122 CALTEX AUSTRALIA STATISTICAL INFORMATION Year Ended 31 December 2016 2015 2014 2013 2012 People Employees (i) Assets Fuel refineries 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 Operations Nameplate refining capacity (barrels per day) – Caltex Refineries (NSW) Pty Ltd (v) – Caltex Refineries (Qld) Pty Ltd Fuel production (ML) Total sales volume (ML) Lost time injury frequency rate (LTIFR)(vi) 3,045 3,078 3,067 3,638 3,610 1 176 38 13 533 842 64 1 199 36 13 514 797 76 1 252 42 13 496 795 81 2 216 66 12 491 765 76 2 168 66 12 480 738 76 – – – 116,000 112,000 109,000 6,374 (ii) 5,979(ii) 15,993 1.1 16,109 0.62 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 Includes employees of Calstores Pty Ltd and Caltex 100% owned resellers. i. ii. 2015 and 2016 reflect fuel production from the Lytton refinery only, following the conversion of the Kurnell refinery. iii. Road tanker numbers include Caltex 100% owned reseller fleet. iv. Caltex has equity in an additional three terminals, along with product supply agreements at a number of other terminals across Australia. 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. 123 ANNUAL REPORT 2016 DIRECTORY Head office Caltex Australia Limited ACN 004 201 307 Queensland/Northern Territory Caltex Refineries (Qld) Pty Ltd ACN 008 425 581 Level 24 2 Market Street Sydney NSW 2000 Australia GPO Box 3916 Sydney NSW 2001 Australia T: +61 2 9250 5000 F: +61 2 9250 5742 www.caltex.com.au secretariat@caltex.com.au Share registry Computershare Investor Services Pty Limited GPO Box 2975 Melbourne VIC 3001 Australia T: 1300 850 505 (enquiries within Australia) T: +61 3 9415 4000 (enquiries outside Australia) F: +61 3 9473 2500 www.computershare.com.au caltex.queries@computershare.com.au New South Wales Caltex Banksmeadow terminal Penrhyn Road Banksmeadow NSW 2019 Australia T: +61 2 9695 3600 F: +61 2 9666 5737 South Street Lytton QLD 4178 Australia T: +61 7 3362 7555 F: +61 7 3362 7111 Caltex Lytton terminal Tanker Street, off Port Drive Lytton QLD 4178 Australia T: +61 7 3877 7333 F: +61 7 3877 7464 Victoria/Tasmania Caltex Newport terminal 411 Douglas Parade Newport VIC 3015 Australia T: +61 3 9287 9555 F: +61 3 9287 9572 Western Australia Level 1 2 Sabre Crescent Jandakot WA 6164 Australia T: +61 8 6595 2888 F: +61 8 9335 3062 Customer support feedback line Environmental hotline T: 1800 675 487 Complaints, compliments and suggestions T: 1800 240 398 Card support centre T: 1300 365 096 Lubelink T: 1300 364 169 124 CALTEX AUSTRALIA C a l t e x A u s t r a l i a L i m i t e d 2 0 1 6 A N N U A L R E P O R T www.caltex.com.au