annual REPORT 2011 This Annual Report includes Downer EDI Limited Directors’ Report, the Annual Financial Report and Independent Audit Report for the financial year ended 30 June 2011. It should be read in conjunction with Downer EDI Limited’s 2011 Annual Review which is available online and provides an overview of key activities for the year ended 30 June 2011. The Annual Report and Annual Review are both available on the Downer website www.downergroup.com. Cover image: James Forest Downer Mining at Christmas Creek COnTEnTS Directors’ Report Financial performance overview Auditors’ Independence Declaration Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the financial statements: 1. Summary of accounting policies 2. Segment information 3. Profit from ordinary activities – continuing operations 4. Individually significant items 5. Income tax 6. Remuneration of auditors 7. Earnings per share 8. Dividends 9. Cash and cash equivalents 10. Inventories 11. Trade and other receivables 12. Other financial assets 13. Tax assets 14. Other assets 15. Equity-accounted investments 16. Property, plant and equipment 17. Intangible assets 18. Trade and other payables 19. Borrowings 20. Other financial liabilities 21. Provisions 22. Tax liabilities 23. Issued capital 24. Reserves 25. Acquisition of businesses 26. Statement of cash flows – additional information 27. Commitments 28. Contingent liabilities 29. Rendering of services and construction contracts 30. Subsequent events 31. Controlled entities 32. Related party information and key management personnel disclosures 33. Key management personnel compensation 34. Employee share plan 35. Financial instruments 36. Parent entity disclosures Directors’ Declaration Independent Auditor’s Report Sustainability Performance Summary 2010/2011 Corporate Governance Information for Investors 2 32 33 34 35 36 37 39 40 54 58 60 61 62 63 65 66 66 66 67 68 69 69 73 75 77 78 81 81 82 83 84 85 85 87 88 89 89 90 94 98 98 98 111 112 113 115 116 121 DIRECTORS’ REPORT for the year ended 30 June 2011 The Directors of Downer EDI Limited submit the Annual Financial Report of the Company for the financial year ended 30 June 2011. In compliance with the provisions of the Corporations Act 2001 (Cth), the Directors’ Report is set out below. BOaRD Of DIRECTORS r m harding (62) Chairman since November 2010, Deputy Chairman since July 2010, Independent Non-executive Director since July 2008 Mr Harding is currently a Non-executive Director of Santos Limited. He has held management positions around the world with British Petroleum (BP), including President and General Manager of BP Exploration Australia. Mr Harding holds a Masters in Science, majoring in Mechanical Engineering. Mr Harding lives in Melbourne. G a fenn (46) Managing Director and Chief Executive Officer since July 2010, Finance Director in July 2010, Chief Financial Officer from October 2009 to July 2010 Mr Fenn is an experienced executive with over 20 years in operational management, strategic development and financial management. Mr Fenn was previously a member of the Qantas Airways Limited (Qantas) Executive Committee, Chairman of Star Track Express and a Director of Australian Air Express. Mr Fenn held a number of senior roles at Qantas including Executive General Manager of Strategy and Investments and Executive General Manager – Associated Businesses, responsible for the Airports, Freight, Flight Catering and Qantas Holidays businesses. Mr Fenn holds a Bachelor of Economics from Macquarie University and is a member of the Australian Institute of Chartered Accountants. Mr Fenn lives in Sydney. S a Chaplain (53) Independent Non-executive Director since July 2008 Ms Chaplain is a former investment banker with extensive experience in public and private sector debt financing. She also has considerable experience as a director of government-owned corporations which includes ten years as a Director of Seqwater Ltd, including over three years as its Chairman. Ms Chaplain is currently a Director of Coal & Allied Industries Limited, a member of the Board of Taxation and a member of the Australian Youth Orchestra Board, in addition to holding directorships with a number of private companies. She chairs the Council of St Margaret’s Anglican Girls School. A Fellow of the Australian Institute of Company Directors, Ms Chaplain holds a Bachelor of Arts degree majoring in Economics and Mandarin in addition to an MBA from the University of Melbourne. Ms Chaplain lives on the Gold Coast. 2 downer edI LImIted L di Bartolomeo (58) Independent Non-executive Director since June 2006 Mr Di Bartolomeo was Managing Director of ADI Limited for four years and prior to this he was Chief Executive of a number of substantial businesses for more than 10 years, including six years as Managing Director of FreightCorp (now Pacific National). Mr Di Bartolomeo is National President of the Australian Industry Group, Chairman of Macquarie Generation and a Director of Australian Rail Track Corporation Limited and Australian Super Limited. Mr Di Bartolomeo is a qualified civil engineer and has a Masters degree in Engineering Science. He is a Fellow of the Australian Institute of Management, a Fellow of the Chartered Institute of Transport and a Member of the Institution of Engineers Australia. Mr Di Bartolomeo lives in Sydney. J S humphrey (56) Independent Non-executive Director since April 2001 Mr Humphrey is currently Deputy Chairman of Mallesons Stephen Jaques, based in Brisbane where he specialises in corporate, M&A and infrastructure project work. Mr Humphrey is currently a Director of Horizon Oil Limited and Wide Bay Australia Limited and is a former Chairman of Villa World Limited. He was appointed to the Board of Evans Deakin Industries Limited in 2000 and, subsequently, to the Board of Downer EDI Limited. He is also a member of the Australian Takeovers Panel. Mr Humphrey holds a Bachelor of Laws from the University of Queensland. Mr Humphrey lives in Brisbane. C G thorne (61) Independent Non-executive Director since July 2010 Dr Thorne is currently a group executive reporting to Rio Tinto’s Chief Executive Officer, but will retire from Rio Tinto on 31 October 2011. He has over 36 years of experience in the mining and extraction industry, specifically in senior operational and executive roles across a broad range of product groups and functional activities in Australia and overseas. His most recent assignments have been as head of Rio Tinto’s coal businesses in Indonesia and Australia, and as global head of its technology, innovation and project engineering functions. From 2006 to 2009, he was Group Executive Technology and Innovation and a member of Rio Tinto’s Executive and Investment Committees. Dr Thorne is a Director of Queensland Energy Resources Limited, a Fellow and Chartered Professional (Management) of the Australasian Institute of Mining and Metallurgy and a Fellow of the Australian Academy of Technological Sciences and Engineering. Dr Thorne also holds directorships with a number of private companies. He holds Bachelor and Doctoral degrees in Metallurgy from the University of Queensland. Dr Thorne lives on the Sunshine Coast. DIRECTORS’ REPORT for the year ended 30 June 2011 fORmER DIRECTORS C J S Renwick AM Independent Non-executive Director, resigned 9 December 2010. P E J Jollie AM Chairman and Independent Non-executive Director, resigned 3 November 2010. G H Knox Managing Director and Chief Executive Officer, resigned 30 July 2010. DIRECTORS’ ShaREhOlDIngS The following table sets out each Director’s relevant interest (direct and indirect) in shares, debentures, and rights or options in shares or debentures (if any) of the Company at the date of this report. No Director has any relevant interest in shares, debentures and rights or options in shares or debentures, of a related body corporate as at the date of this report. Director R M Harding G A Fenn* L Di Bartolomeo S A Chaplain J S Humphrey C G Thorne Number of Fully Paid Ordinary Shares Number of Fully Paid Performance Rights Number of Fully Paid Performance Options – 346,061 60,903 50,137 67,982 13,750 – – – – – – – – – – – – * mr fenn’s shareholding comprises 30,769 shares acquired under the Company’s accelerated renounceable rights offer and 315,292 shares that have met all vesting conditions being the first tranche of shares in his 2009 grant (64,767 shares) and his sign-on grant that vested on 1 July 2011 (250,525 shares). a further 905,148 shares have been purchased as mr fenn’s long-term incentive and are held by Cpu Share plans pty Ltd (trustee of the downer edI Limited deferred employee Share plan). these shares comprise a grant of 200,000 shares with specific hurdles related to delivery of waratah train Sets over the period to 30 September 2011 and are subject to a service period condition. the remaining 705,205 shares are subject to performance and service period conditions over the period 2012 to 2015. further details regarding the conditions relating to these restricted shares are outlined in sections 5.4 and 8 of the remuneration report. COmPany SECRETaRy The Company Secretarial function is responsible for ensuring that the Company complies with its statutory duties and maintains proper documentation, registers and records. It also provides advice to Directors and officers about corporate governance and gives practical effect to any decisions made by the Board. Bruce Crane was Company Secretary until his retirement on 27 July 2011. A Fellow of the Institute of Chartered Secretaries and the Institute of Chartered Accountants, he has qualifications in business and commerce from the University of Technology and corporate governance from Chartered Secretaries Australia. Peter Tompkins was appointed Company Secretary on 27 July 2011. He has qualifications in law and commerce from Deakin University and is an admitted solicitor in New South Wales. Peter joined Downer in 2008 and was appointed General Counsel in 2010. Peter Lyons was appointed joint Company Secretary on 27 July 2011. A member of CPA Australia and Chartered Secretaries Australia, he has qualifications in commerce from the University of Western Sydney and corporate governance from Chartered Secretaries Australia. Peter was previously Deputy Company Secretary and has been in financial and secretarial roles in Downer’s corporate office for over 10 years. PRInCIPal aCTIvITIES Downer provides comprehensive engineering and infrastructure management services to the public and private Minerals & Metals, Oil & Gas, Power, Transport Infrastructure, Communications, Property and Water sectors across Australia, New Zealand, the Asia Pacific region and the United Kingdom. REvIEw Of OPERaTIOnS Downer performed solidly during the year despite facing numerous challenges, including: – prolonged and severe wet weather conditions, particularly in Eastern Australia; – intense competition for Engineering and Works and the cost of maintaining capacity in the business as a consequence of delayed projects; – lower government expenditure on road and rail infrastructure maintenance in Australia and New Zealand; and – ongoing tough conditions in New Zealand, compounded by the major earthquakes that struck Christchurch and the Canterbury region in September 2010 and February 2011. annuaL report 2011 3 DIRECTORS’ REPORT for the year ended 30 June 2011 The main features of the result for the 12 months to 30 June 2011 were: OPERaTIOnal hIghlIghTS – total revenue1 of $7.0 billion, up 15.2 per cent – statutory earnings before interest and tax (EBIT) of $25.7 million – statutory loss after tax of $27.7 million – underlying EBIT2 of $292.2 million, down 8.1 per cent – underlying net profit after tax (NPAT2) of $166.4 million, down 15.7 per cent – underlying operating cash flow of $324.9 million, 111 per cent of underlying EBIT – gearing3 of 25.5 per cent and liquidity of $915.7 million, comprising cash of $288.6 million and undrawn committed facilities of $627.1 million – investment grade credit rating (BBB-, stable outlook) – work-in-hand of about $20 billion – industry-leading safety performance with Lost Time Injury Frequency Rate of 0.93 per million hours worked The 15.2 per cent growth in total revenue to $7.0 billion was driven by the Mining, Rail and Engineering businesses. On 27 January 2011, Downer announced an additional pre- tax provision of $250.0 million in respect of the Waratah train project. As a result of this provision and impairments of $7.8 million relating to CPG New Zealand and $8.8 million relating to Works UK, Downer reported a net EBIT of $25.7 million and a net loss after tax of $27.7 million. Underlying operating cash flow was $324.9 million, which is 111 per cent of underlying EBIT. After $139.3 million of cash outflows relating to the Waratah train project, operating cash flow was $185.6 million. Downer continued to win new contracts and secure contract renewals across the Group and holds work-in-hand worth about $20 billion. Downer maintained its industry leading safety performance during the year, with continuing improvement in both its Lost Time Injury Frequency Rate (LTIFR) and Total Recordable Injury Frequency Rate (TRIFR). LTIFR for the year was 0.93 per million hours worked and TRIFR was 11.8 per cent lower at 7.17 per million hours worked. On 29 March 2011, Downer successfully completed an equity raising of approximately $279.3 million. This capital raising was undertaken to strengthen Downer’s balance sheet, support Downer maintaining investment grade credit rating metrics and to provide financial flexibility to pursue attractive growth opportunities. At 30 June 2011, Downer had gearing of 25.5 per cent and liquidity of $915.7 million, comprising cash of $288.6 million and undrawn committed facilities of $627.1 million. The Board did not resolve to pay an interim or final dividend for the 2011 financial year. Downer will continue to pay dividends on its Redeemable Optionally Adjustable Distributing Securities (ROADS). mInInG – Total revenue of $1.5 billion, up 50.6 per cent – Underlying EBIT of $119.6 million, up 75.4 per cent – Underlying EBIT margin of 8.2 per cent, up 1.2 ppts – ROFE4 of 19.8 per cent, up 6.8 ppts – Work-in-hand of $7.5 billion Downer Mining performed strongly during the year driven by continuing demand for contract mining services and a number of large contract wins and renewals, in particular: – a six-year contract, awarded in August 2010 and valued at approximately $3 billion, with Fortescue Metals Group Limited (Fortescue) for the provision of mining services at its Christmas Creek operation in the East Pilbara region of Western Australia. The Christmas Creek contract is one of the largest mining services contracts of its type in Australia; and – five-year extension and expansion contracts, awarded in July 2010, with BHP Billiton Mitsubishi Alliance (BMA) at Goonyella Riverside and Norwich Park Mines in the Bowen Basin in central Queensland. The contracts, jointly valued at approximately $2 billion, are for load and haul of prestrip material and drill and blast services at Goonyella Riverside Mine, and for load and haul of prestrip material at Norwich Park Mine. Both of these major projects are making good progress. In addition, in December 2010, Downer signed a five-year mining service agreement with Idemitsu Australia Resources Pty Ltd (Idemitsu) for the provision of mining services at the Boggabri open-cut coal mine in the Gunnedah Basin in New South Wales. This extended contract starts in December 2011 and will continue the Company’s involvement at Boggabri to over a decade. Services to be provided will include drill and blast, mine planning, and load and haul of both overburden and coal. The value of the contract revenue will depend on the mine’s production output, which has yet to be finalised. The base case values revenue at approximately $900 million over the duration of the contract. raIL – Total revenue of $1.1 billion, up 7.9 per cent – Underlying EBIT of $75.0 million, down 3.7 per cent – Underlying EBIT margin of 6.6 per cent, down 0.8 ppts – ROFE of 18.4 per cent, down 6.8 ppts – Work-in-hand of $5.2 billion Strong demand for resources, particularly coal and iron ore, is driving demand for Downer Rail’s narrow and standard gauge locomotives from customers including QR National, Pacific National, BHP Billiton and Genesee & Wyoming (GWA). Downer Rail also won a contract during the year to supply and maintain passenger rolling stock for Queensland Rail (QR). 1 total revenue is a non-statutory disclosure and includes revenue, other income and notional revenue from joint ventures and other alliances not proportionately consolidated. 2 underlying eBIt and npat performance reflect statutory results adjusted for individually significant items. 3 net debt/net debt plus total equity. 4 return on funds employed equals eBIt divided by average funds employed. 4 downer edI LImIted DIRECTORS’ REPORT for the year ended 30 June 2011 During the year, Downer Rail secured: – a contract valued at approximately $190 million to expand and upgrade QR’s fleet of high speed passenger diesel Tilt Trains that service the Brisbane to Cairns rail corridor. The vehicles will be delivered progressively from April 2013; Downer Group portfolio. The review does not include Downer’s resource-focused consultancy businesses, Snowden, QCC and Mineral Technologies. workS – an order for 13 new standard gauge diesel electric – Total revenue of $2.1 billion, down 0.5 per cent locomotives to support Pacific National’s coal haulage services in New South Wales. The fleet will be delivered progressively between mid-2011 and mid-2012 and Downer will maintain these locomotives for Pacific National; – an order for seven new standard gauge diesel electric locomotives for GWA. The locomotives will be delivered in the fourth quarter of 2011 and Downer will maintain these locomotives for GWA; and – a contract extension for four new narrow gauge diesel electric locomotives to support Pacific National’s coal haulage services in Queensland. These locomotives will be delivered in the second quarter of 2012 and be maintained by Downer. In addition, Downer (through a joint venture with Keolis), was a member of the GoldLinQ Consortium that was the successful proponent for the Gold Coast Rapid Transport Project. enGIneerInG – Total revenue of $2.3 billion, up 21.4 per cent – Underlying EBIT of $72.0 million, down 36.0 per cent – Underlying EBIT margin of 3.1 per cent, down 2.8 ppts – ROFE of 18.3 per cent, down 8.1 ppts – Work-in-hand of $2.2 billion The increase in total revenue during the year was driven by projects including Collgar Wind Farms (Western Australia), the Mangoola coal project (New South Wales), the Curragh expansion (central Queensland) and construction of transmission lines from Yabulu South to Ingham (north Queensland). The main reasons for the lower EBIT and EBIT margin performance were very competitive market conditions, high tender costs, the cost of maintaining capacity following delayed projects, and a number of underperforming contracts, particularly Curragh. Action is being taken to address the underperforming projects. In addition, wet weather had a $6.8 million impact on Downer Engineering’s EBIT for the year. Downer Engineering won a number of new projects during the year, including: – a contract with OneSteel Manufacturing Pty Ltd to construct an iron ore beneficiation plant in Iron Baron, South Australia. The contract, valued at more than $60 million, is for the design, procurement, construction and commissioning of all process equipment as well as site preparation and civil works; and – a $120 million contract with Karara Mining Limited for the construction of a 180 kilometre, 330kV power transmission line from the Karara Iron Ore Project to Eneabba in Western Australia. On 3 August 2011, Downer announced it was conducting a review of CPG Asia, CPG Australia and CPG New Zealand, including the potential divestment of these consultancy businesses, as part of its ongoing focus on optimising the – Underlying EBIT of $54.0 million, down 47.5 per cent – Underlying EBIT margin of 2.6 per cent, down 2.3 ppts – ROFE of 10.8 per cent, down 5.6 ppts – Work-in-hand of $5.2 billion Downer Works’ profitability was significantly affected by prolonged and severe wet weather, particularly in Eastern Australia. Wet weather had an estimated adverse impact of $10 million on the Australian and New Zealand Works business during the year. New Zealand is experiencing ongoing tough economic conditions, with discounting putting pressure on margins. There has been a significant reduction in expenditure by central and local governments. The severity of the Christchurch earthquake of 22 February 2011 placed further pressure on maintenance and infrastructure expenditure across New Zealand. Government spending was reallocated and customers implemented expenditure freezes as they assessed the impact of the earthquake. The negative impact on EBIT as a consequence of the earthquake was about $10.0 million. On 3 May 2011, Downer signed an interim alliance agreement with the Christchurch Earthquake Recovery Authority (CERA), New Zealand Transport Agency (NZTA) and Christchurch City Council for the rebuilding of earthquake-damaged infrastructure in Christchurch. The agreement covers the rebuilding of city roads, sewerage, water supply pipes and parks damaged in the earthquakes and is part of an alliance involving several other parties expected to undertake works valued at more than NZ$2 billion over five years. Despite the severe weather and difficult market conditions, Downer Works maintained its market leading position and secured a number of contract wins during the year, including: – (with joint venture partner Mouchel) three Integrated Service Agreements (ISAs) with Main Roads Western Australia for the delivery of fence-to-fence road network asset management. Under these three ISAs (Metropolitan, Mid-West and Gascoyne), Downer Mouchel will manage 6,600 road kilometres and the contracts will deliver annualised revenues of approximately $50 million over the next 10 years; – a five year contract renewal, valued at over $30 million, to deliver routine road maintenance services on Yarra Ranges Council’s road network east of Melbourne; – a contract with Australian Rail Track Corporation (ARTC) to undertake rail upgrade work as part of the Federal Government’s Nation Building Rail Investment; and – an 18 month extension of the V1 Alliance with ARTC for rail track maintenance and infrastructure work in Victoria and southern New South Wales, continuing an alliance relationship spanning more than 10 years. annuaL report 2011 5 DIRECTORS’ REPORT for the year ended 30 June 2011 waratah traIn proJeCt The first Waratah train received a certificate of Practical Completion from RailCorp on 30 June 2011, entered passenger service on 1 July 2011 and is performing well. The second Waratah train was presented to RailCorp for Practical Completion on 28 July 2011. Dr Grant Thorne was appointed a Non-executive Director of Downer on 1 July 2010 and Chris Renwick retired as a Non- executive Director on 9 December 2010 after serving on the Board for six years. Downer will continue the process of Board renewal in 2012 as appropriate. Train Sets 3 to 6 are scheduled for delivery to RailCorp before the end of the 2011 calendar year. ChangES In STaTE Of affaIRS downer auStraLIa Downer announced on 22 February 2011 that its Australian Works, Engineering, Emerging Sectors and CPG Resources businesses would be combined into one division, Downer Australia. From 1 July 2011, the Downer Group consists of four divisions – Downer Australia, Downer New Zealand, Downer Mining and Downer Rail. Downer Australia is the Group’s largest division, contributing about half of its total revenue. It provides integrated solutions to support the critical infrastructure needs of our customers in the core markets of Minerals & Metals, Oil & Gas, Power, Transport Infrastructure, Water, Communications, Social Infrastructure and Property. Downer will start reporting its results in line with the new structure in the 2012 financial year. OuTlOOk Downer has work-in-hand of around $20 billion, is strongly aligned to the resources and energy sectors and is well placed to capitalise on the pipeline of opportunities driven by those markets. Tendering activity has been very high over the past six months particularly in Downer Australia and Downer Rail. There is short term risk relating to the timing of projects. It is also unclear at this point whether the broader financial market volatility will have a negative impact on the project pipeline. Subject to the risks highlighted and general market conditions, Downer expects to deliver EBIT of around $340 million for the 2012 financial year and NPAT of around $180 million. BOaRD REnEwal The process of Board renewal continued during the year. Peter Jollie AM did not stand for re-election as Chairman at the Company’s Annual General Meeting on 3 November 2010 and Mike Harding was appointed Chairman following the AGM. Mr Harding was previously Deputy Chairman of Downer and has been an independent Non-executive Director of Downer since July 2008. During the financial year there was no significant change in the state of affairs of the consolidated entity other than that referred to in the financial statements or notes thereto. SuBSEquEnT EvEnTS There have been no matters or circumstances other than those referred to in the financial statements or notes thereto, that have arisen since the end of the financial year, that have significantly affected, or may significantly affect, the operations of the consolidated entity, the results of those operations, or the state of affairs of the consolidated entity in subsequent financial years. fuTuRE DEvElOPmEnTS Disclosure of information regarding likely developments in the operations of the consolidated entity in future financial years and the expected results of those operations is likely to result in unreasonable prejudice to the consolidated entity. Accordingly, this information has not been disclosed in this report. Downer recognises its obligation to stakeholders – clients, shareholders, employees, contractors and the community – to operate in a way that advances sustainability and mitigates our environmental impact. As a corporate citizen we respect the places and communities in which we operate. Our values and beliefs are the spirit that underpins everything we do and we are committed to conducting our operations in a manner that is environmentally responsible and sustainable. The Board oversees the company’s environmental performance through regular reports. It has established a sustainability charter and strategy and has allocated internal responsibilities for reducing the impact of our operations and business activities on the environment. In addition, all Downer divisions conduct regular environmental audits by independent third parties. The international environmental standard, ISO 14001, is used by Downer as a benchmark in assessing, improving and maintaining the environmental integrity of its business management systems. The Company’s divisions also adhere to environmental management requirements established by customers in addition to all applicable license and regulatory requirements. 6 downer edI LImIted DIRECTORS’ REPORT for the year ended 30 June 2011 DIvIDEnDS The Board did not resolve to pay an interim or final dividend for the 2011 financial year. As detailed in the Directors’ Report for the 2010 financial year, a final dividend of 16 cents per share (unfranked, 100 per cent Conduit Foreign Income) was paid to the holders of fully paid ordinary shares on 1 October 2010 in respect of the financial year ended 30 June 2010. EmPlOyEE DISCOunT ShaRE Plan (ESP) 1,884,000 shares were issued under the terms of the ESP during the 2011 financial year (2010: nil). Further details about the employee discount share plan are disclosed in Note 34 to the financial statements. ExECuTIvE ShaRE OPTIOn SChEmE 2006 (EOS) No options were granted under the EOS during the 2011 financial year (2010: nil). Further details on the executive share option plan are disclosed in the Remuneration Report. ShaRE OPTIOnS No performance options or rights were granted or exercised during the year ended 30 June 2011. Grants of performance rights and performance options made to executives during the year ended 30 June 2007 were re-tested during the year. All performance rights and performance options lapsed as a result of failing the test. There are no performance rights or performance options outstanding. InDEmnIfICaTIOn Of OffICERS anD auDITORS During the financial year, the Company paid a premium in respect of a contract insuring the Directors of the Company (as named above), the Company Secretary, all executive officers of the Company and of any related body corporate against a liability incurred as a director, secretary or executive officer to the extent permitted by the Corporations Act 2001 (Cth). The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. Under the Downer Constitution, Downer indemnifies, to the extent permitted by law, each Director and Company Secretary of Downer and its subsidiaries against liability incurred as such an officer of Downer. The Directors listed on page 3, the Company Secretaries listed on page 3, individuals who act as a director or company secretary of Downer’s subsidiaries and certain individuals who formerly held any of these roles also have the benefit of the indemnity in the Constitution. The Company has not otherwise, during or since the financial year, indemnified or agreed to indemnify an officer or auditor of the Company or of any related body corporate against a liability incurred as such an officer or auditor. DIRECTORS’ mEETIngS The following table sets out the number of Directors’ meetings (including meetings of Board Committees) held during the 2011 financial year and the number of meetings attended by each Director (while they were a Director or Board Committee member). During the year, 24 Board meetings, six Audit Committee meetings, six Remuneration Committee meetings, three Risk Committee meetings, three Zero Harm Committee meetings and two Nominations and Corporate Governance Committee meetings were held. In addition, 11 ad hoc meetings (attended by various Directors) were held in relation to various matters including tender review and contract review. Director R M Harding P E J Jollie G A Fenn G H Knox S A Chaplain L Di Bartolomeo J S Humphrey C J S Renwick C G Thorne Board Audit Committee Remuneration Committee Held* Attended Held* Attended Held* Attended 24 11 24 4 24 24 24 14 24 24 11 24 3 24 23 21 9 23 – 2 – – 6 – 6 3 4 – 2 – – 6 – 4 2 4 3 3 – – 6 6 – – – 3 3 – – 6 6 – – – annuaL report 2011 7 DIRECTORS’ REPORT for the year ended 30 June 2011 Director R M Harding P E J Jollie G A Fenn G H Knox S A Chaplain L Di Bartolomeo J S Humphrey C J S Renwick C G Thorne Risk Committee Zero Harm Committee Nominations and Corporate Governance Committee Held* Attended Held* Attended Held* Attended 2 2 – – 3 3 – – 1 2 1 – – 3 3 – – 1 3 – 2 1 – – 1 2 2 3 – 2 1 – – – 2 2 1 1 – – 1 2 2 1 – 1 1 – – 1 2 1 1 – * these columns indicate the number of meetings held during the period each person listed was a director or member of the relevant Board Committee. CORPORaTE gOvERnanCE In recognising the need for the highest standards of corporate behaviour and accountability, the Board endorses the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (ASX Principles). The consolidated entity’s corporate governance statement is set out at page 116 of this Annual Report. nOn-auDIT SERvICES Downer is committed to audit independence. The Audit Committee reviews the independence of the external auditors on an annual basis. This process includes confirmation from the auditors that, in their professional judgment, they are independent of the consolidated entity. To ensure that there is no potential conflict of interest in work undertaken by our external auditors (Deloitte Touche Tohmatsu), they may only provide services that are consistent with the role of the Company’s auditor. The Board has considered the position and, in accordance with the advice from the Audit Committee, is satisfied that the provision of non-audit services during the year is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001 (Cth). The Directors are of the opinion that the services as disclosed below do not compromise the external auditors’ independence, based on advice received from the Audit Committee, for the following reasons: – all non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and – none of the services undermine the general principles relating to auditor independence as set out in the Institute of Chartered Accountants in Australia and CPA Australia’s Code of Conduct APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional & Ethical Standards Board, including reviewing or auditing the auditor’s own work, acting in a management or decision-making capacity for the Company, acting as advocate for the Company or jointly sharing economic risks and rewards. A copy of the auditor’s independence declaration is set out on page 33 of this Annual Report. During the year details of the fees paid or payable for non-audit services provided by the auditor of the parent entity, its related practices and related audit firms were as follows: Non-audit services Tax Services Audit related services Due diligence, capital raising and other non-audit services June 2011 $ June 2010 $ 228,372 73,474 810,694 1,112,540 729,717 54,529 96,000 880,246 ROunDIng Of amOunTS The company is of a kind referred to in ASIC Class Order 98/0100, dated 10 July 1998, and in accordance with that class order, amounts in the Directors’ Report and the Financial Report have, unless otherwise stated, been rounded off to the nearest thousand dollars. 8 downer edI LImIted DIRECTORS’ REPORT for the year ended 30 June 2011 REmunERaTIOn REPORT – auDITED The remuneration report provides information about the remuneration arrangements for key management personnel (KMP), which includes Non-executive Directors and the most senior group executives, for the year to 30 June 2011. Reference to executives in this report means KMPs who are not Non-executive Directors. The report covers the following matters: 1. Remuneration policy, principles and practices; 2. Relationship between remuneration policy and company performance; 3. The Board’s role in remuneration; 4. Description of Non-executive Director remuneration; 5. Description of executive remuneration; 6. Details of Director and executive remuneration; 7. Key terms of employment contracts; and 8. Legacy equity-based remuneration plans. Summary of ChanGeS to remuneratIon poLICy Downer’s executive remuneration policy was reviewed during the period. The review considered Company strategy, reward plans based on performance measurement and stakeholder feedback on prior practices. As a result of this continuous improvement process, there have been changes to the policy. These are noted in the various sections of this report and are summarised in the table below. Feedback Response Level of short-term incentive (STI) payments was high – STI only payable if EBIT of at least 90 per cent of target profit Peer group for the relative TSR long-term incentive (LTI) tranche is too broad is achieved; – For corporate executives, the hurdle is 90 per cent of the Group budgeted profit target. For business unit executives, the hurdle is 90 per cent of the business unit budgeted profit target. Only two executives named in this report met this criteria and were awarded an STI; and – Zero Harm remains an important feature with a subsequent serious incident gateway for any Zero Harm bonus to be paid. The ASX100 was retained with the Financials sector excluded as the financial services sector is subject to an additional regulatory regime to other ASX100 companies, impacting their comparability for relative performance assessment. Consideration was given to using a smaller group of direct competitors for customers, however: – this was considered not to represent all competitors for capital and executives; – limiting the comparator group to a small number of direct competitors could result in very volatile outcomes from period to period, which may have unintended behavioural consequences impacting risk; and – management’s strong focus on improving the Company’s ranking among ASX100 companies has become embedded in Company culture, so reinforcing this rather than trying to dislodge it with another focus is considered desirable. Dividends paid on unvested LTI shares – Dividends are no longer paid on unvested LTI with the latest Approval of LTI grant to the Managing Director and Chief Executive Officer of Downer (Managing Director) was not sought grant; and – Dividends accrue on unvested shares and are only paid on shares that vest once all vesting conditions for those shares are met. Shareholder approval is being sought for the 2012 LTI grant. annuaL report 2011 9 DIRECTORS’ REPORT for the year ended 30 June 2011 1. REmunERaTIOn POlICy, PRInCIPlES anD PRaCTICES 1.1 non-exeCutIve dIreCtor remuneratIon poLICy Downer’s Non-executive Director remuneration policy is to provide fair remuneration that is sufficient to attract and retain Directors with the experience, knowledge, skills and judgement to steward the Company’s success. 1.2 exeCutIve remuneratIon poLICy Downer’s executive remuneration policy and practices are summarised in the table below. Policy Practices aligned with policy Attract experienced, proven performers Retain experienced, proven performers, and those considered to have high potential for succession – Provide a total remuneration opportunity sufficient to attract proven and experienced executives from secure positions in other companies. – Provide remuneration that is internally equitable and fair; and – Defer a substantial part of pay contingent on service and sustained performance. Focus performance – Provide a substantial component of pay contingent on performance; – Focus attention on the most important drivers of value by linking pay to their achievement; and – Require profitability to reach an acceptable level before any bonus payments can be made. Provide a Zero Harm environment – Incorporate “Zero Harm” for our employees, contractors, Manage risk Align executive interests with those of shareholders 10 downer edI LImIted communities and the environment as a significant component of reward. – Encourage sustainability by balancing incentives for achieving both short-term results and longer-term results; – Set stretch targets that finely balance returns with reasonable but not excessive risk taking; – Cap maximum incentive payments to moderate risk taking; – Do not provide significant “cliff” reward vesting that may encourage excessive risk taking as a performance threshold is approached; – Long-term performance is assessed using multiple measures, diversifying risk and limiting the prospects of unintended consequences from focusing on just one measure; – Require service beyond performance periods for reward vesting to encourage retention and allow forfeiture of rewards that are the result of misconduct or material adjustments; – The Board retains discretion to vary incentive payments in the event of excessive risk taking; – Staggered testing of performance at the end of the financial year (STIs) and calendar year (LTIs) encourages performance sustainability and reduces the chance of excessive risk taking to maximise reward at one testing time; and – Restrict trading of vested equity rewards to ensure compliance with the Company’s Share Trading Policy. – Provide that a significant proportion of pay is delivered as shares so part of executive reward is linked to shareholder value performance; – Maintain a guideline minimum shareholding requirement for the three most senior executives; – Encourage holding of shares after vesting via a trading restriction for all executives; and – Prohibit hedging of unvested equity and equity subject to a trading lock to ensure alignment with shareholder outcomes. DIRECTORS’ REPORT for the year ended 30 June 2011 2. RElaTIOnShIP BETwEEn REmunERaTIOn POlICy anD COmPany PERfORmanCE Remuneration is linked to performance by: – Requiring a significant portion of executive remuneration to vary with short-term and long-term performance; – Introducing a profitability gateway to be achieved by the Company before an STI calculation for executives is made; – Applying challenging financial and non-financial measures to assess performance; and – Ensuring that these measures focus management on strategic business objectives that create shareholder value. Downer measures performance on the following key corporate measures: – Earnings per share (EPS) growth; – Total shareholder return (TSR) relative to other ASX100 companies (excluding ASX “Financials” sector companies); – Earnings before interest and tax expense (EBIT); – Operating cash flow; – Development of our people; and – “Zero Harm” measures of safety and environmental sustainability. Remuneration for all executives varies with performance on these key measures. The following graph shows the Company’s performance compared to the median performance of the ASX100 over the three year period to 30 June 2011. Downer EDI TSR compared to peer group median* ) 0 0 1 o t d e x e d n i ( n r u e R r t l e d o h e a h S r l t a o T 160 140 120 100 80 60 40 20 0 30/06/08 Downer EDI TSR Peer Group median TSR 30/09/08 31/12/08 31/03/09 30/06/09 30/09/09 31/12/09 31/03/10 30/06/10 30/09/10 31/12/10 31/03/11 30/06/11 *Peer group is S&P/ASX100 companies as at 30/06/2008 annuaL report 2011 11 DIRECTORS’ REPORT for the year ended 30 June 2011 The table below shows the performance of Downer against key financial indicators over the last five years Revenue including joint ventures and associates and other income Earnings before interest and tax (after significant items) Net profit/(loss) after tax (after significant items) Operating cash flow Share price at start of the year* Share price at end of the year Interim dividend (cents) Final dividend (cents) Total Shareholder Return Basic earnings/(loss) per share Earnings per share growth (%) Earnings growth rate % 2007 $’000 2008 $’000 2009 $’000 2010 $’000 2011 $’000 5,422,157 5,587,647 5,941,391 6,055,935 6,975,104 128,661 101,498 106,156 7.44 7.36 13cps 8cps 2% 165,842 276,031 7.36 6.87 13cps 12.5cps (3%) 281,117 304,799 189,376 53,362 3,052 336,464 204,266 6.87 5.59 13cps 16cps (14%) 5.59 3.60 13.1cps 16cps (30%) 25,663 (27,700) 185,625 3.48 3.70 - - 6% 31.3cps 47.9cps 54.4cps (2.4cps) (10.5cps) 473% 507% 53% 63% 14% 14% (104%) (338%) (98%) (1,008%) * the opening value for 2011 has been adjusted to reflect the impact of the accelerated renounceable rights offer during the year. The chart below illustrates Downer’s performance on lost time injuries (LTIFR) and total recordable injuries (TRIFR) over the last three years. ) R F I R T ( d e k r o w s r u o h 0 0 0 0 0 0 1 r , , e p s e i r u n j I l e b a d o c e R r l t a o T ) R F I T L ( d e k r o w s r u o h 0 0 0 0 0 0 1 r , , e p s e i r u n j I e m i T t s o L 2.5 2.0 1.5 1.0 0.5 LTIFR TRIFR 18 16 14 12 10 8 6 4 2 Se p-08 D e c-08 M ar-09 Ju n-09 Se p-09 D e c-09 M ar-10 Ju n-10 Se p-10 D e c-10 M ar-11 Ju n-11 12 downer edI LImIted DIRECTORS’ REPORT for the year ended 30 June 2011 3. ThE BOaRD’S ROlE In REmunERaTIOn The Board engages with shareholders, management and other stakeholders as required, to continuously refine and improve executive and Director remuneration polices and practices. The refinement to the Company’s STI policy and the treatment of dividends on unvested LTIs in the 2011 year are the result of the Board’s engagement with stakeholders to seek feedback on the prior policy after the 2010 Annual General Meeting (AGM) vote on the remuneration report. Two Board Committees deal with remuneration matters. They are the Remuneration Committee and the Nominations and Corporate Governance Committee. The role of the Remuneration Committee is to review and make recommendations to the Board in relation to senior executives in respect of: – executive remuneration and incentive policy; – remuneration of senior executives of the Company; – executive reward and its impact on risk management; – executive incentive plan; – equity based incentive plan; – superannuation arrangements; – recruitment, retention, performance measurement and termination policies and procedures for all key management personnel and senior executives reporting directly to the Managing Director; – disclosure of remuneration in the Company’s public materials including ASX filings and the Annual Report; and – retirement payments. The Nominations and Corporate Governance Committee is responsible for recommending and reviewing remuneration arrangements for the Executive Directors and Non-executive Directors of the Company. To ensure coordination of remuneration policy, the chairs of the Remuneration Committee and the Nominations and Corporate Governance Committee are members of both Committees. Each Committee has the authority to engage external professional advisers without seeking approval of the Board or management. During the reporting period, the Remuneration Committee retained Guerdon Associates as its adviser. Guerdon Associates does not provide services to management and is considered to be independent. 4. DESCRIPTIOn Of nOn-ExECuTIvE DIRECTOR REmunERaTIOn There has been no change to the basis of Non-executive Director fees since the prior reporting period. Fees for Non-executive Directors are fixed and are not linked to the financial performance of the Company. The Board believes this is necessary for Non-executive Directors to maintain their independence. Shareholders approved an annual aggregate cap of $2 million for Non-executive Director fees at the 2008 AGM. The allocation of fees to Non-executive Directors within this cap has been determined after consideration of a number of factors including the time commitment of Directors, the size and scale of the Company’s operations, the skill sets of Board members, the quantum of fees paid to Non-executive Directors of comparable companies and participation in Board Committee work. The basis of fees and the fee pool are reviewed when new Directors are appointed to the Board, when the structure of the Board changes, or at least every three years. Reference is made to individual Non-executive Director fee levels and workload (i.e. number of meetings and the number of Directors) at comparably sized companies from all industries other than the financial services sector, and the fee pools at these companies. In addition, an assessment is made on the extent of flexibility provided by the fee pool to recruit any additional Directors for planned succession after allocation of fees to existing Directors. The Chairman receives a base fee of $375,000 per annum (inclusive of all Committee fees) plus superannuation. The other Non-executive Directors each receive a base fee of $150,000 per annum plus superannuation. Additional fees are paid for Committee duties: $35,000 for the chair of the Audit Committee; $15,000 for the chair of the Zero Harm Committee, Remuneration Committee and the Risk Committee and $60,000 per annum for Lucio Di Bartolomeo’s additional services as a Director of Reliance Rail until his resignation in December 2010. Under his original terms of appointment in 2001, John Humphrey is eligible for certain retirement benefits. Consistent with the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations, the right to these retirement benefits has been frozen and has been fully provided for in the financial statements. Other Non- executive Directors are not entitled to retirement benefits. All Non-executive Directors are entitled to payment of statutory superannuation entitlements in addition to Directors’ fees. 5. DESCRIPTIOn Of ExECuTIvE REmunERaTIOn 5.1 exeCutIve remuneratIon StruCture Executive remuneration has a fixed component and a component that varies with performance. The variable component ensures that a proportion of pay varies with performance. Performance is assessed annually for performance periods covering one year and three years. Payment for performance assessed over one year is an STI. Payment for performance over a three year period is an LTI. If Company performance exceeds that of competitors, realised total executive remuneration, including incentive payouts, will be in the top quartile of the market. In order for maximum STIs to be awarded, performance must exceed the planned budget for the period. This enables the Company to attract and retain better performing executives, and ensures pay outcomes are better aligned with shareholder returns. Target STIs are less than the maximum STI. Target STI is payable on achievement of planned objectives. For KMPs and other named executives, target STI is 75 per cent of the maximum STI. The maximum total remuneration that can be earned by an executive is capped. The maximums are determined as a percentage of fixed remuneration. These maximums are equal to or higher than most market peers. If maximum total remuneration is achieved, the proportions attributable to each incentive component for most executives will be as shown in the following table. annuaL report 2011 13 DIRECTORS’ REPORT for the year ended 30 June 2011 Executive position Managing Director* Executives appointed prior to 2011 Executives appointed during 2011* Target STI % of fixed pay Maximum STI % of fixed pay Maximum LTI % of fixed pay 75 75 50 100 100 75 100 75 50 Maximum total performance based pay as % of fixed pay 200 175 125 *refer to Sections 5.3.4 and 5.4.5 for a description of variances from policy. Policy regarding the maximum proportions of fixed pay that can be earned as incentive pay was amended in 2011 as a result of market reviews to bring total remuneration opportunity more into line with market standards and reduce the prospect of excessive risk taking. The proportions of STI to LTI took into account: – Market practice; – The service period before executives can receive equity rewards; – The behaviours that the Board sought to encourage through direct key performance indicators; and – The requirement for the most senior executives to maintain a shareholding as a multiple of pay after equity rewards have vested. 5.2 fIxed remuneratIon Fixed remuneration is the sum of salary and the direct cost of providing employee benefits, including superannuation, motor vehicles, car parking, living away from home expenses and fringe benefits tax. The level of remuneration is set to be able to attract proven performers from secure employment elsewhere, while maintaining internal equity to retain proven performers whether sourced externally or internally. Remuneration is benchmarked against a peer group of direct competitors and a general industry peer group. While market levels of remuneration are monitored on a regular basis, there is no contractual requirement or expectation that any adjustments will be made. Adjustments to executive fixed remuneration in 2011 were to recognise changed responsibilities and accountabilities or significant variations from market levels. Target and maximum incentive payments are set as a percentage of fixed remuneration. 5.3 Short-term InCentIve 5.3.1 STI OVERVIEW The STI plan provides for an annual payment that varies with annual performance. This has been applied to performance measured over the Company’s financial year to 30 June 2011. The basis of the plan has changed from the prior period to better align STI outcomes with financial results. No STI is paid unless a minimum of 90 per cent of the relevant budgeted profit target is met. For corporate executives, the hurdle is 90 per cent of the Group budgeted profit target. For business unit executives, the hurdle is 90 per cent of the business unit budgeted profit target. Profit for this purpose is defined as Earnings Before Interest and Tax expense (EBIT). This minimum must be of a materially sufficient size to justify the payment of STI to an executive. As noted in section 5.1, the maximum STI that can be earned is capped to minimise excessive risk taking. The STI payment is made in cash after finalisation of the annual audited results. No part of the STI is deferred, as Directors believe risk management is carefully addressed by other remuneration policies. Nevertheless, this aspect of policy remains under review, given emerging market trends to defer part of STI. 14 downer edI LImIted DIRECTORS’ REPORT for the year ended 30 June 2011 5.3.2 HOW STI PAYMENTS ARE ASSESSED Target STI plan per cent of pay An individual’s target incentive under the STI plan is expressed as a percentage of fixed remuneration. The STI plan percentage is set according to policy tabulated in section 5.1. Organisational or divisional scorecard result As a principle, “target” achievement would be represented at budget. Threshold and maximums are also set. Individual performance modifier (IPM) At the end of the plan year, eligible employees are provided with an IPM against their key performance indicators and relative performance. Individual key performance indicators are set between the individual and the Managing Director (if reporting to the Managing Director) or the Board (if the Managing Director) at the start of the performance period. IPMs must average to 1. STI plan incentive calculation Fixed remuneration x target STI plan per cent x scorecard result x IPM 5.3.3 STI PERFORMANCE REQUIREMENTS Overall Company performance is assessed on company EBIT, operational cash flow, Zero Harm and a measure of “people empowerment”. This was changed from the prior year in order to capture more diverse measures of Company performance across both STI and LTI for valid assessment and better risk management. EBIT includes joint ventures and associates and adjustments including changes in accounting policy, material asset sales and material acquisitions or divestments. Operating Cash Flow is defined as net cash from operating activities (i.e. EBIT plus non-cash items in operating profit plus distributions received from joint ventures or associates plus movements in working capital plus movements in operating assets less net interest less tax paid). Zero Harm reflects Downer’s commitment to environmental, social and governance matters. The Zero Harm element includes the following safety measures, underscoring Downer’s commitment to customers, employees, regulators and the communities it operates in: – Total Recordable Injury Frequency Rate (TRIFR) calculated as the number of recordable injuries x 1,000,000/the hours worked in 12 months; – Lost Time Injury Frequency Rate (LTIFR) is calculated as the number of lost time Injuries x 1,000,000/the hours worked in 12 months. Where a fatality or serious environmental incident occurs, the Zero Harm portion of the STI is either foregone or significantly reduced. People measures include the proportion of performance plans and reviews completed. Weightings applied to the 2011 STI scorecard measures for all senior executives, including the Managing Director, are set out in the table below. Executive Corporate Business unit EBIT 40% 40% (10% Group, 30% business unit) Operational cash flow Zero Harm People 20% 20% (5% Group, 15% business unit) 30% 30% 10% 10% The Board, in its discretion, may approve payment that varies by up to + or – 15 per cent from the payment applicable to the level of performance achieved. The Board has resolved to increase its discretion to up to + or – 100 per cent for the 2012 STI period onwards for new employees and where existing contractual arrangements allow. Specific details of STI performance requirements are set out in section 6.4. annuaL report 2011 15 DIRECTORS’ REPORT for the year ended 30 June 2011 5.3.4 STI TABULAR SUMMARY The following table outlines the major features of the 2011 STI plan. Purpose of STI plan – Focus performance on drivers of shareholder value over 12 month period; – Improve “Zero Harm” results; and – Ensure a part of remuneration costs varies with the Company’s 12 month performance. Minimum performance “gateway” before any payments can be made 90 per cent of budgeted EBIT for the business unit applicable to the executive, i.e. the Company EBIT for the Managing Director and corporate executives and business unit EBIT for business unit heads. Maximum STI that can be earned – Executives appointed pre 2011: up to 100 per cent of fixed remuneration – Executives appointed in 2011: up to 75 per cent of fixed remuneration Percentage of STI that can be earned on achieving target expectations 75 per cent of the maximum. For an executive to receive more will require performance in excess of target expectations. Individual performance modifier – An IPM may be applied against an executive’s individual key Discretion to vary payments performance indicators and relative performance; and – moderate individual performance may result in a an IPM of less than 1 or outstanding performance may result in an IPM greater than 1. The IPM must average 1 across all participants. The Board, in its discretion, may approve payment that varies by up to + or – 15 per cent from the payment applicable to the level of performance achieved. Performance period Performance assessed 1 July 2010 to 30 June 2011. August 2011, following release of audited accounts. Additional service period after performance period for payment to be made None. Payment made Payment vehicle Performance requirements New recruits Terminating executives September 2011. Cash. Group and divisional EBIT, operational cash flow, Zero Harm and people measures. New executives (either new starts or promoted employees) are eligible to participate in the STI in the year in which they commence in their position with a pro-rata entitlement. There is no STI entitlement where an executive’s employment terminates prior to the end of the financial year. The Board retains the right to vary from policy in exceptional circumstances. However, any variation from policy and the reasons for it will be disclosed. There have been three variations from policy during this financial period: – Grant Fenn was appointed Managing Director on 30 July 2010. At this time, short-term concerns associated with meeting delivery schedules for the Waratah trains contract were impacting shareholder value. The Board used its discretion to grant 100,000 shares with vesting contingent on meeting contract delivery obligations for the practical completion of the first Waratah train in December 2010. This milestone was not attained, and this share grant lapsed. A further 200,000 shares were granted for completion of delivery milestones for Waratah Train Sets two to six by 30 September 2011, with final vesting after this performance test contingent on an additional 2.25 years service. The current delivery schedule indicates that this hurdle will not be met and accordingly that these shares are unlikely to vest. These shares were granted in lieu of pro rata LTI shares on Mr Fenn’s appointment to the position of Managing Director. See section 7 for further detail. – Kevin Fletcher was appointed Chief Financial Officer on 2 November 2010. In his previous role with the Company, Mr Fletcher was entitled to a maximum STI of 100 per cent and maximum LTI of 75 per cent. The Board used its discretion to maintain these participation levels for Mr Fletcher upon appointment to his new role. External benchmarking confirms that Mr Fletcher’s total remuneration package is in line with market levels. – Peter Borden was appointed Chief Executive Officer of Downer Rail on 3 December 2010. In his previous role with the Company, Mr Borden was entitled to a maximum STI of 100 per cent and maximum LTI of 50 per cent. The Board used its discretion to maintain the STI participation level for Mr Borden upon appointment to his new role. External benchmarking confirms that Mr Borden’s total remuneration package is in line with market levels. Apart from the Chief Executive Officer – Downer Mining, no KMP received an STI payment for 2011 performance as the 90 per cent of EBIT gateway test was not met. The Chief Executive Officer – Downer Asia also received an STI payment having passed the EBIT gateway test. 16 downer edI LImIted DIRECTORS’ REPORT for the year ended 30 June 2011 5.4 LonG-term InCentIve 5.4.1 LTI OVERVIEW Executives participate in an LTI plan. This is an equity-based plan that provides for a reward that varies with Company performance over three year measures of performance. Three year measures of performance are considered to be the maximum reasonable time period for setting incentive targets for earnings per share. The payment is in the form of restricted shares. The shares are purchased and held in a trust. This allows the Company to align the timing of its tax deduction with the impact on cash flow. Dividends on the shares held in trust are distributed to executives, prior to any vesting of the shares. Directors note that these dividends are proportional to profit, which reinforces the focus on performance and alignment with the interests of shareholders provided by this form of remuneration. From the 2011 LTI plan onwards, the Board has resolved not to distribute dividends on shares held in trust during the performance measurement and service periods. Accumulated dividends will be distributed to executives after all vesting conditions have been met. The 2011 LTI represents an entitlement to ordinary shares subject to satisfaction of both a performance condition and a continued employment condition. Grants are in two equal tranches, with each tranche subject to an independent performance requirement. The performance requirements for both tranches share two common features: 1. once minimum performance conditions are met, the proportion of shares that qualifies for vesting gradually increases pro rata with performance. This approach avoids “cliff” vesting, where a large proportion of reward either vests or does not vest either side of a minimum performance requirement. This approach reduces the incentive for excessive risk taking; and 2. the maximum reward is capped at a ‘stretch’ performance level that is considered attainable without excessive risk taking. Performance for the 2011 LTI grants is measured over the three year period to 31 December 2013. The Board is of the view that with STI assessed at the end of the financial year, assessing LTI at the end of the calendar year reduces risk because: – incentive rewards are contingent on different measurement dates. This reduces the likelihood of excessive risk taking because attempts to maximise reward at one point in the year could adversely affect incentive reward outcomes at the next measurement point; and – the risk of executive turnover is reduced given that incentives do not all vest at one time in the year. The proportion of shares that can vest will be calculated in February 2014, but executives must remain in service until 31 December 2014, (or, but for payment in lieu of notice, would have remained in service until 31 December 2014) before they receive any shares. This additional service requirement is to further enhance Company risk management by: – encouraging retention; – allowing discovery of any factors that could contribute to financial restatement that may result in forfeiture of reward; – allowing for a review of executive behaviours to ensure they have complied with the Company’s ethical and risk management guidelines and standards of business conduct; and – maintaining shareholder alignment for a longer period. After vesting, the shares remain in trust and are subject to a trading restriction that is governed by the Remuneration Committee. The Remuneration Committee considers requests to lift the trading restriction after reviewing executive compliance with insider trading policy guidelines. All vested and unvested shares held in the trust will be forfeited if the Board determines that an executive has committed an act of fraud, defalcation or gross misconduct or in other circumstances specified by the Board. 5.4.2 PERFORMANCE REQUIREMENTS One tranche of restricted shares in the 2011 LTI grant qualifies for vesting subject to performance relative to other companies, while the other tranche of restricted shares qualifies for vesting subject to an absolute performance requirement. The relative performance requirement is based on total shareholder return (TSR). TSR is calculated as the difference in share price over the performance period, plus the value of shares earned from reinvesting dividends received over this period, expressed as a percentage of the share price at the beginning of the performance period. If the TSR for each company in the comparator group is ranked from highest to lowest, the median TSR is the percentage return to shareholders that exceeds the TSR for half of the comparison companies. The 75th percentile TSR is the percentage return required to exceed the TSR for 75 per cent of the comparison companies. Shares in the tranche to which the relative TSR performance requirement applies vest pro rata between the median and 75th percentile. That is, 0 per cent of the tranche vest at the 50th percentile, 4 per cent at the 51st percentile, 8 per cent at the 52nd percentile and so on until 100 per cent vest at the 75th percentile. The comparator group for the 2011 LTI grant is the companies, excluding financial services companies, in the ASX100 index as at the start of the performance period on 1 January 2011. Consideration was given to using a smaller group of direct competitors for customers, however: – this was considered not to represent all competitors for capital and executives; – limiting the comparator group to a small number of direct competitors could result in very volatile outcomes from period to period, which may have unintended behavioural consequences impacting risk; and – management’s strong focus on improving the Company’s ranking among ASX100 companies has become embedded in Company culture, so reinforcing this rather than trying to dislodge it with another focus is considered desirable. The absolute performance requirement applicable to the other tranche of shares is based on EPS growth over the three year performance period to 31 December 2013. The EPS measure conforms to AASB 133 Earnings per Share and is externally audited. annuaL report 2011 17 DIRECTORS’ REPORT for the year ended 30 June 2011 The tranche of shares dependent on the EPS performance condition vests pro rata between 6 per cent compound annual EPS growth and 12 per cent compound annual EPS growth. The minimum EPS growth hurdle was set by reference to a higher earnings hurdle that excludes the impact of announced profit write-downs, while the maximum reflects the maximum projected in long-term strategic plans approved by the Board. The graduated rate of vesting from meeting the minimum EPS growth performance requirement is more conservative than most companies that have an EPS growth performance requirement. Downer’s Directors believe that more graduated vesting provides better risk management because it reduces the tendency for excessive risk taking stemming from executives having very significant difference in reward outcomes either side of a performance “cliff”. Likewise, capping maximum reward outcomes at 12 per cent annual compound EPS growth reduces the tendency for excessive risk taking and volatility that may be encouraged if the annual compound EPS growth bar is set above 12 per cent. 5.4.3 POST-VESTING SHAREHOLDING GUIDELINE The Managing Director, Chief Executive Officer – Downer Australia and Chief Financial Officer are required to continue holding shares after they have vested until the shareholding guideline has been attained. This guideline requires that they hold vested performance shares equal in value to 100 per cent of their fixed remuneration. The Remuneration Committee has discretion to allow variations from these guideline requirements in exceptional circumstances. The guideline requirement policy has been developed to reinforce alignment with shareholder interests. 5.4.4 CHANGES FROM PRIOR PERIOD The 2011 LTI plan differs from the 2010 LTI plan in two ways: – dividends accrued on unvested shares are only paid out after all vesting conditions have been met for the shares that vest. Otherwise, excess dividends are returned to the Company or used to acquire additional shares on market for employee equity plans. Directors authorised this change as a result of feedback from stakeholders; and – financial services companies are excluded from the relative TSR ASX100 comparison group of companies. The Board considered this appropriate given that the financial services sector is subject to an additional regulatory regime to other ASX100 companies, impacting their comparability for relative performance assessment. 5.4.5 LTI TABULAR SUMMARY The following table outlines the major features of the 2011 LTI plan. Purpose of LTI plan – Focus performance on drivers of shareholder value over three year period; – Manage risk by countering any tendency to overemphasise short-term performance to the detriment of longer-term growth and sustainability; and – Ensure a part of remuneration costs varies with the Company’s longer-term performance. Maximum value of equity that can be granted – Managing Director: 100 per cent of fixed remuneration. – Other executives appointed pre-2011: 75 per cent of fixed remuneration. – Other executives appointed in 2011: 50 per cent of fixed remuneration. Performance period Performance assessed 1 January 2011 to 31 December 2013. February 2014. Additional service period after performance period for shares to vest Shares for which the relevant performance vesting condition is satisfied will not vest unless executives remain employed with the Group on 31 December 2014. Shares vest Payment vehicle Performance conditions 18 downer edI LImIted 1 January 2015. Restricted shares. There are two performance conditions. Each applies to half the shares granted to each executive. relative tSr The relative total shareholder return (TSR) performance condition is based on the Company’s total shareholder return (TSR) performance relative to the TSR of companies comprising the ASX100 index, excluding financial services companies, at the start of the performance period, measured over the three years to 31 December 2013. DIRECTORS’ REPORT for the year ended 30 June 2011 Performance conditions – continued The performance vesting scale applicable to the shares subject to the relative TSR test is: downer edI Limited’s tSr ranking per cent of shares subject to tSr condition that qualify for vesting 50th percentile or less 0 per cent Above 50th and below 75th percentile Pro rata so that 4 per cent of the restricted shares in the tranche vest for every one percent increase between the 50th percentile and 75th percentile 75th percentile and above 100 per cent epS growth The earnings per share (EPS) growth performance condition is based on the Company’s compound annual EPS growth over the three years to 31 December 2013. The performance vesting scale applicable to the shares subject to the EPS growth test is: downer edI Limited’s epS compound annual growth per cent of shares subject to epS condition that qualify for vesting <6 per cent 0 per cent 6 per cent to <12 per cent 16.67 per cent of the restricted shares in the tranche vest for every one percent increase in EPS growth between 6 per cent and 12 per cent, on a pro rata basis 12 per cent or more 100 per cent Are shares acquired on-market or newly issued? Shares are normally acquired on-market and placed in trust to: Treatment of dividends and voting rights on restricted shares Restriction on hedging Restriction on trading New recruits Terminating executives Change of control – minimise dilution; and – obtain a tax deduction aligned with the cash flow being incurred. For the 2011 LTI grant, there were sufficient forfeited shares in the scheme to cover the allocation to executives. Dividends are received by the trust. The trust either uses dividends to acquire additional shares or distributes to executives the dividends that accrued during the vesting period on shares that vest, when they vest. Hedging of entitlements under the plan is not permitted. Vested shares may only be released from the trust with the approval of the Remuneration Committee. Approval requires that trading comply with the Company’s Securities Trading Policy. New executives (either new starts or promoted employees) are eligible to participate in the LTI on the first grant date applicable to all executives after they commence in their position, with an additional pro rata entitlement if their employment commenced after the grant date in the prior calendar year. All shares in the 2011 LTI grant will be forfeited where an executive’s employment terminates prior to 31 December 2014 (unless, but for payment in lieu of notice, the executive would have remained in service until 31 December 2014). Providing at least 12 months of the grant’s performance period have elapsed, unvested shares pro rated with the elapsed service period are tested for vesting with performance against the relevant relative TSR or EPS growth requirements for that relevant period. Shares that have already been tested, have met performance requirements and are subject to the completion of the service condition, fully vest. The Board retains the right to vary from policy in exceptional circumstances. However, any variation from policy and the reasons for it will be disclosed. annuaL report 2011 19 DIRECTORS’ REPORT for the year ended 30 June 2011 There have been three variations from policy during this financial period: The named persons held their current position for the whole of the most recent financial year, except as noted: – The Board decided to include approval of the 2012 LTI grant for the Managing Director in the business of the 2011 AGM; – Kevin Fletcher was appointed Chief Financial Officer on 2 November 2010. In his previous role with the company, Mr Fletcher was entitled to a maximum STI of 100 per cent and maximum LTI of 75 per cent. The Board used its discretion to maintain these participation levels for Mr Fletcher upon his appointment to his new role. External benchmarking confirms that Mr Fletcher’s total remuneration package is in line with market levels; and – Under a fixed term contractual arrangement, David Cattell will not receive grants for 2011 and 2012 under the LTI plan. For further detail see section 7.1. P Borden C Bruyn D Cattell S Cinerari K Fletcher (Chief Executive Officer – Downer Rail, appointed 1 November 2010, Acting Chief Executive Officer – Downer Rail, 1 July 2010 to 31 October 2010) (Chief Executive Officer – Downer New Zealand and United Kingdom) (Chief Executive Officer – Downer Australia, appointed 22 February 2011, Chief Operating Officer 1 July 2010 to 21 February 2011) (Chief Executive Officer – Downer Works Australia) (Chief Financial Officer, appointed 2 November 2010, Acting Chief Financial Officer, 30 July 2010 to 1 November 2010) E Kolatchew (Chief Executive Officer – Downer Engineering, resigned 21 February 2011) D Overall (Chief Executive Officer – Downer Mining) Certain employees have been included in this report as they were among the five highest remunerated employees of the Group or the parent entity. The named persons held their current position for the whole of the most recent financial year, except as noted: S Dodds R Moffat P Reidy (Chief Executive Officer – Downer Asia) (Executive General Manager – Investor Relations) (Chief Strategy & Growth Officer – Downer Australia, appointed 3 March 2011, Chief Executive Officer – Emerging Sectors, 1 July 2010 to 2 March 2011) 6. DETaIlS Of DIRECTOR anD ExECuTIvE REmunERaTIOn 6.1 dIreCtorS and exeCutIveS The following persons acted as Directors of the Company during or since the end of the most recent financial year: R M Harding (Chairman, appointed 3 November 2010, Deputy Chairman, 1 July 2010 to 2 November 2010) P E J Jollie AM (Chairman, resigned 3 November 2010) G A Fenn (Managing Director and Chief Executive Officer, appointed 30 July 2010, Finance Director and Chief Financial Officer, 1 July 2010 to 29 July 2010) G H Knox (Managing Director and Chief Executive Officer, resigned 30 July 2010) S A Chaplain L Di Bartolomeo J S Humphrey C J S Renwick AM (resigned 9 December 2010) C G Thorne The term “executives” applies to key management personnel (KMP) who are not Non-executive Directors. 20 downer edI LImIted DIRECTORS’ REPORT for the year ended 30 June 2011 6.2 remuneratIon reCeIved In reLatIon to the 2011 fInanCIaL year Executives receive a mix of remuneration during the year, comprising fixed remuneration, an STI paid in cash and an LTI in the form of restricted shares that vest four or five years later, subject to meeting performance and continued employment conditions. The table below lists the remuneration actually received in relation to the 2011 financial year, comprising fixed remuneration, STIs relating to 2011 and the value of LTI grants that vested during the 2011 financial year. This information differs to that provided in the statutory remuneration table at section 6.3 which has been prepared in accordance with accounting standards. Bonus paid or payable in respect of current year $ Fixed remuneration 1 $ Termination benefits $ Total cash payments $ Equity that vested during 20112 $ Total remuneration received $ Non-executive Directors R M Harding P E J Jollie S A Chaplain L Di Bartolomeo J S Humphrey C J S Renwick C G Thorne KMP executives G Fenn G Knox P Borden C Bruyn D Cattell S Cinerari K Fletcher E Kolatchew D Overall Other named executives S Dodds R Moffat P Reidy Total 344,883 139,953 201,650 208,284 163,500 89,925 183,493 1,741,419 342,937 740,465 616,384 1,651,505 651,056 733,599 872,274 917,414 778,817 563,746 833,261 – – – – – – – – – – – – – – – 702,644 523,939 – – – – – – – – – – 344,883 139,953 201,650 208,284 163,500 89,925 183,493 – – – – – – – 1,741,419 301,167 2,000,000 2,342,937 1,130,010 – – – – – 865,479 – – – – 740,465 616,384 1,651,505 651,056 733,599 1,737,753 1,620,058 1,302,756 563,746 833,261 – 134,785 601,645 156,445 – – 398,928 144,410 216,853 239,442 344,883 139,953 201,650 208,284 163,500 89,925 183,493 2,042,586 3,472,947 740,465 751,169 2,253,150 807,501 733,599 1,737,753 2,018,986 1,447,166 780,599 1,072,703 11,774,565 1,226,583 2,865,479 15,866,627 3,323,685 19,190,312 1 2 fixed remuneration comprises salary and fees, non-monetary benefits and superannuation payments. represents the value of restricted shares granted in previous years that vested during the year, calculated as the number of restricted shares that vested multiplied by the closing market price of downer shares on the vesting date. annuaL report 2011 21 DIRECTORS’ REPORT for the year ended 30 June 2011 6.3 remuneratIon of dIreCtorS, key manaGement perSonneL and top fIve paId exeCutIveS 2011 Short-term employee benefits Post-employment benefits Bonus paid or payable in respect of current year Non- monetary Super- annuation $ Termina- tion benefits $ Salary and fees $ Non-executive Directors R M Harding6 P E J Jollie1 S A Chaplain3 L Di Bartolomeo4 J S Humphrey C J S Renwick1,5 C G Thorne7 KMP executives G Fenn G Knox9 P Borden12 C Bruyn D Cattell10 S Cinerari K Fletcher1 E Kolatchew1,8 316,406 110,897 159,987 191,086 150,000 82,500 168,342 1,563,134 342,937 681,667 539,321 1,554,232 561,067 710,416 832,768 28,477 29,056 41,663 17,198 13,500 7,425 15,151 163,086 15,199 $ – – – – – – – – – – – – – – – $ – – – – – – – – 33,798 65,588 72,273 52,209 266 – D Overall 887,897 702,644 17,415 Other named executives11 S Dodds12 R Moffat P Reidy12 625,000 525,000 551,666 523,939 128,817 – – 13,746 256,595 Share- based payment trans- actions2 $ – – – – – – – Subtotal $ 344,883 139,953 201,650 208,284 163,500 89,925 183,493 Total $ 344,883 139,953 201,650 208,284 163,500 89,925 183,493 1,741,419 1,308,314 3,049,733 – – – – – – – – – 2,000,000 2,342,937 (1,306,996) 1,035,941 25,000 11,475 25,000 37,780 22,917 39,506 12,102 25,000 25,000 25,000 – – 740,465 22,986 763,451 616,384 125,087 741,471 550,877 2,202,382 747,983 2,950,365 – – 651,056 154,595 805,651 733,599 65,155 798,754 865,479 1,737,753 20,102 1,757,855 – – – – 1,620,058 255,274 1,875,332 1,302,756 165,324 1,468,080 563,746 833,261 270,950 834,696 279,198 1,112,459 10,554,323 1,226,583 803,793 416,449 3,416,356 16,417,504 2,107,972 18,525,476 1 2 3 4 5 6 amounts represent the payments relating to the period during which the individuals were key management personnel. represents the value of vested and unvested equity expensed during the period, in accordance with aaSB 2 Share-based payment, related to grants made to the executive. vesting of the majority of securities remains subject to significant performance and service conditions as outlined in sections 5.4.1 and 5.4.2. S a Chaplain: comprised of $150,000 Board fee and $35,000 audit Committee chair fee. an amount of $25,013 was salary sacrificed into superannuation. L di Bartolomeo: fees comprise payment of $165,000 for services rendered to downer ($150,000 Board fee, $15,000 remuneration Committee chair fee) and $26,086 for services rendered to reliance rail. C J S renwick: comprised of $75,000 Board fee and $7,500 Zero harm Committee chair fee. r m harding: comprised of $311,311 Board fee and $5,095 risk Committee chair fee. 7 C G thorne: comprised of $150,000 Board fee, $9,905 risk Committee chair fee and $8,437 Zero harm Committee chair fee. 8 9 e kolatchew (resigned as Chief executive officer – downer engineering on 21 february 2011). Salary and fees includes payment for accrued annual leave of $45,917 and payment of $250,000 for the final instalment of sign-on payment. the termination payment was awarded in accordance with the terms of mr kolatchew’s employment contract. G knox (resigned 30 July 2010). Salary and fees includes payment for accrued annual leave entitlements of $176,270. the termination payment was awarded in accordance with the terms of mr knox’s employment contract. Share-based payments includes reversal of expense for forfeited equity incentives. 10 d Cattell: includes $104,470 cash-in of annual leave. termination benefits represents the accrual of cash benefits payable at the end of mr Cattell’s fixed term contract. 11 disclosure has been made due to the executive being one of the five highest remunerated employees of the consolidated group or parent entity. 12 due to the nature of the downer business, non-monetary benefits include living away from home expenses. 22 downer edI LImIted DIRECTORS’ REPORT for the year ended 30 June 2011 2010 Short-term employee benefits Post-employment benefits Bonus paid or payable in respect of current year Non- monetary Super- annuation Termina- tion benefits Salary and fees $ Non-executive Directors $ – – – – – - – 375,000 113,500 43,548 216,250 168,750 185,000 165,000 1,958,333 1,275,000 519,987 249,845 1,435,000 382,500 573,848 211,663 727,955 255,000 506,322 – 705,784 432,289 $ – – – – - – – 56,066 51,588 40,000 24,153 4,259 187 29,018 – P E J Jollie S A Chaplain P R Coates1 L Di Bartolomeo5 R M Harding6 J S Humphrey7 C J S Renwick8 Executives G Knox C Bruyn D Cattell S Cinerari G Fenn1,3 W Nolan1,9 D Overall G Wannop E Kolatchew1,4 637,150 203,184 666,925 172,610 71,367 Other named executives10 D O’Reilly P Reichler 750,000 224,400 – 804,820 305,388 12,881 Share- based payment trans- actions2 $ – – – – – – – Subtotal $ 408,750 163,500 47,467 235,713 183,938 201,650 179,850 Total $ 408,750 163,500 47,467 235,713 183,938 201,650 179,850 3,331,066 1,797,808 5,128,874 833,607 105,768 939,375 1,882,500 795,929 2,678,429 834,664 998,060 122,766 957,430 733,614 1,731,674 $ – – – – – – – – – – – – – 867,618 3,718 871,336 800,000 1,354,518 (694,006) 660,512 – – – – 1,174,624 265,018 1,439,642 943,977 472,171 1,416,148 1,024,400 491,141 1,515,541 1,173,089 491,141 1,664,230 $ 33,750 50,000 3,919 19,463 15,188 16,650 14,850 41,667 12,187 25,000 25,000 10,846 27,097 19,178 36,551 33,075 50,000 50,000 1 2 3 4 5 6 7 8 9 10,553,172 3,711,879 289,519 484,421 800,000 15,838,991 4,585,068 20,424,059 amounts represent the payments relating to the period during which the individuals were key management personnel. represents the value of vested and unvested equity expensed during the period, in accordance with aaSB 2 Share-based payment, related to grants made to the executive. vesting of the majority of securities remains subject to significant performance and service conditions as outlined in sections 5.4.1 and 5.4.2. G fenn (commenced 6 october 2009). Share based payment transactions includes $663,966 in relation to sign on grants of 250,525 restricted shares. e kolatchew (appointed Chief executive officer – downer engineering on 11 January 2010). Salary and fees includes sign-on payment of $250,000. L di Bartolomeo: fees comprise payment of $156,250 for services rendered to downer ($150,000 Board fee, $6,250 remuneration Committee chair fee) and $60,000 for services rendered to reliance rail. r m harding: comprised of $150,000 Board fee and $18,750 risk Committee chair fee (being $15,000 in relation to the 2010 financial year and $3,750 in relation to 2009 financial year). J S humphrey: comprised of $150,000 Board fee and $35,000 audit Committee chair fee. C J S renwick: comprised of $150,000 Board fee and $15,000 Zero harm Committee chair fee. w nolan (resigned 27 october 2009). Salary and fees includes payment for accrued annual leave entitlements of $145,664 and long service leave of $110,702. the termination payment was awarded in accordance with the terms of mr nolan’s employment contract. Share based payments includes reversal of expense for forfeited equity incentives. 10 disclosure has been made due to the executive being one of the five highest remunerated employees of the consolidated group or parent entity. annuaL report 2011 23 DIRECTORS’ REPORT for the year ended 30 June 2011 6.4 performanCe reLated remuneratIon The table below lists the proportions of remuneration paid during the year ended 30 June 2011 that are performance and non-performance related. Performance Related Non-Performance Related KMP executives G Fenn1 G Knox1 P Borden1 C Bruyn1 D Cattell1 S Cinerari1 K Fletcher E Kolatchew1 D Overall Other executives S Dodds1 R Moffat1 P Reidy1 43% (126%) 3% 17% 25% 19% 8% 1% 51% 47% 32% 25% 57% 226% 97% 83% 75% 81% 92% 99% 49% 53% 68% 75% 1 performance related portion includes the reversal of expense for forfeited equity incentives. Weightings applied to the 2011 STI scorecard measures for senior executives are set out in the table below. Executive Corporate Business unit EBIT 40% Operational cash flow 20% 40% (10% Group, 30% business unit) 20% (5% Group, 15% business unit) Zero Harm 30% 30% People 10% 10% The Zero Harm element of the scorecard comprised measures as follows: Measure Target TRIFR (total recordable injury frequency rate) Achieve a set reduction in the TRIFR at level of responsibility. Award pro rates linearly from 0-100 per cent. LTIFR (lost time injury frequency rate) Achieve a set reduction in the LTIFR at level of responsibility. Award pro rates linearly from 0-100 per cent. Sustainable development Development of an environmental sustainability plan. Specific STI financial and commercial targets at business unit and corporate levels remain commercially sensitive and so have not been reported. In order for an STI to be paid, a minimum of 90 per cent of the budgeted profit target must be met. For corporate executives, the hurdle is 90 per cent of the Group budgeted profit target. For business unit executives, the hurdle is 90 per cent of the business unit budgeted profit target. Profit for this purpose is defined as Earnings Before Interest and Tax expense (EBIT). The corporate and business unit EBIT results were less than 90 per cent of the target EBIT for all but the Mining Division and Asia business units. Therefore no STI payments under the plan were made to KMP except to the Chief Executive Officer – Downer Mining. The Chief Executive Officer – Downer Asia also received an STI payment. 24 downer edI LImIted DIRECTORS’ REPORT for the year ended 30 June 2011 The following table shows the performance achieved by the Chief Executive Officer – Downer Mining and Chief Executive Officer – Downer Asia. Executive EBIT Operational cash flow Zero Harm People Chief Executive Officer – Downer Mining Business Unit achieved above target, below stretch – 98 per cent awarded. Business Unit achieved above target, below stretch – 92 per cent awarded. Chief Executive Officer – Downer Asia1 Group target not achieved – 0 per cent awarded. Group target not achieved – 0 per cent awarded. Business Unit achieved above target, below stretch – 85 per cent awarded. Group target not achieved – 0 per cent awarded. Business Unit stretch target achieved – 100 per cent awarded. Group target not achieved – 0 per cent awarded. Achieved above target, below stretch – 92 per cent awarded. Safety stretch targets achieved. Environmental target achieved. 87 per cent awarded. Stretch targets achieved. Stretch target achieved. 100 per cent award achieved. 100 per cent award achieved. 1 the downer asia business was restructured during the year. targets were adjusted to reflect the restructured business and these targets were achieved as indicated. The following table shows the STIs that were earned during the year ended 30 June 2011 due to the achievement of the relevant performance targets. Short Term Incentive in respect of 2011 financial year Paid Forfeited KMP executives G Fenn G Knox P Borden C Bruyn D Cattell S Cinerari K Fletcher E Kolatchew D Overall Other executives S Dodds R Moffat P Reidy 0% 0% 0% 0% 0% 0% 0% 0% 78% 81% 0% 0% 100% 100% 100% 100% 100% 100% 100% 100% 22% 19% 100% 100% annuaL report 2011 25 DIRECTORS’ REPORT for the year ended 30 June 2011 The table below summarises LTI performance measures tested and the outcomes for each executive. Relevant executives Relevant LTI measure Performance outcome % LTI tranche that vested P Borden, C Bruyn, D Cattell, S Cinerari, S Dodds, R Moffat, P Reidy P Borden, C Bruyn, D Cattell, S Cinerari, S Dodds, R Moffat, P Reidy 2006 Plan Percentile ranking of Downer’s TSR relative to the constituents of the ASX100 over a four-year period. 2006 Plan Compound annual EPS growth hurdles, with reference to the average Australian Commonwealth Government three-year bond yield, over a three year period. D Cattell, R Moffat, D Overall, P Reidy 2008 Plan Share price hurdle. G Fenn, C Bruyn, D Cattell, S Cinerari, S Dodds, R Moffat, D Overall, P Reidy Tranche 2 of 3 in 2009 plan Percentile ranking of Downer’s TSR relative to the constituents of the ASX100 over a one year period. Actual performance ranked at the 30th percentile. 0 per cent. Vesting range required compound annual EPS growth of 8.0 per cent to 10.5 per cent. Actual performance was (62.8) per cent. The vesting range was $10 to $12.50. The actual share price was $4.68. Actual performance ranked at the 10th percentile. 0 per cent. 0 per cent. The shares are subject to a final re-test. 0 per cent became provisionally qualified. The tranche is subject to a single re-test. 6.5 Share-BaSed paymentS 6.5.1 RESTRICTED SHARES The table below shows the number of restricted shares granted and percentage of restricted shares that vested or were forfeited during the year for each grant that affects compensation in this or future reporting periods. 2008 plan 2009 plan 2010 plan Number of Shares (share price hurdle)1 – 1,600,000 – – 387,500 – – – KMP executives G Fenn G Knox4 P Borden C Bruyn D Cattell S Cinerari K Fletcher E Kolatchew – 15% – – 8% – – – D Overall 270,000 14% Other executives S Dodds R Moffat P Reidy 175,000 175,000 – 8% 8% % vested % forfeited Number of shares2 % vested % forfeited Number of shares3 % vested % forfeited – 444,825 15% – 95,410 60% 518,135 – 86,957 291,451 100,932 – – – – 33% 33% 33% – – 145,726 33% 93,168 97,150 111,724 33% 33% 33% – – – – – – – – – – 100% 254,427 – – – – – – – – – – 31,803 53,430 143,115 62,017 77,309 85,869 71,558 62,017 52,476 54,861 – – – – – – – – – – – – – 100% – – – – – 100% – – – – 1 2 3 Grant date 29 april 2008 except for d overall (27 January 2009). all shares with eBIt and cash flow hurdles have vested in prior years and are not disclosed in the table. Grant date 1 april 2009 except for C Bruyn and S Cinerari (12 June 2009) and G fenn (332,258 30 June 2009, 112,567 27 January 2010). Grant date 11 June 2010 (except for an additional 27,696 shares granted to kevin fletcher on 2 november 2010). the fair value of shares granted was $4.46 per share for the epS tranche and $1.46 per share for the tSr tranche. the fair value of the additional grants to kevin fletcher was $5.17 per share for the epS tranche and $1.87 for the tSr tranche. 4 G knox resigned on 30 July 2010. 956,987 shares in the 2008 plan, 518,135 shares in the 2009 plan and 254,427 in the 2010 plan forfeited. 26 downer edI LImIted DIRECTORS’ REPORT for the year ended 30 June 2011 2011 Plan Managing Director 30 July 2011 Number of shares1 % vested % forfeited Number of shares2 % vested % forfeited 300,000 – 33% KMP executives G Fenn P Borden C Bruyn D Cattell S Cinerari K Fletcher D Overall Other executives S Dodds R Moffat P Reidy 480,205 86,704 130,055 – 130,055 160,068 180,077 130,055 – 115,049 – – – – – – – – – – – – – – – – – – – – 1 2 Grant date 21 June 2011. the fair value of shares granted was $3.72 per share for the epS tranche and $1.99 per share for the tSr tranche. Grant date 30 July 2010. the fair value of shares granted was $4.97 per share. In lieu of a pro rata grant of LTI shares on his appointment to the position of Managing Director, Grant Fenn was granted 300,000 restricted shares with performance hurdles linked to milestones for the Waratah train project. The first tranche of 100,000 shares with vesting contingent on meeting contract delivery obligations for the practical completion of the first Waratah train in December 2010 was not attained, and this tranche, representing 33 per cent of the grant, forfeited. None of the shares vested. The fair value of these grants made on 30 July 2010 was $4.97 per share. See section 7 for further detail on these grants. The maximum number of restricted shares that may vest in future years that will be recognised as share-based payments in future years is set out in the table below. 2011 2012 2013 2014 2015 KMP executives G Fenn G Knox P Borden C Bruyn D Cattell S Cinerari K Fletcher D Overall Other executives S Dodds R Moffat P Reidy 315,292 572,712 – 28,986 176,317 33,644 – 103,575 31,056 67,383 72,241 64,767 572,712 – 28,986 226,316 33,644 – 108,575 31,056 90,715 95,573 164,766 372,711 – 28,985 390,266 33,644 – 138,576 31,056 79,051 83,909 295,410 254,427 31,803 53,430 – 62,017 77,309 131,558 62,017 75,810 78,195 480,205 – 86,704 130,055 – 130,055 160,068 210,077 130,055 – 115,049 annuaL report 2011 27 DIRECTORS’ REPORT for the year ended 30 June 2011 The maximum value of restricted shares that may vest in future years that will be recognised as share-based payments in future years is set out in the table below. The amount reported is the value of share based payments calculated in accordance with AASB 2 Share-based Payment over the vesting period. 2011 2012 2013 2014 2015 KMP executives G Fenn G Knox P Borden C Bruyn D Cattell S Cinerari K Fletcher E Kolatchew D Overall Other executives S Dodds R Moffat P Reidy 1,496,831 1,272,998 28,383 150,789 784,286 174,560 65,155 71,459 255,274 165,324 282,832 299,110 739,133 808,696 96,687 231,651 561,843 251,968 201,780 71,647 338,337 244,661 197,766 302,202 589,341 447,461 96,375 192,492 242,208 206,561 201,154 71,320 277,107 202,707 112,144 211,965 460,626 162,468 83,304 140,808 29,916 146,572 165,495 36,027 199,664 145,371 39,881 135,280 195,329 – 35,268 52,901 – 52,901 65,109 – 75,214 52,901 – 46,797 6.5.2 optIonS and rIGhtS No performance options or rights were granted or exercised during the year ended 30 June 2011. Grants of performance rights and performance options made to executives during the year ended 30 June 2007 were re-tested during the year. All performance rights and performance options lapsed as a result of failing the test. There are no performance rights or performance options outstanding. 7. kEy TERmS Of EmPlOymEnT COnTRaCTS 7.1 notICe and termInatIon paymentS All executives are on contracts with no fixed end date. The following table captures the notice periods applicable to termination of the employment of KMPs. Termination notice period by Downer Termination notice period by employee Termination payments payable under contract Managing Director* Other executives 12 months 12 months 6 months 6 months 12 months 12 months * refers to Grant fenn. details for Geoff knox are provided below. There has been one variation from policy during this financial period: – A fixed term contract was entered into on 16 August 2010 with David Cattell to ensure management continuity following the departure of Mr Knox. That contract ends on 1 January 2013. Subject to legislative requirements, Mr Cattell will be entitled to the following benefits at the end of the contract period: statutory leave entitlements, a cash payment equivalent to 12 months fixed remuneration, a pro rata STI payment based on performance and vesting of restricted shares granted to Mr Cattell that have met their performance conditions. As a result of these entitlements, Mr Cattell is not eligible to receive grants under LTI plans for 2011 and 2012. Termination payments are calculated based upon total fixed remuneration at the date of termination. No payment is made for termination due to gross misconduct. Termination payments in addition to statutory payments made to KMPs during 2011 are set out in the table below. Name Geoff Knox Eric Kolatchew Position Date of termination Payment in lieu of notice Managing Director 30 July 2010 Chief Executive Officer – Downer Engineering 21 February 2011 $2,000,000 $865,479 28 downer edI LImIted DIRECTORS’ REPORT for the year ended 30 June 2011 7.2 manaGInG dIreCtor and ChIef exeCutIve offICer of downer’S empLoyment aGreement Mr Fenn was appointed as the Managing Director and Chief Executive Officer of Downer commencing on 30 July 2010. Mr Fenn’s contract will continue until terminated by either party under the terms of the employment agreement as summarised below. Mr Fenn is eligible to participate in the annual LTI plan and the value of the award is 100 per cent of fixed remuneration calculated using the volume weighted average price after each year’s half yearly results announcement. Mr Fenn’s performance requirements have been described in section 5. Mr Fenn’s remuneration comprises fixed and variable components. The initial fixed remuneration is $1.8 million per annum. This amount includes superannuation contributions and non-cash benefits and excludes Mr Fenn’s home telephone rental and call costs, home internet costs and medical health, life and salary continuance insurance. Mr Fenn may also be accompanied by his wife when travelling on business, at the Chairman’s discretion. There was no such travel during the year. It is reviewable annually in accordance with Downer’s policies. Mr Fenn was granted 250,525 shares as a sign-on payment with a two year employment condition to 30 June 2011 on his appointment as Chief Financial Officer in 2009. These shares vested on 1 July 2011. Mr Fenn is eligible to receive an annual STI and the maximum STI opportunity is 100 per cent of fixed remuneration. Any entitlement to an STI is at the discretion of the Board, having regard to performance measures and targets developed in consultation with Mr Fenn including Downer’s financial performance, safety, environmental and sustainability targets and adherence to risk management policies and practices. The Board also retains the right to vary the STI by + or – 15 per cent (up to the 100 per cent maximum) based on its assessment of performance. Mr Fenn’s performance requirements have been described in section 5. There is no STI entitlement where the Managing Director’s employment terminates prior to the end of the financial year, other than in the event of a takeover or by mutual agreement. Mr Fenn was also eligible to receive key milestone incentives on a once-only basis in lieu of an LTI grant pro rated with service as Managing Director for calendar 2010. These milestones are over and above the STI operating and financial objectives, and are considered to be sufficiently critical to shareholder value to warrant special STI treatment on a one-off basis. As part of these special milestone incentives, a grant of 100,000 shares in Downer was made to Mr Fenn. The specific performance hurdle for this award was the practical completion of the first Waratah train by 31 December 2010. The service period prior to vesting was a further two years to 31 December 2012. As noted in section 5.3.4, above, this timing was not met and the shares forfeited. A further grant of 200,000 shares was made with a further specific performance hurdle requiring the achievement of practical completion of the first six Waratah Train Sets by 30 September 2011. The service period prior to vesting is a further 2.25 years to 31 December 2013. In the event of a change of control, providing at least 12 months of a grant’s performance period have elapsed, unvested shares pro rated with the elapsed service period are tested for vesting with performance against the relevant hurdles for that period. The specific milestone performance shares not yet tested will fully vest on a change of control. Shares that have already been tested, have met performance requirements and are subject to the completion of the service condition, fully vest. The Board retains the right to vary from policy in exceptional circumstances. Mr Fenn can resign: (a) by providing six months written notice; or (b) immediately in circumstances where there is a fundamental change in his role or responsibilities. In these circumstances, Mr Fenn is entitled to a payment in lieu of twelve months notice. Downer can terminate Mr Fenn’s employment: (a) immediately for misconduct or other circumstances justifying summary dismissal; and (b) by providing twelve months written notice. When notice is required, Downer can make a payment in lieu of notice of all or part of any notice period (calculated based on Mr Fenn’s fixed annual remuneration). If Mr Fenn resigns because ill health prevents him from continuing his duties, he will receive a payment in recognition of his past services equivalent to 12 months fixed remuneration. At the discretion of the Board, his shares under the LTI plan may also vest. If Downer terminates Mr Fenn’s employment on account of redundancy, in addition to the notice (or payment in lieu of notice) required to be given by Downer, Mr Fenn will receive a payment in recognition of his past services equivalent to 12 months fixed remuneration. If Mr Fenn resigns he will be subject to a six month post- employment restraint in any area that the Downer Group operates, where he is restricted from working for certain competitive businesses. The agreement contains provisions regarding leave entitlements, duties, confidentiality, intellectual property, moral rights and other facilitative and ancillary clauses. It also contains provisions regarding corporate governance and a provision dealing with the Corporations Act 2001 (Cth) limits on termination benefits to be made to Mr Fenn. annuaL report 2011 29 DIRECTORS’ REPORT for the year ended 30 June 2011 Mr Geoff Knox was Managing Director and Chief Executive Officer of Downer until 30 July 2010. There was no change to Mr Knox’s contract of employment in the current reporting period from the prior period. Mr Knox’s employment contract had no fixed end date. The Company could have terminated his employment with 12 months written notice or immediately with cause. Mr Knox could also have resigned by providing 12 months written notice. Mr Knox’s remuneration comprised fixed and variable components. Mr Knox’s fixed remuneration was $2 million per annum inclusive of compulsory superannuation contributions. The variable component comprised STIs and LTIs. Mr Knox was eligible for LTI rewards that have met performance requirements that are due to vest during his notice period. This meant that 243,013 shares relating to the 2008 LTI scheme that met the performance hurdle at 31 December 2009 vested on 31 December 2010. Mr Knox forfeited all remaining provisionally qualified or unvested shares in the LTI scheme relating to the 2008, 2009 and 2010 LTI schemes (1,729,549 shares). Mr Knox’s termination payment comprised a payment of $2 million, being payment in lieu of the notice period. 8. lEgaCy EquITy-BaSED REmunERaTIOn PlanS Legacy Downer equity based remuneration plans in which executives retained an interest during the reporting period are: – 2010 executive share plan; – 2009 executive share plan; and – 2008 executive share plan. Details of legacy LTI plans are set out in the table below. Plan name Type of award 2010 executive share plan Grant of restricted shares delivered in two equal tranches Re-test There is no re-test Service requirements The service condition requires that the executive remains employed at all times for a period of 12 months from 31 December in the final year of the performance period for which the performance condition is satisfied. Performance requirements Tranche 1: Percentile ranking of Downer’s TSR relative to the constituents of the ASX100 as at the beginning of the performance tests period. Tranche 2: EPS annual compound growth to be within 6 per cent to 12 per cent. The performance period for both tranches is three years. Vesting schedule Tranche 1: The measure ensures that awards vest only when Downer’s growth in shareholder value has exceeded the 50th percentile of its TSR peer group, the ASX100. Shares vest pro rata between the median and 75th percentile. That is, 4 per cent of the shares vest at the 51st percentile, 8 per cent at the 52nd percentile and so on until 100 per cent vest at the 75th percentile. Tranche 2: Pro rata from 6 per cent to 12 per cent EPS growth such that 16.67 per cent of the restricted shares in the tranche vest for every 1 per cent increase in EPS growth between 6 per cent and 12 per cent, on a pro rata basis. 30 downer edI LImIted DIRECTORS’ REPORT for the year ended 30 June 2011 Plan name Type of award Performance requirements Re-test Service requirements 2009 executive share plan Grant of restricted shares delivered in three equal tranches Percentile ranking of Downer’s TSR relative to the constituents of the ASX100 as at the beginning of the performance test period. Initial performance periods for the three tranches are 1, 2 and 3 years, respectively. Shares that do not meet the initial relative TSR test are subject to a single retest 12 months after the first test. If the performance hurdles are met at the retest, the awards will vest. Shares that do not meet the retest are forfeited. The service condition requires that the executive remains employed at all times for a period of 12 months from 31 December in the final year of the performance period for which the performance condition is satisfied. 2008 executive share plan Grant of restricted shares The service condition requires the executive to be in continuous employment for a certain period of months after the testing date. After attaining share price hurdles, service conditions apply for shares to vest, with a third of shares that pass the hurdles to vest providing the executive remains in service to the 31 December of 2012, 2013 and 2014 respectively. Two tranches of restricted shares were granted under the plan. The performance conditions for those pools are: Tranche 1: 50 per cent vests on achievement of an EBIT target and 50 per cent vests on achievement of an operating cash flow target for the year ended 30 June 2008. There is no retest for awards that vest on satisfaction of an EBIT or operating cash flow target. At the discretion of the Board, tranches of awards subject to a share price hurdle that do not meet the hurdle may be retested under the conditions of the following tranche. If the performance hurdle is met at the retest, the relevant proportion of the tranche will vest. Tranche 2: A share price hurdle as at 31 December in the relevant year. The share price is calculated as the 10-day volume weighted average price (VWAP) leading up to 31 December for each cycle. Vesting schedule The measure ensures that awards vest only when Downer’s growth in shareholder value has exceeded the 50th percentile of its TSR peer group, the ASX100. Shares vest pro rata between the median and 75th percentile. That is, 4 per cent of the shares vest at the 51st percentile, 8 per cent at the 52nd percentile and so on until 100 per cent vest at the 75th percentile. By 31 December, 2010 pro rated vesting between 0 per cent and 100 per cent for share prices from $10 to $12.50. By 31 December 2011 pro rated vesting 0 per cent to 100 per cent for a share price hurdle between $6 and $13. The latter re-test hurdle was added at the Board’s discretion due to the unforeseen impact of the global financial crisis on the overall share market. Signed in accordance with a resolution of the Directors made pursuant to section 298(2) of the Corporations Act 2001 (Cth). On behalf of the Directors R M Harding Chairman Sydney, 24 August 2011 annuaL report 2011 31 fInanCIal PERfORmanCE OvERvIEw fIve-year reCord for the year ended 30 June 2011 Five Year Record for the year ended 30 June 2011 $’000 2010 $’000 2009 $’000 2008 $’000 2007 $’000 Total revenue including other income and joint ventures and associates 6,975,104 6,055,935 5,941,391 5,587,647 5,422,157 Earnings before interest and tax (EBIT) (before significant items) 292,236 313,362 304,799 Earnings before interest and tax (EBIT) (after significant items) 25,663 53,362 304,799 281,117 281,117 280,894 128,661 Interest expense (net) Income tax expense (before significant items) Profit after tax (before significant items net of tax) (64,309) (61,540) 166,387 (51,295) (45,774) (49,171) (56,018) (60,383) (69,649) (66,104) (63,310) 201,684 189,376 165,842 161,566 Individually significant items net of tax (194,087) (198,632) – – (60,068) (Loss)/profit after tax after significant items (27,700) 3,052 189,376 165,842 101,498 Total equity Net debt 1,442,385 1,242,851 1,330,388 1,196,364 1,169,907 492,497 530,697 517,693 406,814 519,175 Total capitalisation (net debt + equity) 1,934,882 1,773,548 1,848,081 1,603,178 1,689,082 Net debt to equity Gearing ratio (net debt/total capitalisation) 34.1% 25.5% 42.7% 29.9% 38.9% 28.0% 34.0% 25.4% 44.4% 30.7% Operating cash flow 185,625 204,266 336,464 276,031 106,156 Basic (loss)/earnings per share on issue (cents) Diluted (loss)/earnings per share (cents) Closing share price (dollars) Dividends per ordinary share (cents) Net tangible asset backing per ordinary share (cents) (10.5) (10.5) $3.70 – 198.8 (2.4) (2.4) $3.60 29.1 194.1 54.4 52.7 $5.59 29.0 217.6 47.9 47.5 $6.87 25.5 190.0 31.3 31.3 $7.36 21.0 187.0 32 downer edI LImIted auDITORS’ InDEPEnDEnCE DEClaRaTIOn Deloitte Touche Tohmatsu ABN 74 490 121 060 Grosvenor Place 225 George Street Sydney NSW 2000 PO Box N250 Grosvenor Place Sydney NSW 1220 Australia DX 10307SSE Tel: +61 (0) 2 9322 7000 Fax: +61 (0) 2 9322 7001 www.deloitte.com.au The Board of Directors Downer EDI Limited Triniti Business Campus 39 Delhi Road NORTH RYDE NSW 2113 24 August 2011 Dear Directors DOWNER EDI LIMITED In accordance with section 307C of the Corporations Act 2001, I provide the following declaration of In accordance with section 307C of the Corporations Act 2001, I provide the following In accordance with section 307C of the Corporations Act 2001, I provide the following independence to the directors of Downer EDI Limited. independence to the directors of Downer EDI Limited. As lead audit partner for the audit of the financial report of Downer EDI Limited for the financial year As lead audit partner for the audit of the financial report of Downer EDI Limited for the financial year As lead audit partner for the audit of the financial report of Downer EDI Limited for the financial year ended 30 June 2011, I declare that to the best of my knowledge and belief, there have been no ended 30 June 2011, I declare that to the best of my knowledge and belief, there h ended 30 June 2011, I declare that to the best of my knowledge and belief, there h contraventions of: (i) the auditor independence requirements of the Corporations Act 2001 in relation to the the auditor independence requirements of the Corporations Act 2001 in relation to the the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (ii) any applicable code of professional conduct in relation to the audit. any applicable code of professional conduct in relation to the audit. Yours faithfully DELOITTE TOUCHE TOHMATSU DELOITTE TOUCHE TOHMATSU AV Griffiths Partner Chartered Accountants Liability limited by a scheme approved under Professional Standards Legislation. Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited Member of Deloitte Touche Tohmatsu Limited annuaL report 2011 33 COnSOlIDaTED InCOmE STaTEmEnT for the year ended 30 June 2011 Revenue from ordinary activities Finance income Other income Total revenue Employee benefits expense (i) Raw materials and consumables used (i) Subcontractor costs (i) Plant and equipment costs (i) Communication expenses Occupancy costs Professional fees Travel and accommodation expenses Other expenses from ordinary activities (i) Depreciation and amortisation Finance costs Share of net profit of joint venture entities and associates Individually significant items (Loss)/profit before income tax Income tax benefit (Loss)/profit after income tax (Loss)/profit for the year that is attributable to: – Non-controlling interest – Members of the parent entity Total (loss)/profit for the year Earnings per share (cents): – Basic (loss) per share – Diluted (loss) per share Note 3(a) 3(a) 3(a) 2011 $’000 2010 $’000 6,633,185 5,796,614 14,180 8,662 18,103 30,050 6,656,027 5,844,767 3(b) (2,218,529) (1,944,269) (1,430,507) (1,451,145) (1,344,403) (1,080,641) (763,230) (56,893) (128,737) (38,664) (85,348) (99,201) (543,370) (60,401) (99,182) (42,868) (59,266) (90,023) (210,494) (160,159) (78,489) 26,395 (69,398) 18,022 (266,573) (260,000) (38,646) 10,946 (27,700) 143 (27,843) (27,700) (10.5) (10.5) 2,067 985 3,052 95 2,957 3,052 (2.4) (2.4) 3(b) 3(b) 15(b) 4 5 7 7 (i) the 2010 balance has been restated to better reflect the nature of the costs incurred. there has been no impact on the profit before income tax as a result of these changes. The consolidated income statement should be read in conjunction with the accompanying notes on pages 40 to 111. 34 downer edI LImIted COnSOlIDaTED STaTEmEnT Of COmPREhEnSIvE InCOmE for the year ended 30 June 2011 Note (Loss)/profit after income tax Other comprehensive expense – Exchange differences arising on translation of foreign operations – Net gain on available-for-sale investments taken to equity – Net gain/(loss) on foreign currency forward contracts taken to equity(i) – Net (loss)/gain on cross currency interest rate swaps taken to equity – Amortisation of share of reserves from associates 24 – Income tax relating to components of other comprehensive income Other comprehensive expense included in equity Total comprehensive expense for the year Total comprehensive expense for the year that is attributable to: Non-controlling interest Members of the parent entity Total comprehensive expense for the year 2011 $’000 (27,700) (18,738) 3,433 10,055 (4,215) 2,801 (2,289) (8,953) (36,653) 143 (36,796) (36,653) 2010 $’000 3,052 (3,816) 333 (38,883) 2,471 2,637 10,939 (26,319) (23,267) 95 (23,362) (23,267) (i) the June 2011 balance includes $65.0 million reclassification adjustment from other comprehensive income into the profit and loss in accordance with AASB 139 Financial Instruments: Recognition and Measurement. The consolidated statement of comprehensive income should be read in conjunction with the accompanying notes on pages 40 to 111. annuaL report 2011 35 COnSOlIDaTED STaTEmEnT Of fInanCIal POSITIOn aS at 30 June 2011 ASSETS Current assets Cash and cash equivalents Inventories Trade and other receivables Other financial assets Current tax assets Other assets Total current assets Non-current assets Equity-accounted investments Property, plant and equipment Intangible assets Other financial assets Deferred tax assets Other assets Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Borrowings Other financial liabilities Provisions Current tax liabilities Total current liabilities Non-current liabilities Trade and other payables Borrowings Other financial liabilities Provisions Deferred tax liabilities Total non-current liabilities Total liabilities Net assets EQUITY Issued capital Reserves Retained earnings Parent interests Non-controlling interest Total equity Note 2011 $’000 2010 $’000 9 10 11 12 13 14 15(b) 16 17 12 13(a) 14 18 19 20 21 22 18 19 20 21 22(a) 23 24 288,575 192,568 385,126 193,138 1,312,998 1,183,878 6,078 14,312 40,961 12,708 13,765 28,787 1,855,492 1,817,402 37,354 1,055,015 589,195 30,977 137,949 4,684 1,855,174 3,710,666 1,117,726 165,121 74,629 239,659 3,866 22,410 862,076 589,414 35,954 123,280 5,464 1,638,598 3,456,000 987,266 272,167 41,513 199,414 5,012 1,601,001 1,505,372 2,812 567,665 71,715 18,809 6,279 667,280 2,268,281 1,442,385 713 617,012 39,597 27,162 23,293 707,777 2,213,149 1,242,851 1,423,897 (121,581) 139,969 1,118,675 (107,893) 231,974 1,442,285 1,242,756 100 95 1,442,385 1,242,851 The consolidated statement of financial position should be read in conjunction with the accompanying notes on pages 40 to 111. 36 downer edI LImIted COnSOlIDaTED STaTEmEnT Of ChangES In EquITy for the year ended 30 June 2011 2011 $’000 Available- for-sale investment reserve Issued capital Foreign currency translation reserve Hedge reserve Employee benefits reserve Retained earnings attributable to owners of the parent Non- controlling interest Total Balance at 1 July 2010 1,118,675 (2,816) (84,642) (39,945) 19,510 231,974 1,242,756 95 1,242,851 (Loss)/Profit after income tax Exchange differences arising on translation of foreign operations Net gain on available-for- sale investments Net gain on foreign currency forward contracts (i) Net loss on cross currency interest rate swaps Amortisation on share of reserves from associates Income tax relating to components of other comprehensive income Total comprehensive (expense)/income for the year Contributions of equity (net of transaction costs)(ii) Income tax relating to capital raising transactions costs Vested executive incentive shares transactions Share-based transactions during the year Income tax relating to share-based transactions during the year Payment of dividends (iii) – – – – – – – – 296,474 3,130 5,618 – – – Balance at 30 June 2011 1,423,897 – – 3,433 – – – – – – 10,055 (4,215) 2,801 (617) (1,672) – – (27,843) (27,843) 143 (27,700) (18,738) – – – – – – – – – – – – – – – – – (18,738) 3,433 10,055 (4,215) 2,801 (2,289) – – – – – – (18,738) 3,433 10,055 (4,215) 2,801 (2,289) 2,816 6,969 (18,738) – (27,843) (36,796) 143 (36,653) – – – – – – – – – – – – – – – – – – – – – (5,618) (2,483) 3,366 – – – – – 296,474 3,130 – (2,483) 3,366 – – – – – 296,474 3,130 – (2,483) 3,366 – (64,162) (64,162) (138) (64,300) (77,673) (58,683) 14,775 139,969 1,442,285 100 1,442,385 (i) (ii) the June 2011 balance includes $65.0 million reclassification adjustment from other comprehensive income into the profit and loss in accordance with AASB 139 Financial Instruments: Recognition and Measurement. Contributions of equity relate to shares issued as a result of Capital raising, employee Share plan and dividend re-investment plan operable for the 2010 final dividend. (iii) payment of dividends relates to 2010 final dividend, roadS dividends and minority interests dividends paid during the financial year. The consolidated statement of changes in equity should be read in conjunction with the accompanying notes on pages 40 to 111. annuaL report 2011 37 COnSOlIDaTED STaTEmEnT Of ChangES In EquITy – COnTInuED for the year ended 30 June 2011 2010 $’000 Available- for-sale investment reserve Issued capital Foreign currency translation reserve Employee benefits reserve Retained earnings attributable to owners of the parent Non- controlling interest Hedge reserve Total Balance at 1 July 2009 1,078,791 (3,053) (61,902) (36,129) 15,960 336,721 1,330,388 – 1,330,388 Profit after income tax Exchange differences arising on translation of foreign operations Loss on available-for-sale investments Net loss on foreign currency forward contracts Net gain on cross currency interest rate swaps Amortisation on share of reserves from associates Income tax relating to components of other comprehensive income Total comprehensive (expense)/income for the year – – – – – – – – Contributions of equity (net of transaction costs)(i) 41,701 Unvested executive incentive shares transactions Vested executive incentive shares transactions Share-based transactions during the year Income tax relating to share-based transactions during the year Payment of dividends (ii) (4,476) 2,659 – – – – – 333 – – – – – – (38,883) 2,471 2,637 (96) 11,035 – (3,816) – – – – – 237 (22,740) (3,816) – – – – – – – – – – – – – – – – – – – – – – – – – – – – (2,659) 6,261 (52) 2,957 2,957 95 3,052 – – – – – – (3,816) 333 (38,883) 2,471 2,637 10,939 – – – – – – (3,816) 333 (38,883) 2,471 2,637 10,939 2,957 (23,362) 95 (23,267) – – – – – 41,701 (4,476) – 6,261 (52) – (107,704) (107,704) – – – – – – 41,701 (4,476) – 6,261 (52) (107,704) Balance at 30 June 2010 1,118,675 (2,816) (84,642) (39,945) 19,510 231,974 1,242,756 95 1,242,851 (i) Contributions of equity relate to shares issued as a result of dividend re-investment plan. (ii) payment of dividends relates to 2010 interim, 2009 final dividend and roadS dividends paid for the financial year. The consolidated statement of changes in equity should be read in conjunction with the accompanying notes on pages 40 to 111. 38 downer edI LImIted COnSOlIDaTED STaTEmEnT Of CaSh flOwS for the year ended 30 June 2011 Cash flows from operating activities Receipts from customers Distributions from equity-accounted investments Dividends received from external entities Payments to suppliers and employees Interest received Interest and other costs of finance paid Income tax paid Note 15(b) Net cash inflow from operating activities 26(c) Cash flows from investing activities Proceeds from sale of property, plant and equipment Payments for property, plant and equipment Proceeds from sale and leaseback of plant and equipment Payments for intangible assets Payments for investments Proceeds from the sale of investments Advances to joint ventures Proceeds from sale of assets held for sale Advances to other entities Payments for businesses acquired Net cash (used) in investing activities Cash flows from financing activities Proceeds from borrowings Repayments of borrowings Net proceeds from issue of equity securities Dividends paid Dividend paid to non-controlling interest Net cash inflow from financing activities 25(b) Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effect of exchange rate changes Cash and cash equivalents at the end of the year 26(a) 2011 $’000 2010 $’000 7,275,150 6,206,952 12,667 701 12,708 359 (7,025,409) (5,940,048) 14,275 (73,399) (18,360) 185,625 18,327 (69,274) (24,758) 204,266 44,154 74,236 (446,010) (207,724) 82,891 (1,421) (3,948) 7,962 (3,201) – – – – (3,985) (29,323) – (666) 89,188 (33,786) (32,336) (319,573) (144,396) 972,576 (1,148,133) 270,185 (44,135) (138) 50,355 (83,593) 378,382 (12,557) 282,232 855,441 (764,183) – (66,003) – 25,255 85,125 292,223 1,034 378,382 The consolidated statement of cash flows should be read in conjunction with the accompanying notes on pages 40 to 111. annuaL report 2011 39 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 1. SummaRy Of aCCOunTIng POlICIES Statement of CompLIanCe These financial statements represent the consolidated results of Downer EDI Limited (ABN 97 003 872 848). The Financial Report is a general purpose Financial Report prepared in accordance with the Corporations Act 2001, Accounting Standards and Interpretations and complies with other requirements of the law. Accounting Standards include Australian equivalents to International Financial Reporting Standards (A-IFRS). Compliance with A-IFRS ensures that the consolidated financial statements and notes of the consolidated entity comply with International Financial Reporting Standards (IFRS). The Financial Report was authorised for issue by the Directors on 24 August 2011. roundInG of amountS The Company is a company of the kind referred to in ASIC Class Order 98/0100, dated 10 July 1998, and in accordance with that Class Order, amounts in the Directors’ Report and the Financial Report have been rounded off to the nearest thousand dollars, unless otherwise indicated. BaSIS of preparatIon The Financial Report has been prepared on a historical cost basis, except for the revaluation of certain financial instruments. Cost is based on the fair values of the consideration given in exchange for assets. The preparation of the Financial Report requires Management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, 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. Actual results may differ from these estimates. 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 if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are described below. appLICatIon of CrItICaL JudGementS and key SourCeS of eStImatIon unCertaInty The following are critical judgements that Management has made in the process of applying the Group’s accounting policies and which have the most significant effect on the amounts recognised in the financial statements: REVENUE RECOGNITION Revenue and expense are recognised in net profit by reference to the stage of completion of each identifiable component for construction contracts. 40 downer edI LImIted A fundamental condition for being able to estimate profit recognition based on percentage of completion is that project revenues and project costs can be reliably estimated. This reliability is based on such factors as compliance with the Group’s system for project control and that project management has the necessary skills. Project control also includes a number of estimates and assessments that depend on the experience and knowledge of project management in respect of project control, industrial relations, risk management, training and the prior management of similar projects. In determining revenues and expense for construction contracts, Management makes key assumptions regarding estimated revenues and expense over the life of the contracts. Where variations are recognised in revenue, assumptions are made regarding the probability that customers will approve variations and the amount of revenue arising from variations. In respect of costs, key assumptions regarding costs to complete contracts may include estimation of labour, technical costs, impact of delays and productivity. Changes in these estimation methods could have a material impact on the financial statements of Downer. CAPITALISATION OF TENDER/BID COSTS Tender/Bid costs are expensed until the Group has reached preferred bidder status and there is a reasonable expectation that the cost will be recovered. At this stage costs are capitalised. Tender/Bid costs are then expensed over the life of the contract. Where a tender/bid is subsequently unsuccessful the previously capitalised costs are immediately expensed. Tender/Bid costs that have been expensed cannot be recapitalised in a subsequent reporting period. Judgement is exercised in determining whether it is probable that the contract will be obtained. An error in judgement would result in capitalised tender costs being recognised in the income statement in the following reporting period. KEY CONTRACTS AND SUPPLIERS A number of contracts that Downer enters into are long-term contracts with recurring revenues but are terminable on short notice for convenience. There is a risk that key contracts may not be renewed, may be renewed on less favourable terms or may be cancelled. Similarly, where Downer is reliant on one or a small set of key suppliers to provide goods and services, the performance of these suppliers will impact Downer’s ability to complete projects and earn profits. In addition, there are particular suppliers with whom Downer has a long-term relationship which support Downer’s business activities. A change in relationship with these suppliers could negatively impact Downer’s future financial performance. Downer also has a large capital equipment fleet which is subject to availability of major spares such as tyres for mining equipment. New contracts often require the acquisition of new equipment and the timing of purchase is dependent upon availability from suppliers in a world market. Management judgement is therefore required to estimate the impact of the loss of key contracts and suppliers on future earnings supporting existing goodwill and intangible assets. nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 1. SummaRy Of aCCOunTIng POlICIES – COnTInuED Key assumptions underpinning the manufacturing program include: – ongoing commitment to the resolution of minor defects on Train Sets to enable presentation to RailCorp for PC; – the “quick win” initiatives introduced for Train Sets 11 to 25 result in the estimated improvement in production rate and quality in China and reduce levels of re-work in Cardiff; – the re-design of certain components and assemblies to achieve the estimated production rates and required quality levels in the bodyshell and interior fit-out shops in China for Train Sets 26 onwards; – CRC deploy the requisite number of resources to the interior fitout shop in Changchun with the appropriate skill and experience to achieve the required productivity and quality in Train Sets; – achieving the reliability performance targets for Train Sets 1 to 6 to allow Train Set 7 to be delivered by mid-January 2012 (the performance of Train Set 1 in service is to date achieving its targeted reliability); – the trains must meet certain performance thresholds while in passenger service (failure of the trains to meet the required thresholds is likely to result in additional costs being incurred by Downer); – all parties continue to honour their contractual obligations; – that RailCorp continues to adopt a reasonable industry approach to the acceptance of the Waratah trains for passenger service through the manufacture phase of the project (including supporting documentation) and the required track access will be made available to allow the project to achieve reliability and growth targets; – that monies held in the Manufacturing Delay Account (MDA) are paid to Downer upon achievement of contracted milestones, and that interest that accrues on the MDA is to be paid when Train Set 78 is delivered to Reliance Rail, together with the balance of MDA. MDA interest receivable in the FCAC assumes that the funds are invested at arm’s length interest rates available for deposits of this term, size and nature; and – an accelerated eight business day delivery cadence from Train Set 30, which has not yet been approved by RailCorp. The FCAC provides for liquidated damages in line with the revised delivery program with no specific contingency for Liquidated Damages (LDs). Any additional liability for LDs as a result of slippage in the revised delivery program will be required to be funded from the general contingency. The general contingency held within the FCAC totals ~$90 million, reflecting the initial general contingency of $73 million and the balance of the transferred interior fit-out scope in Cardiff of $17 million that is no longer expected to be required. WARATAH TRAIN PROJECT Based on a full Forecast-Cost-At-Completion (FCAC) review of the Rolling Stock Manufacturing (RSM Contract) element the Waratah Train Project (WTP) undertaken during January- February 2011, an additional provision of $250.0 million was raised during the period against the project. In determining this provision, Management continues to be required to estimate future events and make a number of key assumptions in relation to the revised program. The provision reflects the revised program which now provides for production of trains in four distinct phases: 1. Train Sets 1 to 10, which required or require significant additional work on the interior fit-out and related areas due to design related production issues, inadequate methods and processes in assembly. These Train Sets were all delivered to Australia by 30 June 2011; 2. Train Sets 11 to 15 are being built by Changchun Railway Vehicles Company (CRC or China) to a first configuration freeze (Configuration Freeze 1) using new methods and processes to aid production of the bodyshell and interior fit-out. Whilst implementation of these new methods and processes has caused a delay to the program announced in February 2011 of two to eight weeks, this has meant that the interior fit-out scope that was planned to be transferred to Cardiff from Train Set 16 will no longer be required, releasing the provision of $17 million in the FCAC to contingency to fund: (i) other program improvement initiatives or otherwise de- risk the project; and (ii) eight shopfloor mentors/coaches from Downer’s Cardiff assembly plant who have been based in CRC to assist in the installation of the more difficult aspects of the interior design; 3. Train Sets 16 to 25 are intended to be built using a flow-line process that is being implemented in the interior fit-out shop in CRC. Process improvements in the bodyshell shop will see bodyshells built to tighter tolerances that will further aid interior installation; and 4. Train Sets 26 to 78 are intended to be built completely in CRC based on a second configuration freeze (Configuration Freeze 2) following implementation of further design improvements for ease of assembly and higher quality. Increased output from the flow-lines in CRC will be required by Train Set 38 to match the targeted delivery program with planning currently underway with CRC to ensure this is achieved. Provisional cost estimates for the increased output are within the FCAC allowances. The manufacturing program is targeting the following delivery milestones, which remain broadly within the “bands” outlined in February 2011: – Train Set 1 was presented to RailCorp for Practical Completion (PC) on 19 April 2011 and received PC on 30 June 2011; – Train Sets 2 to 6 are being progressively delivered to RailCorp for PC between August 2011 and December 2011; – Train Set 7 to be entering passenger service in mid January 2012 following the achievement of reliability performance targets by Train Sets 1 to 6; and – Train Set 78 being delivered to RailCorp and entering passenger service in the first half of calendar 2014. annuaL report 2011 41 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 1. SummaRy Of aCCOunTIng POlICIES – COnTInuED WARATAH TRAIN PROJECT – CONTINUED The FCAC is summarised below by major cost category. Cost Category Materials and Sub-Contracted Components Labour Engineering Services Transport, Logistics and Procurement Project Management Insurance, Bonding and Finance Forecast Liquidated Damages (LDs) Manufacturing Delay Account (MDA) interest receivable Other Costs General Contingency Total FCAC Feb Estimate $m 1,019 324 131 175 143 95 155 (111) 78 73 2,082 Change $m 15 (24) 17 (3) (17) (3) (5) (6) 9 17 – June Estimate $m 1,034 300 148 172 126 92 150 (117) 87 90 2,082 MATERIALS AND SUB-CONTRACTED COMPONENT This cost category represents approximately 50 per cent of the total FCAC and has been contracted and committed. The materials forecast reflects current yield and scrappage experience contained within the existing bill of material (BOM). For example, the BOM assumes a 20 per cent loss on stainless steel whilst cutting due to scrappage. No specific allowance has been made for variation to these yield assumptions, obsolete parts or materials associated for future engineering changes or potential improvements to the yield associated with value engineering proposed to be undertaken. Stainless steel required by the project is contracted, however, subject to market price escalation. The FCAC assumes that future stainless steel orders will be priced at the average price of recent shipments. The FCAC assumes that all current suppliers remain solvent over the three year build time frame and that there are no latent defects or quality issues in any parts or designs provided. Should any latent defects manifest through the build or testing phase, it is assumed that they will be rectified at the supplier’s cost with no significant delays to the manufacturing schedule. The FCAC has allowed for the additional storage costs associated with the revised delivery program where suppliers could not be contractually slowed down (without significant penalties) to match the revised manufacturing schedule. This is reflected within the logistics provision. Whilst Downer currently has a potential right of recovery of liquidated damages from materials suppliers, the FCAC does not assume recovery of these amounts at this stage. Similarly, the FCAC does not assume any potential increases in materials costs associated with suppliers in the future attempting to claim liquidated damages from Downer due to the manufacturing delays. LABOUR Labour includes manpower costs sub-contracted with CRC in China and those incurred directly by Downer at Cardiff. It is assumed that CRC will increase the labour undertaking the interior fitout to allow them to meet their contracted cadence and will continue to satisfy their obligations. Included within the Cardiff labour in the FCAC is allowance for the significant rework of Train Sets 1 to 10 at Cardiff and minor levels of rework thereafter to Train Set 78. In making the estimates for rework, the experience of the trains built to date has been taken into consideration, as well as a process of Cardiff personnel signing-off rework requirements before trains depart Changchun for Australia. In addition, the expected productivity benefits derived from an assumed learning curve (derived from the learning curve experienced on past passenger train builds) have been applied. Similar learning curve assumptions have been factored into the labour productivity assumptions for the original Cardiff scope of work. The FCAC assumes that suitable skilled tradesmen are available to perform this transferred scope of work and that they will be paid ordinary rates pursuant to the Enterprise Bargaining Agreements that are in force. No provision has been made in the FCAC for the potential future redundancy costs associated with making Cardiff staff redundant at the completion of this project on the assumption that all staff will be redeployed. 42 downer edI LImIted nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 1. SummaRy Of aCCOunTIng POlICIES – COnTInuED WARATAH TRAIN PROJECT – CONTINUED FORECAST LIQUIDATED DAMAGES (LDs) ENGINEERING SERVICES This category includes the cost of the initial train design, testing and commissioning throughout the program and the proposed manufacturability assessment and redesign outlined above to improve vehicle components and assembly. The FCAC assumes approximately 170,000 hours of Engineering and 60,000 hours of Drafting will be applied to the project at a fully burdened labour rate including proportionate overhead recovery for the Granville site and incremental direct overheads after allowance for future CPI price escalation through to the end of the program. The FCAC assumes that the Engineering resource reduces during the program as the trains reach a steady state of production and delivery. The FCAC does not provide for any significant delays in the program due to failures in service that require substantial engineering redesign. In addition to these labour costs, the Engineering Services FCAC includes a $7.5 million provision for an estimated weight penalty. TRANSPORT, LOGISTICS AND PROCUREMENT This includes transport, warehousing, demurrage, logistics and procurement management and import and customs duty. The FCAC provides the transport of all Sets from China to Australia with allowances for single or double shipments where currently expected. All Train Sets and warehoused materials are insured for direct loss but not for any consequential loss. The FCAC provides for the customs duty expected to be incurred on importation of dutiable materials into Australia at a rate of 5 per cent. PROJECT MANAGEMENT Project Management includes all support activities to complete the program including allowance for a senior management team with the requisite high-volume, assembly-line build and project management expertise, as well as a team of experts to support the revised production approach in China. The FCAC provides for all the travel, housing and expatriate benefits related to this team. The FCAC assumes that the project management resource tapers off during the program as Train Sets reach a steady state of production and delivery. The FCAC has provided for the expected future cost of international travel to China, consultants, external accounting services and legal costs associated with the normal operation of the program. These costs have been determined by reference to historical experience, as well as stage of the project and have been indexed for expected inflation. INSURANCE, BONDING AND FINANCE This includes the actual costs incurred to insure property, liability and people for the full duration of the program. This insurance cost was fully contracted at inception of the program. The cost of bonding reflected in the FCAC assumes a market rate being applied to the outstanding bond value through to completion of the project and that existing committed bonding facilities will be rolled on substantially similar terms to those in place at 30 June 2011. Financing costs also includes the cost of hedging the foreign exchange risk associated foreign denominated costs included within the FCAC. It is noted that approximately 85 per cent of the foreign currency costs were hedged at inception of the Rolling Stock Manufacture (RSM) contract. Unhedged costs denominated in foreign currencies are included in the FCAC at the long-term average rates. Forecast LDs are based on a formula that broadly approximates to $200,000 per train per month the train is not in service. While 78 Trains Sets are being manufactured under the project, only 72 Trains Sets are required to be in passenger service so LDs are only payable against 72 Train Sets. The projected LDs of $150 million represent an approximate delay of 13 months for every Train Set to be delivered which is consistent with the entry into passenger service of Train Set 1 in June 2011, compared to the original contract delivery date of Train Set 1 of April 2010 (after allowing for the three month grace period). Forecast LDs assume an accelerated eight business day delivery cadence from Train Set 30 which has not yet been approved by RailCorp. Using a contractual delivery cadence of 10 business days would result in increased liquidated damages of $50.2 million. Any additional liability for LDs as a result of slippage in the revised delivery program will be required to be funded from the general contingency. MANUFACTURING DELAY ACCOUNT (MDA) This MDA reflects the contractual arrangement between Downer, the RSM and Reliance Rail under which milestone payments are paid to Downer in accordance with the actual delivery schedule achieved. To the extent that monies are not paid to Downer due to late delivery and/or missed performance milestones, monies are held by Reliance Rail in the MDA. Monies held in the MDA are paid to Downer upon achievement of contract milestones. Interest, which accrues on the MDA is to be paid to Downer when Train Set 78 is delivered to Reliance Rail, together with the balance of the MDA. MDA interest receivable has been shown as a cost offset in the FCAC. This estimate assumes that the funds are invested at arm’s length interest rates available for deposits of this term, size and nature. Any additional liability for LDs as a result of slippage in the revised delivery program will be required to be funded from the general contingency. GENERAL CONTINGENCY The FCAC no longer includes a specific contingency for liquidated damages. Any additional liability for LDs as a result of slippage in the revised delivery program will be required to be funded from the general contingency. A general contingency of $90 million is now included in the FCAC to cover unforeseen events or cost variations that may arise over the life of the program. This could include, for example, a minor delay in delivery of Train Sets in the early stages of the program or additional costs to achieve a faster delivery rate of trains from CRC as required from Train Set 40 onwards to achieve the revised program. A program of this size and duration would normally have unidentified cost savings or tasking built into the FCAC based on historical experience and Management’s judgement. At this stage only $6.5 million of future costs savings are currently built into the FCAC. The FCAC discussed above does not rely on any recovery from claims submitted or other commercial actions which may be available to Downer. If, however, the revised Waratah project for example experiences incremental delays beyond June 2015, the cost of which could not be abated, further provision would be required. No specific allowance has been made for potential future legal claims against Downer in relation to this project. annuaL report 2011 43 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 1. SummaRy Of aCCOunTIng POlICIES – COnTInuED RELIANCE RAIL Reliance Rail Pty Ltd (Reliance Rail) is an unlisted, special purpose vehicle established to execute the New South Wales (NSW) Public Private Partnership (PPP) Waratah Train Project. Under the Project Contract with RailCorp, Reliance Rail is to: – Design and build 78 eight-car double-deck Train Sets, which it has subcontracted under a Rolling Stock Manufacturing contract (RSM Contract); – Construct a maintenance facility at Auburn (the Maintenance Facility Contract), NSW for the purpose of maintaining the sets over their effective life which it has subcontracted to Downer; and – Maintain the 78 Train Sets and make available 72 of these Train Sets to Railcorp for 30 years under the Project Contract, which maintenance obligations Reliance Rail has subcontracted to Downer under a Through Life Support (TLS Contract). These contracts are collectively known as the Waratah Train Project (WTP). The RSM contract has been subcontracted to an unincorporated joint venture between Downer EDI Rail Pty Ltd and Hitachi Limited (the RSM Joint Venture). The total funding raised by Reliance Rail to deliver the WTP is $2.4 billion. The majority of this funding ($2.1 billion) was raised via equity coupled with senior and junior ranking bonds in December 2006. The bonds are guaranteed by two specialist financial guarantors, FGIC (UK) Ltd and Syncora Guarantee Inc (monoline insurers). These funds were placed on deposit and are being progressively released to meet ongoing project costs and expenses as milestones under the contracts are achieved. As part of the funding, a $357 million senior, secured committed bank debt facility (Bank Facility) was raised in December 2006 with scheduled drawdowns to commence in February 2012. This facility remained undrawn at 30 June 2011. Reliance Rail’s funding arrangements are on a non-recourse basis to Downer and Downer is not obliged to provide further equity to Reliance Rail. The $357 million Bank Facility may be cancelled under certain circumstances prior to the scheduled drawdown date commencing in February 2012. The facility contains a termination provision that in the event of the insolvency of both monoline insurers, the banks have a right to terminate any undrawn commitments. Since 2009, the monoline insurers have been adversely affected by the global financial crisis (GFC) and the financial position of both monoline insurers remains uncertain, although they are still operating. If both monoline insurers are in default at the same time, or become insolvent, the undrawn component of the Bank Facility could be cancelled by the banking syndicate. On 16 August 2011, Reliance Rail received a “reservation of rights” notice from its monoline insurers claiming events of default under Reliance Rail’s debt financing documents. Reliance Rail has advised its financial guarantors and other financial stakeholders that there are no events of default and that it categorically rejects the unsubstantiated allegations. Based on legal advice received, Downer does not expect the “reservation of rights” notice to adversely affect the delivery of the Waratah Rolling Stock Manufacture contract. This advice is based on the assumption that no events of default exist or are continuing as stated by Reliance Rail. The Auditor’s Report in respect of Reliance Rail’s financial statements for the year ended 30 June 2010 included an “Emphasis of Matter” which outlined the uncertainties relating to Reliance Rail’s ability to refinance its borrowings when they fall due, the first of which is between September 2016 - 2018. The opinion considered it appropriate for the financial statements to be prepared as a “Going Concern” basis at that date. Prior to the first utilisation of the $357 million Bank Facility in February 2012 the Directors of Reliance Rail, in issuing the relevant loan draw-down notice, will be required to form a view that Reliance Rail is able to pay its debts as and when they become due and payable. Reliance Rail’s bond facilities contain options (exercisable by Reliance Rail) to extend their final maturities. Should these options be exercised, the first debt maturity of $400 million of senior secured bonds can be extended from September 2016 to September 2018. It is the current view of Downer that Reliance Rail will continue as the operating entity, based on public comments made by the NSW Government as to the importance of the WTP to the State and people of NSW. Notwithstanding this view, Management has considered the possibility that the WTP is terminated and has estimated, based on commercial judgement, legal interpretation of the contractual terms between Downer and other parties, including sub-contractors, suppliers and Reliance Rail, the financial consequences for Downer as: – A pre-tax accounting loss of between $400-$450 million, which includes the write-off of the $73.8 million currently reflected in Hedge Reserves; and – A negative cash impact of between $300-350 million, which would be payable over several years as sub- contractor claims are resolved. In assessing the potential financial consequences of the WTP being terminated, significant judgement and estimation has been necessary, particularly in relation to commitments that have been made by sub-contractors and suppliers to Downer under orders placed with them, and the extent to which they are able to mitigate their potential losses. The key underlying assumptions used by Management in relation to this analysis are: – The RSM Contract is terminated and no further delivery of trains is required; – Downer ceases to manufacture trains and ceases testing and commissioning activities; – Approximately 40 per cent of all currently committed purchase orders could be mitigated by suppliers; – All current Work In Progress (WIP) and future payments to suppliers (approximately 60 per cent of current committed purchase orders) will be written off assuming no recoveries; – No provision has been made for redundancy costs on the assumption that all permanent staff will be redeployed; – All foreign exchange contracts are closed out at current market rates; – All performance bonds issued to Reliance Rail are returned to Downer; 44 downer edI LImIted nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 1. SummaRy Of aCCOunTIng POlICIES – COnTInuED RELIANCE RAIL – CONTINUED – No additional contract “break costs” are incurred as key suppliers are assumed to take all reasonable steps to mitigate their losses; and – Other project termination costs are in accordance with normal business practices. The estimated profit and cash flow impacts on Downer of a termination of the WTP could result in Downer’s debt facilities becoming repayable on demand. In this circumstance Downer would be required to engage with its key financiers to obtain a covenant breach waiver, and any such waiver is likely to be conditional upon Downer undertaking a number of capital management initiatives including asset sales, business divestments or an equity capital raising. In the event of the WTP being terminated and if the Group’s financiers were to require the Group’s debt facilities to be immediately repaid or substantially reduced, then, in the opinion of the Directors, material uncertainty would exist regarding the ability of the Group to continue as a going concern and pay its debts as and when they become due. The financial report has been prepared on the basis that the Group is a going concern, which assumes continuity of normal business activities and the realisation of assets and settlement of liabilities in the ordinary course of business. No adjustments have been made to the financial report relating to the recoverability and classification of assets or liabilities that might be necessary as a result of a failure of Reliance Rail to continue as the Operating Entity under the WTP. IMPAIRMENT OF ASSETS The Group determines whether goodwill and intangible assets with indefinite useful lives are impaired at least on an annual basis or whenever there is an indication of impairment. This requires an estimation of the recoverable amount of the cash-generating units to which the goodwill and intangible assets with indefinite useful lives are allocated. The Group uses the higher of fair value less costs to sell, and value in use to determine recoverable amount. An impairment loss of $16.6 million (2010: $42.0 million) was recognised in the current year in respect of assets related to the Works UK business and CPG New Zealand consulting business following an assessment of the future performance of those businesses. Key assumptions requiring Management’s judgement include projected cash flows, growth rate estimates, discount rates, gross margin, working capital and capital expenditure. ANNUAL LEAVE AND LONG SERVICE LEAVE The provision is calculated using expected future increases in wages and salary rates including on-costs and expected settlement dates based on staff turnover history and is discounted using the rates attaching to Australian Government bonds at balance date which most closely match the terms of maturity of the related liabilities. RECOVERY OF DEFERRED TAX ASSETS Deferred tax assets are recognised for deductible temporary differences, as management considers that it is probable that future taxable profits will be available to utilise those temporary differences. Management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and the level of future taxable profits. INCOME TAXES The Group is subject to income taxes in Australia and jurisdictions where it has foreign operations. Judgement is required in determining the worldwide provision for income taxes. Judgement is also required in assessing whether deferred tax assets and certain deferred tax liabilities are recognised on the statement of financial position. Assumptions about the generation of future taxable profits depend on Management’s estimate of future cash flows. Changes in circumstances will alter expectations, which may impact the amount of deferred tax assets and liabilities recognised on the statement of financial position and the amount of other tax losses and temporary differences not yet recognised. ENVIRONMENTAL RISK AND REGULATION Downer and the industries in which it operates are subject to a broad range of environmental laws, regulations and standards (including certain licensing requirements). This could expose Downer to legal liabilities or place limitations on the development of its operations. In addition there is a risk that property utilised by Downer from time to time may be contaminated by materials harmful to human health (such as asbestos and other hazardous materials). In these situations Downer may be required to undertake remedial works on contaminated sites and may be exposed to third party compensation claims and other environmental liabilities. Management judgement is therefore required to estimate the impact of such factors on future earnings supporting existing goodwill and intangible assets. CARBON TAX On 10 July 2011 the Government announced the start- up price and architecture for the proposed carbon price mechanism: – A fixed price of $23/tCO2e as of the start of the scheme on 1 July 2012, increasing to $24.15/tCO2e and $25.40/tCO2e for 2012-13 and 2013-14, respectively; – From 1 July 2015, the scheme will transition to a cap and trade emissions trading scheme with the carbon price to be determined by the market; – Organisations with operational control over facilities that generate greater than 25 ktCO2e will be required to purchase permits to cover emissions from these “threshold” facilities; – The scheme covers emissions generated from stationary energy, industrial processes, fugitive emissions (other than from decommissioned coal mines), emission from non- legacy waste, transport fuels used only used for domestic aviation, domestic shipping, rail transport and off-road transport of liquid and gaseous fuels. A potential direct liability under the announced scheme for the Group is currently believed to be confined to one Mining facility. The mine site generates greenhouse gas emissions of around 73 KtCO2e per year (as of FY2009-10), equating to a total liability of $1.7 million. However, contractual mechanisms have been enacted to ensure that any costs associated with a direct liability arising from the impost of the carbon pricing mechanism can be transferred to the mine owner. annuaL report 2011 45 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 1. SummaRy Of aCCOunTIng POlICIES – COnTInuED result in goodwill; being the difference between any consideration paid and the relevant share acquired of the carrying value of identifiable net assets of the subsidiary. revenue reCoGnItIon Amounts disclosed as revenue are net of trade allowances, duties and taxes paid. Revenue is recognised and measured at fair value of the consideration received or receivable to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must be met before revenue is recognised: RENDERING OF SERVICES Revenue from a contract to provide services is recognised by reference to the stage of completion of the contract. This is normally determined as services performed up to and including the balance sheet date as a proportion of the total to be performed. Revenue from time and material contracts is recognised at the contractual rates as labour hours are delivered and direct expenses are incurred. Services rendered include international mine consulting and contracting services, maintenance and construction of roads, highways and rail infrastructure, infrastructure maintenance services, engineering and consultancy services and facilities management. Services contracts are reported in trade receivables and trade payables, as gross amounts due from/to customers. If cumulative work done to date (contract costs plus contract net profit) of contracts in progress exceeds progress payments received, the difference is recognised as an asset and included in amounts due from customers for contract work. If the net amount after deduction of progress payments received is negative, the difference is recognised as a liability and included in amounts due to customers for contract work. MINING SERVICES CONTRACTS Revenue from a contract to provide mining services is recognised by reference to the stage of completion of the contract. The stage of completion of the contract is determined by reference to the services performed up to and including the balance sheet date as a proportion of the total service to be performed. CONSTRUCTION CONTRACTS (i) Construction contracts Construction contracts are contracts specifically negotiated for the construction of an asset or combination of assets. Revenues and expenses from construction contracts are recognised in net profit by reference to the stage of completion of the contract as at the reporting date. The stage of completion is determined by reference to physical estimates, surveys of the work performed or a cost incurred, and is usually measured as the ratio of contract costs incurred for work performed to date against total contract costs. Any expected loss is recognised as an expense immediately. CARBON TAX – CONTINUED Other potential impacts from the carbon pricing mechanism on the Group will include operating costs both direct and indirect from increased commodity costs (electricity and natural gas). The level of increase is still uncertain, but some initial modelling suggests that increases in electricity and gas costs are unlikely to be material. Management is currently assessing the potential financial impact of the pass-through costs from the impost of a price on carbon from suppliers and third parties within the Group supply chain. As part of this assessment contractual agreements will be reviewed to determine the extent of this “pass-through” and consideration will be given to the treatment of the carbon price in new agreements negotiated in the future. SIGnIfICant aCCountInG poLICIeS Accounting policies are selected and applied in a manner which ensures that the resulting financial information satisfies the concepts of relevance and reliability, thereby ensuring that the substance of the underlying transactions or other events is reported. The accounting policies set out below have been consistently applied in preparing the Financial Report for the year ended 30 June 2011, as well as the comparative information presented in these financial statements. prInCIpLeS of ConSoLIdatIon The Financial Report is prepared by combining the financial statements of all the entities that comprise the consolidated entity, being the Company (the parent entity) and its subsidiaries as defined in Accounting Standard AASB 127 Consolidated and Separate Financial Statements. Consistent accounting policies are employed in the preparation and presentation of the consolidated financial statements. On acquisition, the assets, liabilities and contingent liabilities of a subsidiary are measured at fair value at the date of acquisition. Any excess of the cost of acquisition over the fair value of the identifiable net assets acquired is recognised as goodwill. If the cost of acquisition is less than the Group’s share of the fair value of the identifiable net assets of the subsidiary acquired, the difference is recognised directly in the income statement, but only after a reassessment of the identification and measurement of the net assets acquired. The Financial Report includes the information and results of each subsidiary from the date on which the Company obtains control and until such time as the Company ceases to control such entity. In preparing the Financial Report, all intercompany balances and transactions, and unrealised profits arising within the consolidated entity, are eliminated in full. Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated statement of comprehensive income, statement of changes in equity and the statement of financial position respectively. The Group applies a policy of treating transactions with minority interest as transactions with parties external to the Group. Disposals to minority interests result in gains and losses for the Group that are recorded in the statement of comprehensive income. Purchases from minority interests 46 downer edI LImIted nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 1. SummaRy Of aCCOunTIng POlICIES – COnTInuED CONSTRUCTION CONTRACTS – CONTINUED OTHER REVENUE Contract revenue is measured at the fair value of the consideration received or receivable. In the early stages of a contract, contract revenue is recognised only to the extent of costs incurred that are expected to be recoverable. That is, no margin is recognised until the outcome of the contract can be reliably estimated. Profit recognition for lump sum fixed price contracts does not commence until cost to complete can be reliably measured. Contract price and cost estimates are reviewed periodically as the work progresses and reflect adjustments proportionate to the percentage of completion in the income statement in the period when those estimates are revised. Where considered material, provisions are made for all known or anticipated losses. Variations from estimated contract performance could result in a material adjustment to operating results for any financial period. Claims are included for extra work or changes in scope of work to the extent of costs incurred in contract revenues when collection is probable. Where claims on customers result in dispute and the amount in dispute is significant, and it is expected that the matters in dispute will not be resolved within 12 months from the Company’s reporting date, the provision will be based on the Company’s assessment of the risk associated with construction contracts at the reporting date. Construction contracts are reported in trade receivables and trade payables, as gross amounts due from/to customers. If cumulative work done to date (contract costs plus contract net profit) of contracts in progress exceeds progress payments received, the difference is recognised as an asset and included in amounts due from customers for contract work. If the net amount after deduction of progress payments received is negative, the difference is recognised as a liability and included in amounts due to customers for contract work. (ii) Construction contract – Public Private Partnership (PPP) Revenue and expenses from the PPP construction contract are recognised in net profit by reference to the stage of completion of each separately identifiable component of the contract for the design and manufacture of rolling stock and construction of a maintenance facility, to the extent of costs incurred plus margin. Margin is recognised based on the relative risk assessment of each component and costs incurred to achieve operational milestones. Any expected loss is recognised as an expense immediately. The rolling stock manufacturing contract comprises detailed engineering design, prototype development and full scale manufacture. These identifiable separate components have been determined based on: – each component being subject to separate customer acceptance procedures; and – the costs and revenues of each component having been identified. SALE OF GOODS Revenue from the sale of goods is recognised when the consolidated entity has transferred to the buyer the significant risks and rewards of ownership of the goods. Other revenue is recognised and measured at fair value of the consideration received or, for revenue that is receivable, to the extent that it is probable that the economic benefits will flow to the Group and it can be reliably measured. (i) Royalties Royalty revenue is recognised on an accrual basis in accordance with the substance of the relevant agreement. (ii) Dividend and interest revenue Dividend revenue is recognised on a receivable basis. Interest revenue is recognised on a time proportionate basis that takes into account the effective yield on the financial asset. (iii) Fee-based revenue Fee-based revenue generated by Corporate office is recognised on an accrual basis as derived. (iv) Gain or Loss on Non-current Asset Disposal The gain or loss on disposal of non-current assets is included as other income or expense at the date control passes to the buyer, usually when an unconditional contract of sale is signed. The gain or loss on disposal is calculated as the difference between the carrying amount of the asset at the time of disposal and the net proceeds on disposal. fInanCe and BorrowInG CoStS Finance costs comprise interest expense on borrowings, impairment losses recognised on financial assets, losses on ineffective hedging instruments that are recognised in profit and loss and finance lease charges. Borrowing costs incurred for the construction of a qualifying asset are capitalised during the period of time that is required to complete and prepare the asset for its intended use or sale. Other borrowing costs, including the cost to establish financing facilities, are expensed over the term of the facility. GoodS and ServICeS tax Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST) except: – where the amount of GST incurred is not recoverable from the taxation authorities, it is recognised as part of the cost of acquisition of an asset or as part of an item of expense; or – for receivables and payables which are recognised inclusive of GST. The net amount of GST recoverable from, or payable to, the taxation authorities, is included as part of receivables or payables. Cash flows are included in the statement of cash flow on a gross basis. The GST component of cash flows arising from investing and financing activities which is recoverable from, or payable to, the taxation authorities, is classified as operating cash flows. annuaL report 2011 47 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 1. SummaRy Of aCCOunTIng POlICIES – COnTInuED InCome tax CURRENT TAX Current tax is calculated by reference to the amount of income taxes payable or recoverable in respect of the taxable profit or tax loss for the period. It is calculated using tax rates and tax laws that have been enacted or substantively enacted by the reporting date. Current tax for current and prior periods is recognised as a liability (or asset) to the extent that it is unpaid (or refundable). DEFERRED TAX Deferred tax is accounted for using the comprehensive balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax base of those items. In principle, deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised to the extent that it is probable that sufficient taxable amounts will be available against which deductible temporary differences or unused tax losses and tax offsets can be utilised. However, deferred tax assets and liabilities are not recognised if the temporary differences arise from the initial recognition of assets and liabilities (other than as a result of a business combination) which affects neither taxable income nor accounting profit. Furthermore, a deferred tax liability is not recognised in relation to taxable temporary differences arising from goodwill. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, associates and joint ventures except when the consolidated entity is able to control the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with these investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period(s) when the asset and liability giving rise to them are realised or settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the reporting date. The measurement of deferred tax liabilities and assets reflect the tax consequences that would follow from the manner in which the consolidated entity expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the company/consolidated entity intends to settle its current tax assets and liabilities on a net basis. CURRENT AND DEFERRED TAX FOR THE YEAR Current and deferred tax is recognised as an expense or income in the income statement, except when it relates to items credited or debited directly to other comprehensive income, in which case the deferred tax is also recognised 48 downer edI LImIted directly in equity, or when it arises from the initial accounting for a business combination, in which case it is taken into account in the determination of goodwill or the excess. TAX CONSOLIDATION Downer EDI Limited and its wholly-owned Australian controlled entities are part of a tax-consolidated group under Australian taxation law. Downer EDI Limited is the head entity in the tax-consolidated group. Entities within the tax-consolidated group have entered into a tax funding arrangement and a tax sharing agreement with the head entity. Under the terms of the tax funding arrangement, Downer EDI Limited and each of the entities in the tax- consolidated group have agreed to pay (or receive) a tax equivalent payment to (or from) the head entity, based on the current tax liability or current tax asset of the entity. CaSh and CaSh equIvaLentS Cash and cash equivalents comprise cash on hand, cash in banks and investments in money market instruments, net of outstanding bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities in the statement of financial position. reCeIvaBLeS Trade receivables are recognised initially at fair value and subsequently, less provision for doubtful debts. Trade receivables are normally due for settlement no more than 30 days from the date of recognition. Prepayments represent the future economic benefits receivable in respect of economic sacrifices made in the current or prior reporting period. InventorIeS Inventories are valued at the lower of cost and net realisable value. Costs, including an appropriate portion of fixed and variable overhead expenses, are assigned to inventories on hand by the method most appropriate to each particular class of inventories, with the majority being valued on a first in first out basis. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. fInanCIaL aSSetS Investments are recognised and derecognised on trade date where purchase or sale of an investment is under a contract whose terms require delivery of the investment within the time frame established by the market concerned, and are initially measured at fair value, net of transaction costs. Subsequent to initial recognition, investments in subsidiaries are measured at cost in the parent entity financial statements. INVESTMENT IN ASSOCIATES Investments in entities over which the consolidated entity has the ability to exercise significant influence but not control are accounted for using equity-accounting principles and are carried at cost plus post-acquisition changes in the consolidated entity’s share of net assets of associates, less any impairment in value. nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 1. SummaRy Of aCCOunTIng POlICIES – COnTInuED INVESTMENT IN ASSOCIATES – CONTINUED Losses of an associate in excess of the Group’s interest in an associate are recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate. If the associate subsequently reports profits, the consolidated entity resumes recognising its share of those profits only after its share of the profits equal the share of losses not recognised. AVAILABLE-FOR-SALE FINANCIAL ASSETS Available-for-sale financial assets are stated at fair value less impairment. Gains and losses arising from changes in fair value are recognised directly in the available-for-sale revaluation reserve, until the investment is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised in the available-for-sale revaluation reserve is included in the profit or loss for the year. LOANS AND RECEIVABLES Loans and other receivables are recorded at amortised cost using the effective interest rate method, less impairment. FAIR VALUE THROUGH PROFIT AND LOSS INVESTMENTS Fair value through profit and loss investments are valued at fair value at each reporting date based on the current bid price. Movements in fair value are taken to the income statement. non-Current aSSetS heLd for SaLe Non-current assets (and disposal groups) classified as held for sale are measured at the lower of carrying amount and fair value less cost to sell. Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition and the sale of the asset (or disposal group) is expected to be completed within one year from the date of classification. JoInt ventureS JOINTLY CONTROLLED ASSETS AND OPERATIONS Interests in jointly controlled assets and operations are reported in the financial statements by including the consolidated entity’s share of assets employed in the joint ventures, the share of liabilities incurred in relation to the joint ventures and the share of any expenses incurred in relation to the joint ventures in their respective classification categories. JOINTLY CONTROLLED ENTITIES Interests in jointly controlled entities are accounted for under the equity method in the consolidated financial statements. property, pLant and equIpment Land is measured at cost. Buildings, plant and equipment, leasehold improvements and equipment under finance lease are stated at cost less accumulated depreciation and impairment. Cost includes expenditure that is directly attributable to the acquisition of the item. In the event that settlement of all or part of the purchase consideration is deferred, cost is determined by discounting the amounts payable in the future to their present value as at the date of acquisition. The cost of self-constructed and acquired assets includes the initial estimate, at the time of installation, of the costs of dismantling and removing the item and restoring the site on which it is located. Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment. Depreciation is provided on property, plant and equipment, including freehold buildings but excluding land. Depreciation is calculated on a basis so as to write down the net cost of each asset over its expected useful life to its estimated residual value. The basis of depreciation is determined after assessing the nature of the productive capacity of the asset and may include straight line, diminishing value and units of production (including hours of use) methodologies. Leasehold improvements are depreciated over the period of the lease or estimated useful life, whichever is the shorter, using the straight line method. The estimated useful lives, residual values and depreciation method are reviewed at the end of each annual reporting period. The expected useful lives of property, plant and equipment are generally: – Buildings – Plant and equipment – Equipment under finance lease 20 – 30 years 3 – 25 years 5 – 15 years The cost of improvements to or on leasehold properties is amortised over the shorter of the unexpired period of the lease, the expected period of lease renewal or the estimated useful life of the improvements to the consolidated entity. LeaSeS Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Assets held under finance leases are initially recognised at their fair value or, if lower, at an amount equal to the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is included in the statement of financial position as a finance lease obligation. FINANCE LEASES Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income. Finance leased assets are depreciated on a straight line basis over the lesser of the estimated useful life of each asset or the lease term. OPERATING LEASES Operating lease payments are recognised as an expense on a straight line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed. annuaL report 2011 49 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 1. SummaRy Of aCCOunTIng POlICIES – COnTInuED IntanGIBLe aSSetS GOODWILL Goodwill, representing the excess of the cost of acquisition over the fair value of the identifiable assets, liabilities and contingent liabilities acquired, is recognised as an asset and not amortised. All potential intangible assets acquired in a business combination are identified and recognised separately from goodwill where they satisfy the definition of an intangible asset and their fair value can be measured reliably. INTELLECTUAL PROPERTY Purchased patents, trademarks and licences are recorded at cost less accumulated amortisation and impairment. Amortisation is charged on a straight line basis over their estimated useful lives having considered contractual terms, which is not greater than 40 years. The estimated useful life and amortisation method are reviewed at the end of each annual reporting period. SOFTWARE Software acquired by the Group is stated at cost less accumulated amortisation and impairment losses. Internally developed software is capitalised once the project is assessed to be feasible. Costs incurred in determining project feasibility are expensed as incurred. The costs capitalised include consulting, licensing and direct labour costs. AMORTISATION Amortisation is charged to the income statement on a straight line basis over the useful lives of intangible assets unless such life is indefinite. Software and other intangible assets are amortised from the date they are available for use. The estimated useful lives are generally: – Software 5 – 6 years; – Intangible assets (other than indefinite useful life intangible assets) 20 years; and – Goodwill has indefinite useful life. ImpaIrment of aSSetS Goodwill and intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. payaBLeS Trade payables and other accounts payable are recognised when the consolidated entity becomes obliged to make future payments resulting from the purchase of goods and services. 50 downer edI LImIted BorrowInGS Borrowings are recorded initially at fair value, net of transaction costs. Subsequent to initial recognition, borrowings are measured at amortised cost with any difference between the initial recognised amount and the redemption value being recognised in profit or loss over the period of the borrowing using the effective interest rate method. derIvatIve fInanCIaL InStrumentS The consolidated entity enters into a variety of derivative financial instruments to manage its exposure to interest rate and foreign exchange rate risk, including forward foreign exchange contracts, interest rate swaps and cross currency swaps. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at each reporting date. The resulting gain or loss is recognised in the profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship. The consolidated entity designates certain derivatives as either hedges of the fair value of recognised assets or liabilities, or firm commitments (fair value hedges) or hedges of highly probable forecast transactions (cash flow hedges). Hedge accounting is discontinued when the hedge instrument expires or is sold, terminated, exercised, or no longer qualifies for hedge accounting. Any cumulative gain or loss deferred in equity at that 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 deferred in equity is recognised immediately in the income statement. FAIR VALUE HEDGES Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the profit or loss immediately, together with any changes in the fair value of the hedged asset or liability that is attributable to the hedged risk. CASH FLOW HEDGES The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is deferred in equity. The gain or loss relating to the ineffective portion is recognised immediately in the profit or loss. Amounts deferred in equity are included in the profit or loss in the same periods the hedged item is recognised in the profit or loss. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the asset or liability. EMBEDDED DERIVATIVES Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of host contracts. This only occurs when the host contracts are not measured at fair value through profit and loss. nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 1. SummaRy Of aCCOunTIng POlICIES – COnTInuED empLoyee BenefItS WARRANTY Liabilities are incurred for benefits accruing to employees in respect of wages and salaries, annual leave, long service leave, redundancy and sick leave when it is probable that settlement will be required and they are capable of being measured reliably. Liabilities incurred in respect of employee benefits expected to be settled within 12 months, are measured at their nominal values using the remuneration rate expected to apply at the time of settlement. Liabilities incurred in respect of employee benefits which are not expected to be settled within 12 months are measured at the present value of the estimated future cash outflows to be paid by the consolidated entity in respect of services provided by employees up to reporting date. Contributions to defined contribution superannuation plans are expensed when incurred. BONUS PLANS A liability for employee benefits in the form of bonus plans is recognised in current provisions when there is no realistic alternative but to settle the liability and at least one of the following conditions is met: – there are formal terms in the plan for determining the amount of the benefit; Provision is made for the estimated liability on products under warranty at balance date. This provision is estimated having regard to service warranty experience. Other warranty costs are accrued for as and when the liability arises. ONEROUS CONTRACT A provision for an onerous contract is recognised when the expected benefits to be derived from a contract are less than the unavoidable costs of meeting the obligations under that contract, and only after impairment losses to assets dedicated to that contract have been recognised. The provision recognised is based on the excess of the estimated cash flows to meet the unavoidable costs under the contract over the estimated cash flows to be received in relation to the contract, having regard to the risks of the activities relating to the contract. The net estimated cash flows are discounted using market yields at balance date of national government guaranteed bonds with terms to maturity and currency that match, as closely as possible, the expected future payment where the effect of discounting is material. – the amounts to be paid are determined before the time foreIGn CurrenCy of completion of the financial report; and – past practice gives clear evidence of the amount of the obligation. Liabilities for bonus plans are expected to be settled within 12 months and are measured at the amounts expected to be paid when they are settled. provISIonS Provisions are recognised when the consolidated entity has a present obligation, the future sacrifice of economic benefits is probable, and the amount of the provision can be measured reliably. DECOMMISSIONING AND RESTORATION Provision is made for close down, restoration and environmental rehabilitation costs (which include the dismantling and demolition of infrastructure, removal of residual materials and remediation of disturbed areas) in the accounting period when the related environmental disturbance occurs, based on estimated future costs. The provision is discounted using a current market based pre-tax discount rate. The provision is the best estimate of the present value of the expenditure required to settle rectification obligations at the reporting date, based on current legal requirements and technology. Future rectification costs are reviewed annually and any changes are reflected in the present value of the rectification provision at the end of the reporting period. FOREIGN CURRENCY TRANSACTIONS All foreign currency transactions during the financial year are brought to account using the exchange rate in effect at the date of the transaction. Foreign currency monetary items at reporting date are translated at the exchange rate existing at reporting date. Non-monetary assets and liabilities carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at reporting date exchange rates are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges. FOREIGN OPERATIONS On consolidation, the assets and liabilities of the consolidated entity’s overseas operations are translated at exchange rates prevailing at the reporting date. Income and expense items are translated at the average exchange rates for the period unless exchange rates fluctuate significantly. Exchange differences arising, if any, are recognised in the foreign currency translation reserve and recognised in the income statement on disposal of the foreign operation. Goodwill and fair value adjustments arising on the acquisition of a foreign entity on or after the date of transition to A-IFRS are treated as assets and liabilities of the foreign entity and translated at exchange rates prevailing at the reporting date. annuaL report 2011 51 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 1. SummaRy Of aCCOunTIng POlICIES – COnTInuED TREASURY SHARES When treasury shares subsequently vest to employees under the Downer employee share plans, the carrying value of the vested shares is transferred to the employee equity benefits reserve. aCCountInG for fInanCIaL Guarantee ContraCtS Financial guarantee contracts are measured initially at their fair values and subsequently measured at the higher of the amount recognised as a provision and the amount initially recognised less cumulative amortisation in accordance with the revenue recognition policies. earnInGS per Share (epS) Basic EPS is calculated as net profit attributable to members of the parent entity, adjusted for the cost of servicing equity (other than ordinary shares), divided by the weighted average number of ordinary shares. Diluted EPS is calculated as net profit attributable to members of the parent entity divided by the total of the weighted average number of ordinary shares on issue during the year and the number of dilutive potential ordinary shares. Potential ordinary shares are anti-dilutive when their conversion to ordinary shares would increase earnings per share or decrease loss per share from continuing operations. The calculation of diluted earnings per share does not assume conversion, exercise, or other issue of potential ordinary shares that would have an anti-dilutive effect on earnings per share. operatInG SeGmentS An operating segment is a component of an entity that engages in business activities from which it may earn revenue and incur expenses, whose 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. new aCCountInG StandardS and InterpretatIonS At the date of authorisation of the Financial Report, the standards and interpretations listed below were in issue but not yet effective. They will be applied in the Group’s Financial Report related to the first annual reporting period commencing after the effective date. Initial application of the following standards will not affect any of the amounts recognised in the Financial Report, but will change the disclosure presently made in relation to the Group’s Financial Report: – AASB 2010-4 Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project effective for annual reporting periods beginning on or after 1 January 2011; and – AASB 2010-5 Amendments to Australian Accounting Standards effective for annual reporting periods beginning on or after 1 January 2011. fInanCIaL InStrumentS DEBT AND EQUITY INSTRUMENTS Debt and equity instruments are classified as either liabilities or as equity in accordance with the substance of the contractual arrangement. TRANSACTION COSTS ON THE ISSUE OF EQUITY INSTRUMENTS Transaction costs arising on the issue of equity instruments are recognised directly in equity as a reduction of the proceeds of the equity instruments to which the costs relate. Transaction costs are the costs that are incurred directly in connection with the issue of those equity instruments and which would not have been incurred had those instruments not been issued. INTEREST AND DIVIDENDS Interest and dividends are classified as expenses or as distributions of profit consistent with the statement of financial position classification of the related debt or equity instruments. dIvIdendS Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the entity, before or at the end of the financial year but not distributed at balance date. Share-BaSed tranSaCtIonS Equity-settled share-based transactions are measured at fair value at the date of grant. The Group makes share-based awards to certain employees. The fair value is determined at the date of grant, taking into account any market related performance conditions. For equity-settled awards, the fair value is charged to the income statement and credited to equity. The fair value at grant date is independently determined using an option pricing model that takes into account the exercise price, the term of the option, the vesting and performance criteria, the impact of dilution, the non-tradeable nature of the option, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate of the term of the option. The fair value of any options granted excludes the impact of any non-market vesting conditions (e.g. profitability and sales growth targets). Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. At each balance sheet date, the entity revises its estimates of the number of options that are expected to vest. The employee benefits expense recognised in each year takes into account the most recent estimate. Share CapItaL ORDINARY SHARES Ordinary shares are classified as equity. Incremental costs directly attributed to the issue of ordinary shares are accounted for as a deduction from equity, net of any tax effects. 52 downer edI LImIted nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 1. SummaRy Of aCCOunTIng POlICIES – COnTInuED new aCCountInG StandardS and InterpretatIonS – ContInued The following standards, amendments to standards and interpretations have been identified as those which may impact the entity in the period of initial application. They have not been applied in preparing this Financial Report. The Group has not yet determined the potential effect of these standards on the Group’s future Financial Reports. – AASB 2009-11 Amendments to Australian Accounting Standards arising from AASB 9 effective on a modified retrospective basis to annual periods beginning on or after 1 January 2013; – AASB 9 Financial Instruments, AASB 2010-7 Amendments to Australian Accounting Standards arising from AASB 9 (December 2010) effective on a modified retrospective basis to annual periods beginning on or after 1 January 2013; – AASB 2010-6 Amendments to Australian Accounting Standards – Disclosures on Transfers of Financial Assets effective for annual periods beginning on or after 1 July 2011; and – AASB 2010-8 Amendments to Australian Accounting Standards – Deferred Tax: Recovery of Underlying Assets effective for annual periods beginning on or after 1 January 2012. The following pronouncements approved by the IASB/IFRIC, where an equivalent pronouncement has not yet been issued by the AASB, have been identified as those which may impact the entity in the period of initial application. They have not been applied in preparing this Financial Report. The Group has not yet determined the potential effect of these standards on the Group’s future Financial Reports. – IFRS 10 Consolidated Financial Statements effective 1 January 2013; – IFRS 11 Joint Arrangements effective 1 January 2013; – IFRS 12 Disclosure of Involvement with Other Entities effective 1 January 2013; – IFRS 13 Fair Value Measurement effective for annual reporting periods beginning on or after 1 January 2013; – IAS 19 Employee Benefits effective 1 January 2013; – IAS 27 Consolidate and Separate Financial Statements effective for annual reporting periods beginning on or after 1 January 2013; and – IAS 28 Investments in Associates and Joint Ventures effective 1 January 2013. annuaL report 2011 53 aCCountInG poLICIeS and Inter-SeGment tranSaCtIonS The accounting policies used by the Group in reporting segments internally are the same as the Group accounting policies contained in Note 1. Inter-entity sales are recorded at amounts equal to competitive market prices charged to external customers for similar goods. The following items and the associated assets and liabilities are not allocated to operating segments as they are not considered part of the core operations of any segment: (a) In the current year, the Group recognised $250.0 million pre-tax provision on the Waratah train project. This provision together with a $16.6 million pre-tax impairment of assets charge is not included in the measurement of segment profit and loss. The details of the provision charge and impairment of assets are separately disclosed as “Individually significant items” in the consolidated income statement and as discussed in Note 4; (b) Interest income and finance cost; (c) Corporate charges comprising non-segmental expenses such as head office expenses; and (d) Income tax expense. nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 2. SEgmEnT InfORmaTIOn IdentIfICatIon of reportaBLe SeGmentS The Group has identified its operating segments based on the internal reports that are reviewed and used by the Board of Directors in assessing performance and in determining the allocation of resources. The operating segments are identified by Management based on the nature of the services provided. Discrete financial information about each of these operating businesses is reported to the Board of Directors on a recurring basis. The reportable segments are based on aggregated operating segments determined by the similarity of the services provided, as these are the sources of the Group’s major risks and have the greatest effect on the rates of return. The operating segments identified within the Group during the year are outlined below: Engineering includes Consulting, Emerging Sectors and Asia: Provides engineering, procurement, construction management services, electrical and instrumentation construction and services. Design, installation and management of power systems including transmission lines and renewable energy facilities. Structural, mechanical and piping construction and services. Project management, feasibility studies, master planning, architecture and urban design. Engineering design and specialist consulting services to public and private sectors. Mining consulting services and design and construction for materials handling and minerals processing. Mining: Provides contract mining services including open- cut and underground operations, whole-of-lifecycle mine planning, tyre management, explosives and exploration, drilling and blasting. Rail: Provides design, build, fit-out and maintenance of passenger rolling stock; design, build and maintenance of freight rolling stock including locomotives and rail wagons, and importing and commissioning of completed locomotives units for use in the resources sector. Works: Provides essential services for the development, management and maintenance of road and rail assets in the public and private sectors, providing utility services such as groundworks for power, gas and telecommunications and maintenance of water supply and wastewater treatment. 54 downer edI LImIted nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 2. SEgmEnT InfORmaTIOn – COnTInuED InformatIon aBout maJor CuStomerS The Group has no single external customer that provided more than 10 per cent of the Group’s revenue. Revenue by operating segment is shown below: By business segment Engineering and Consulting Mining Rail Works Total revenue(i) Share of sales revenue in joint venture entities and associates Total revenue including joint ventures and associates 2011 $’000 2010 $’000 2011 $’000 2010 $’000 2011 $’000 2010 $’000 2,268,608 1,868,782 1,391,723 947,036 913,224 943,759 30,453 74,154 24,857 60,249 2,299,061 1,893,639 1,465,877 973,473 181,989 102,998 1,129,025 1,046,757 2,037,453 2,058,278 32,481 23,064 2,069,934 2,081,342 Inter-segment sales (9,885) (12,647) – – (9,885) (12,647) Subtotal Unallocated Total 6,634,935 5,771,396 319,077 211,168 6,954,012 5,982,564 21,092 73,371 – – 21,092 73,371 6,656,027 5,844,767 319,077 211,168 6,975,104 6,055,935 (i) total revenue includes other income and inter-segment sales, recorded at amounts equal to competitive market prices charged to external customers for similar goods. annuaL report 2011 55 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 2. SEgmEnT InfORmaTIOn – COnTInuED By business segment Engineering and Consulting Mining Rail Works Total reported segment income Unallocated Interest revenue Interest expense Net interest expense Total (loss)/profit before income tax Income tax benefit Total net (loss)/profit after income tax Reconciliation of segment net operating profit to net profit after tax: Segment net operating profit Unallocated: Provision for Waratah train project Impairment of goodwill Impairment of assets Provision for legacy customer contracts Provision for MB Century investment Total individually significant items Impairment of MB Century Gain on property sales (i) Ramu arbitration award (ii) Segment results 2011 $’000 2010 $’000 Note 3(a) 3(b) 4 4 4 4 4 72,015 119,578 75,034 53,977 320,604 112,519 68,191 77,926 102,901 361,537 (294,941) (308,175) 14,180 (78,489) (64,309) (38,646) 10,946 (27,700) 18,103 (69,398) (51,295) 2,067 985 3,052 2011 $’000 2010 $’000 320,604 361,537 (250,000) (190,000) (9,770) (6,803) – – (42,000) – (18,000) (10,000) (266,573) (260,000) – 4,050 – – 13,166 (6,894) (38,690) (294,941) 14,180 (78,489) (38,646) 10,946 (27,700) (15,871) 27,823 31,000 2,350 (32,914) (5,300) (55,263) (308,175) 18,103 (69,398) 2,067 985 3,052 Gain on disposal of MB Century classified as asset held for sale 3(a) Settlement/provision for customer contracts Restructuring costs Corporate costs Total unallocated Interest revenue Interest expense Total (loss)/profit before income tax Income tax benefit Total net (loss)/profit after tax (i) during the year, a number of properties in australia and new Zealand have been sold and/or subject to sale and leaseback for gross proceeds of $12.8 million, net proceeds of $12.2 million and profit of $4.1 million. (ii) Included within prior year revenue is a net recovery of $31.0 million referable to an international arbitral award (kina 86.4 million) awarded in the Group’s favour in relation to the construction of the ramu highway in papua new Guinea. the amount comprises the award less a provision against a GSt receivable and expected costs to recover from the papua new Guinea Government. following the Court proceeding in february 2011, consent orders were issued and downer has received the full recovery amount in June 2011. 56 downer edI LImIted nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 2. SEgmEnT InfORmaTIOn – COnTInuED By business segment Engineering and Consulting Mining Rail Works Total Unallocated Total By business segment Engineering and Consulting Mining Rail Works Total Unallocated Total Segment assets Segment liabilities Depreciation and amortisation 2011 $’000 2010 $’000 2011 $’000 2010 $’000 2011 $’000 2010 $’000 875,024 1,013,383 786,784 823,576 693,969 790,101 442,131 427,753 452,976 257,223 404,309 364,888 950,986 1,048,084 481,855 465,723 24,202 123,239 5,393 52,061 22,961 71,057 6,746 56,541 3,626,177 3,355,730 1,756,048 1,540,810 204,895 157,305 84,489 100,270 512,233 672,339 5,599 2,854 3,710,666 3,456,000 2,268,281 2,213,149 210,494 160,159 Carrying value of equity- accounted investments Share of net profit of equity-accounted investments Acquisition of segment assets 2011 $’000 2010 $’000 2011 $’000 2010 $’000 2011 $’000 2010 $’000 10,615 11 20,649 6,079 37,354 – 4,784 11 13,089 4,526 22,410 – 6,500 9,948 8,337 1,610 191 9,965 5,740 2,126 34,231 53,572 410,726 130,900 18,049 47,408 22,996 35,066 26,395 18,022 510,414 242,534 – – 2,381 7,935 37,354 22,410 26,395 18,022 512,795 250,469 The consolidated entity operated in five principal geographical areas – Australia, Pacific (New Zealand, Papua New Guinea and Fiji), North East Asia (Hong Kong and China), South East Asia (Singapore, Malaysia, Thailand, Vietnam, Indonesia and the Philippines) and Other (United Kingdom, Canada, South Africa and Brazil). By geographic location Australia Pacific North East Asia South East Asia Other Total Total revenue(i) Segment assets Acquisition of segment assets 2011 $’000 2010 $’000 2011 $’000 2010 $’000 2011 $’000 2010 $’000 5,443,237 4,529,942 3,063,976 2,729,457 495,558 226,134 878,484 918,707 434,461 459,276 12,928 19,691 9,476 244,938 79,892 19,754 264,974 111,390 11,286 13,699 160,319 199,552 40,624 54,016 – 1,832 2,477 – 3,461 1,183 6,656,027 5,844,767 3,710,666 3,456,000 512,795 250,469 (i) total revenue includes other income and inter-segment sales, recorded at amounts equal to competitive market prices charged to external customers for similar goods. annuaL report 2011 57 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 3. PROfIT fROm ORDInaRy aCTIvITIES – COnTInuIng OPERaTIOnS a) Revenue Sales revenue Rendering of services Mining services Construction contracts Sale of goods Other revenue Other revenue Rental income Dividends Other entities Interest revenue Other loans and receivables Other income Net gain on disposal of property, plant and equipment Gain on disposal of MB Century classified as asset held for sale Net foreign exchange gains Total other income Total revenue and other income Share of sales revenue from joint venture entities and associates Total revenue and other income including joint ventures and associates Consolidated 2011 $’000 2010 $’000 Note 4,100,861 1,364,048 934,317 214,324 3,821,611 890,091 892,971 174,911 17,390 1,544 15,727 944 701 359 6,633,185 5,796,614 14,180 18,103 8,490 – 172 8,662 27,700 2,350 – 30,050 6,656,027 5,844,767 319,077 211,168 6,975,104 6,055,935 2 2 2 58 downer edI LImIted nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 3. PROfIT fROm ORDInaRy aCTIvITIES – COnTInuIng OPERaTIOnS – COnTInuED b) Operating expenses Cost of goods sold Finance costs on liabilities carried at amortised cost: Interest expense Finance lease expense Total interest and finance lease expense Net foreign exchange losses Net loss on disposal of business Depreciation and amortisation of non-current assets: Plant and equipment Buildings Amortisation of leased assets Total depreciation Amortisation of intellectual property/software Total depreciation and amortisation Doubtful debts Operating lease expenses related to land and buildings Operating lease expenses relating to plant and equipment Total operating lease expenses Employee benefits expense: Defined contribution plans Share-based transactions Employee benefits Total employee benefits expense (Gain) arising on derivatives in a designated fair value hedge accounting relationship Loss arising on adjustment to hedged item in a designated fair value hedge accounting relationship Consolidated 2011 $’000 2010 $’000 Note 2 16 16 16 17 165,451 135,426 73,712 4,777 78,489 – 441 65,291 4,107 69,398 527 – 196,826 146,622 2,425 8,795 208,046 2,448 210,494 2,931 6,882 156,435 3,724 160,159 2,499 1,770 69,852 164,753 234,605 111,599 4,870 2,102,060 2,218,529 (732) 508 (224) 61,971 110,200 172,171 100,603 6,075 1,837,591 1,944,269 (1,487) 1,315 (172) annuaL report 2011 59 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 4. InDIvIDually SIgnIfICanT ITEmS The following material items are relevant to an understanding of the Group’s financial performance: – Provision for Waratah train project (Note 1) – Impairment of goodwill – Impairment of assets – Provision for legacy customer contracts – Provision for MB Century investment Note 17 Consolidated 2011 $’000 2010 $’000 250,000 9,770 6,803 – – 266,573 190,000 42,000 – 18,000 10,000 260,000 provISIon for waratah traIn ContraCt On 27 January 2011, the Group announced a $250.0 million pre-tax provision on the Waratah Rolling Stock Manufacture (RSM) train project following a full review of the project. The review undertaken revealed that the tendered estimates did not sufficiently provide for the full extent of the design development and approval, material supply and time-related project overhead costs being incurred during the procurement and manufacturing phases of the contract. The provision represents the best professional estimate of the forward forecast cost to complete for a project of this size and complexity at this stage of completion. ImpaIrment of GoodwILL and aSSetS As required by accounting standards, the Group undertook an assessment of the carrying value of assets, having had regard to the current and future operating performance of a number of businesses. As a result of this assessment, management identified impairments of goodwill and assets relating to CPG New Zealand (Consulting arm of the Engineering Division) and Works UK totalling $16.6 million. CONSULTING – CPG NZ The CPG business in New Zealand has underperformed as a result of challenging economic conditions in NZ. Management decided to impair goodwill amounting to $7.8 million (2010: $22.0 million). WORKS UK The Works UK business was acquired in 2006. The weak UK economy has seen the business underperform and as a result a goodwill impairment of $2.0 million (2010: $20.0 million) has been recognised in the current year. Management has completed a review of assets held and recognised impairment for a total value of $6.8 million to reduce the carrying value of the assets to their expected realisable value. 60 downer edI LImIted nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 5. InCOmE Tax a) Income tax recognised in the income statement Tax benefit comprises: Current tax (benefit)/expense Deferred tax expense/(benefit) relating to the origination and reversal of temporary differences Total tax benefit Consolidated 2011 $’000 2010 $’000 (25,212) 48,875 14,266 (10,946) (49,860) (985) The prima facie income tax (benefit)/expense on pre-tax accounting profit reconciles to the income tax benefit in the financial statements as follows: (Loss)/profit before income tax (38,646) 2,067 Group income tax (benefit)/expense calculated at 30 per cent of operating (loss)/profit (11,594) – Amortisation of intangible assets – Non-taxable gains – Exempt income – Non-deductible expenses – Share of net profit of associates and joint ventures – Effect of different rates of tax on overseas income – Research and development – Effect of unrecognised temporary differences – Impairment of goodwill – Other items Over provision of income tax in previous year Income tax benefit attributable to profit 73 (862) (832) 343 – (5,899) (2,130) 3,407 2,930 4,484 (10,080) (866) (10,946) 620 148 (5,934) (823) 477 (307) (5,473) (4,300) (418) 12,600 3,017 (393) (592) (985) The tax rate used in the above reconciliation is the corporate tax rate of 30 per cent payable by Australian corporate entities on taxable profits under Australian tax law. There has been no change in the corporate tax rate when compared with the previous year. annuaL report 2011 61 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 5. InCOmE Tax – COnTInuED b) Income tax recognised directly in other comprehensive income The following current and deferred amounts were charged directly to equity during the year: Current tax – unvested executive incentive shares Deferred tax – capital raising transaction costs – share-based costs Revaluations of financial instruments treated as: – cash flow hedges – available for sale reserve Total deferred tax charged to equity Consolidated 2011 $’000 2010 $’000 – 1,547 3,130 3,366 (1,672) (617) 4,207 – (2,653) 11,993 – 9,340 Total charged directly to equity 4,207 10,887 nOTE 6. REmunERaTIOn Of auDITORS Audit or review of financial reports: Auditor of the parent entity Related practice of the parent entity auditor Non-audit services: Tax services Audit related services Due diligence and other non-audit services (i) Consolidated 2011 $ 2010 $ 2,780,516 2,800,016 733,824 833,348 3,514,340 3,633,364 228,372 73,474 810,694 1,112,540 729,717 54,529 96,000 880,246 The auditor of the Group is Deloitte Touche Tohmatsu. (i) other services relate to agreed-upon procedures, accounting advice and capital raising advisory services. 62 downer edI LImIted nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 7. EaRnIngS PER ShaRE Earnings per share (EPS) from continuing operations: – Basic EPS – Diluted EPS 2011 Loss attributable to members of the parent entity ($’000) Adjustment to reflect ROADS dividends paid ($’000) Loss attributable to members of the parent entity used in calculating EPS ($’000) Weighted average number of ordinary shares (WANOS) on issue (No. (000’s)) WANOS adjustment to reflect potential dilution for ROADS (No. (000’s))(i) WANOS used in the calculation of EPS (No. (000’s)) 2011 Cents per share 2010 Cents per share (10.5) (10.5) Basic EPS (27,843) (10,392) (2.4) (2.4) Diluted EPS (27,843) – (38,235) (27,843) 365,448 – 365,448 365,448 43,281 408,729 Earnings per share from continuing operations (cents per share)(ii) (10.5) (10.5) (i) the wanoS adjustment is calculated based on the issued value of roadS divided by the average market price of the Company’s ordinary shares for the period 1 July 2010 to 30 June 2011 ($4.13). the average market price was used in the calculation as it produces a more representative price by taking into consideration the fluctuating share price during the financial year. (ii) at 30 June 2011, the roadS are deemed anti-dilutive; hence, diluted epS remained at (10.5) cents per share. annuaL report 2011 63 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 7. EaRnIngS PER ShaRE – COnTInuED 2010 Profit attributable to members of the parent entity ($’000) Profit adjustment to reflect ROADS dividends paid ($’000) Profit attributable to members of the parent entity used in calculating EPS ($’000) Weighted average number of ordinary shares (WANOS) on issue (No. (000’s)) WANOS adjustment to reflect potential dilution for ROADS (No. (000’s))(i) WANOS used in the calculation of EPS (No. (000’s)) Basic EPS 2,957 (11,020) Diluted EPS 2,957 – (8,063) 2,957 333,663 – 333,663 333,663 23,877 357,540 Earnings per share from continuing operations (cents per share)(ii) (2.4) (2.4) (i) the wanoS adjustment is calculated based on the issued value of roadS divided by the average market price ($7.48) of the Company’s ordinary shares for the financial year ended 30 June 2010. the average market price was used in the calculation as it produces a more representative price by taking into consideration the fluctuating share price during the financial year. (ii) at 30 June 2010, the roadS are deemed anti-dilutive; hence diluted epS remained at (2.4) cents per share. 64 downer edI LImIted nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 8. DIvIDEnDS No interim dividend was paid in relation to the financial year ended 30 June 2011. No final dividend will be paid in relation to the financial year ended 30 June 2011. a) Ordinary shares Dividend per share (in Australian cents) Franking percentage Cost (in $’000) Payment date Dividend record date Final 2010 Interim 2010 16.0 13.1 unfranked unfranked 54,155 43,712 1/10/2010 9/04/2010 1/09/2010 9/03/2010 The final dividend paid for 2010 includes an additional 1,884,000 shares issued under the employee share plan on 31 August 2010. b) Redeemable Optionally Adjustable Distributing Securities (ROADS) Dividend per ROADS (in Australian cents) 1.35 1.30 1.26 1.33 Quarter 1 2011 Quarter 2 2011 Quarter 3 2011 Quarter 4 2011 New Zealand imputation credit percentage per ROADS Cost (in A$’000) Payment date 100% 2,611 100% 2,601 100% 2,526 100% 2,654 15/09/2010 15/12/2010 15/03/2011 15/06/2011 Quarter 1 2010 Quarter 2 2010 Quarter 3 2010 Quarter 4 2010 Dividend per ROADS (in Australian cents) 1.41 1.38 1.33 1.39 Total 2011 5.24 100% 10,392 Total 2010 5.51 100% 11,020 100% 2,813 100% 2,762 100% 2,658 100% 2,787 15/09/2009 15/12/2009 15/03/2010 15/06/2010 New Zealand imputation credit percentage per ROADS Cost (in A$’000) Payment date Franking credits Franking account balance Parent Entity 2011 $’000 – 2010 $’000 – annuaL report 2011 65 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 9. CaSh anD CaSh EquIvalEnTS Cash at bank and in hand Short-term deposits nOTE 10. InvEnTORIES Current Raw materials – at cost Work in progress – at cost Finished goods – at cost Components and spare parts – at cost nOTE 11. TRaDE anD OThER RECEIvaBlES Current Trade receivables Allowance for doubtful debts Amounts due from customers under contracts and rendering of services Provision for Waratah train project(i) Other receivables Total trade and other receivables Note 35(a) 11(a) 11(b) 29 29 Consolidated 2011 $’000 286,395 2,180 288,575 144,959 1,748 32,348 13,513 192,568 2010 $’000 381,776 3,350 385,126 116,081 2,520 16,686 57,851 193,138 564,057 (5,573) 558,484 504,739 (4,606) 500,133 957,491 803,525 (254,598) (190,000) 702,893 613,525 51,621 70,220 1,312,998 1,183,878 (i) provision for waratah train project includes $185.4 million of provision utilisation during the financial year ended 30 June 2011. (a) Of the total $564.1 million (2010: $504.7 million) of trade receivables, $383.1 million (2010: $359.1 million) are current (i.e. within 30 days). Management considers that there are no indications as of the reporting date that the debtors will not meet their payment obligations. Of the total receivables of $564.1 million (2010: $504.7 million): – $nil (2010: $0.1 million) are renegotiated receivables and Management has assessed that these are all recoverable and no impairment has been taken; – $175.4 million (2010: $140.9 million) are past due but not impaired with an average of more than 67 days. These relate to a number of customers for whom there is no recent history of default, nor other indicators of impairment. Management considers that no provision is required on these balances. The consolidated entity does not hold any collateral over these balances; and – $5.6 million (2010: $4.6 million) are impaired and have been provided for. An allowance account has been made for estimated irrecoverable trade receivable amounts arising from the past rendering of services, determined by reference to past default experience. 66 downer edI LImIted nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 11. TRaDE anD OThER RECEIvaBlES – COnTInuED (b) Movement in the allowance for doubtful debts Balance at the beginning of financial year Additional provisions Amounts used Amounts reversed Foreign currency exchange differences Balance at the end of financial year The consolidated entity has used the following basis to assess the allowance loss for trade receivables: i) a specific provision based on historical bad debt experience; ii) the general economic conditions in specific geographical regions; iii) an individual account-by-account specific risk assessment based on past credit history; and iv) any prior knowledge of debtor insolvency or other credit risk. nOTE 12. OThER fInanCIal aSSETS Current Available-for-sale investments Foreign currency forward contracts Cross currency and interest rate swaps Fair value through profit and loss investments Other financial assets Non-current Available-for-sale investments Foreign currency forward contracts Cross currency and interest rate swaps Fair value through profit and loss investments Deferred consideration receivable Other financial assets Total other financial assets Consolidated 2011 $’000 (4,606) (3,133) 1,424 634 108 2010 $’000 (8,198) (5,355) 5,178 3,585 184 (5,573) (4,606) – 5,179 – 150 749 6,078 2,149 6,894 303 2,607 755 12,708 13,750 15,236 607 1,122 5,223 475 9,800 2,125 4,210 3,723 860 9,800 30,977 35,954 37,055 48,662 annuaL report 2011 67 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 13. Tax aSSETS Current Current tax assets Non-current a) Deferred tax assets Consolidated 2011 $’000 2010 $’000 Note 14,312 13,765 137,949 123,280 b) Movement in deferred tax assets for the financial year Balance at the beginning of the financial year Charged to income statement as deferred income tax benefit 13(d) Charged to equity Acquisition of businesses Net foreign currency exchange differences Tax losses recognised/(transfers or utilisation of losses) Disposal of entities and operations Other Balance at the end of the financial year (gross) Set-off of deferred tax liabilities within the same tax jurisdiction 13(c) 22(b) Net deferred tax assets c) Deferred tax assets at the end of the financial year (prior to offsetting balances within the same tax jurisdiction) are attributable to: Trade and other receivables Inventories Property, plant and equipment Equity-accounted investments Trade and other payables Provisions Borrowings Income tax losses Hedges and foreign exchange movements Capital raising transaction costs Other Total deferred tax assets (gross) d) Amounts charged to income statement as deferred income tax benefit: Trade and other receivables Inventories Property, plant and equipment Equity-accounted investments Trade and other payables Provisions Borrowings Income tax losses Hedges and foreign exchange movements Other Deferred tax assets in relation to prior years Charged to income statement as deferred income tax benefit 68 downer edI LImIted 192,565 18,119 (1,336) – (2,279) 51,172 (126) (5,044) 253,071 (115,122) 137,949 43,566 4,275 8,649 95 18,151 78,139 661 62,976 32,395 3,130 1,034 180,620 34,380 13,334 660 (1,459) (33,194) – (1,776) 192,565 (69,285) 123,280 59,168 3,996 7,827 877 18,749 61,605 872 25,855 12,307 – 1,309 253,071 192,565 10,113 279 5,681 (637) (2,512) 14,417 (227) (6,676) 2,893 (381) (4,831) 18,119 28,341 (673) 1,177 636 (1,771) 8,102 (20) 2,524 (18) 616 (4,534) 34,380 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 14. OThER aSSETS Current Prepayments Other deposits Other current assets Non-current Prepayments Total other assets Consolidated 2011 $’000 2010 $’000 35,540 4,134 1,287 40,961 4,684 45,645 21,887 3,072 3,828 28,787 5,464 34,251 nOTE 15. EquITy-aCCOunTED InvESTmEnTS Equity-accounted investments Note 15(b) 2011 $’000 37,354 2010 $’000 22,410 a) The consolidated entity has interests in the following joint venture operations: Name of joint venture Principal activity BPL Downer Joint Venture Building construction Downer CSS Joint Venture (i) Telecommunications Downer Electrical GHD JV(i) Traffic control infrastructure Country of operation Singapore Thailand Australia Leighton Works Road construction New Zealand Yokogawa Downer Joint Venture Refurbishment of power station Australia Tenix Downer Joint Venture (ii) Power transmission and distribution Australia Downer Mouchel (iii) Road maintenance Thiess Downer EDI Works Roche Thiess Linfox Joint Venture (iv) Construction of coast to coast railway Contract mining; civil works and plant hire Australia Australia Australia Synergy Joint Venture Road and pavement construction Australia Dampier Highway Joint Venture Highway construction and design Australia Ownership interest 2011 % 2010 % 50 60 90 50 50 – 50 25 44 33 50 50 60 90 50 50 50 50 25 44 – – (i) Contractual arrangement prevents control despite ownership of more than 50 per cent of these joint ventures. (ii) these joint ventures were dissolved during the financial year ended 30 June 2011. (iii) downer mouchel is an unincorporated joint venture. the joint venture agreement specifies 50 per cent ownership, except where an Integrated Service arrangement obligation is in place, whereby downer edI owns 60 per cent of the joint venture. (iv) roche thiess Linfox is an unincorporated joint venture at 30 June 2011. annuaL report 2011 69 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 15. EquITy-aCCOunTED InvESTmEnTS – COnTInuED b) The consolidated entity and its controlled entities have interests in the following joint venture and associates entities: Name of entity Principal activity Joint ventures Allied Asphalt Limited Asphalt plant Bitumen Importers Australia Joint Venture Construction of bitumen storage facility Bitumen Importers Australia Pty Ltd Bitumen importer EDI Rail-Bombardier Transportation (Maintenance) Pty Ltd Maintenance of railway rolling stock EDI Rail-Bombardier Transportation Pty Ltd Sale and maintenance of railway rolling stock Country of incorporation New Zealand Australia Australia Australia Australia Emulco Limited Emulsion plant New Zealand John Holland EDI Joint Venture Research reactor MPE Facilities Management Sdn Bhd Facilities management consultancy service Australia Malaysia SIP Jiacheng Property Development Co Ltd Property development China Green Vision Recycling Limited Recycling Stockton Alliance Limited Mine operations New Zealand New Zealand Associates Clyde Babcock Hitachi (Australia) Pty Ltd Design, construction and maintenance of boilers Australia D’axis Planners & Consultants Co. Ltd Master planning and consulting China Reliance Rail Pty Ltd KDR Victoria Pty Ltd KDR Gold Coast Pty Ltd service Rail manufacturing and maintenance Operation of Yarra Trams and Melbourne tram network Operations and maintenance for Gold Coast Rapid Transit Project Australia Australia Australia Aromatrix Technologies Pte Ltd (i) Environmental engineering and consultancy services Singapore (i) this associate was sold during the financial year ended 30 June 2011. Ownership interest 2011 % 2010 % 50 50 50 50 50 50 40 50 50 33 50 27 40 49 49 49 – 50 50 50 50 50 50 40 50 50 – 50 27 40 49 49 – 33 70 downer edI LImIted nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 15. EquITy-aCCOunTED InvESTmEnTS – COnTInuED Equity-accounted investments Equity accounted amount of investment at the beginning of the financial year – Share of net profit – Share of distributions – Additional interest in joint venture entities – Disposal of interest in joint venture entities – Foreign currency exchange differences Equity-accounted investment at the end of the financial year Share of results of joint venture entities and associates Revenue Expenses Summarised financial information of the consolidated entity’s share of the above joint venture entities and associates: Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Investment in associates Reliance Rail Pty Ltd Consolidated 2011 $’000 2010 $’000 Note 22,410 26,395 (12,667) 2,448 (791) (441) 37,354 8,437 18,022 (12,708) 10,584 (1,902) (23) 22,410 3(a) 319,077 (288,876) 30,201 211,168 (189,992) 21,176 121,022 30,237 151,259 105,621 17,812 123,433 102,352 38,393 140,745 101,071 17,758 118,829 27,826 21,916 The Group has a 49 per cent investment in Reliance Rail. The investment initially totalled $67.0 million and comprised $66.3 million A1 notes included as part of “Other Financial Assets” and $0.7 million included as part of “Equity-Accounted Investments”. The Group equity accounts for its share of profit and loss and hedge reserve movements in accordance with AASB 128 Investments in Associates. With effect from May 2009, Reliance Rail ceased hedge accounting for its financial derivative instruments. Downer adopted a consistent accounting treatment. The hedge reserve of $79.1 million at that date is being amortised on a straight line basis over 30 years, being the contracted term of the Waratah Public Private Partnership (PPP) Through-Life Support contract. Should Reliance Rail cease to be a going concern, the Group may be required to write-off the unamortised balance. annuaL report 2011 71 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 15. EquITy-aCCOunTED InvESTmEnTS – COnTInuED Movement in 49% investment in Reliance Rail Equity-accounted amount of investment at the beginning of the financial year Share of loss recognised for the year (i) Release of allowance against investment Equity-accounted amount of investment at the end of the financial year Consolidated 2011 $’000 2010 $’000 – – – – – (59,033) 59,033 – (i) the Group’s share of losses in the current year was $18.6 million (based on unaudited accounts). as the carrying value of the investment was already fully written-down at the beginning of the financial year, the Group has not equity accounted its share of reliance rail’s net loss for the year. Unaudited summarised financial position of Reliance Rail Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net liabilities Group’s share of associate’s net liabilities c) Contingent liabilities 1,085,427 995,924 2,081,351 116,153 2,007,549 2,123,702 42,351 20,752 1,023,335 1,047,586 2,070,921 70,862 2,010,183 2,081,045 10,124 4,961 The consolidated entity’s share of the contingent liabilities of joint venture entities are included in Note 28. 72 downer edI LImIted nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 16. PROPERTy, PlanT anD EquIPmEnT 2011 $’000 At 1 July 2010 Cost Accumulated depreciation Net book value Year ended 30 June 2011 Additions Disposals at net book value Disposals of business at net book value Depreciation expense (Note 3(b)) Impairment (Note 17) Transfers/reclassifications at net book value Net foreign currency exchange differences at net book value Closing net book value At 30 June 2011 Cost Accumulated depreciation Closing net book value Consolidated Freehold Land Buildings Plant and Equipment Equipment under Finance Lease Total 11,388 54,029 1,499,571 64,271 1,629,259 – (16,283) (740,196) (10,704) (767,183) 11,388 37,746 759,375 53,567 862,076 8,349 (823) – – – – 4,383 438,292 60,003 511,027 (2,468) (103,293) (445) (107,029) (3) (714) – (717) (2,425) (196,826) (8,795) (208,046) (426) (1,479) (894) 3,595 – 5,564 (1,320) 7,680 (42) (541) (8,039) (34) (8,656) 18,872 34,787 891,496 109,860 1,055,015 18,872 49,203 1,688,721 130,826 1,887,622 – (14,416) (797,225) (20,966) (832,607) 18,872 34,787 891,496 109,860 1,055,015 annuaL report 2011 73 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 16. PROPERTy, PlanT anD EquIPmEnT – COnTInuED 2010 $’000 At 1 July 2009 Cost Accumulated depreciation Net book value Year ended 30 June 2010 Additions Disposals at net book value Acquisition of businesses Depreciation expense (Note 3(b)) Impairment (Note 17) Reclassifications at net book value Consolidated Freehold Land Buildings Plant and Equipment Equipment under Finance Lease Total 26,170 65,246 1,383,265 55,708 1,530,389 – (17,707) (663,077) (3,301) (684,085) 26,170 47,539 720,188 52,407 846,304 1,887 10,327 211,790 (16,626) (15,764) (27,051) – 10,564 489 (168) 1,309 224,493 (59,609) 11,873 (2,931) (146,622) (6,882) (156,435) – (957) (4,417) (5,368) – 6,443 (4,417) – – – – (118) Net foreign currency exchange differences at net book value 75 (468) 291 (31) (133) Closing net book value 11,388 37,746 759,375 53,567 862,076 At 30 June 2010 Cost Accumulated depreciation Closing net book value 11,388 54,029 1,499,571 64,271 1,629,259 – (16,283) (740,196) (10,704) (767,183) 11,388 37,746 759,375 53,567 862,076 74 downer edI LImIted nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 17. InTangIBlE aSSETS 2011 $’000 At 1 July 2010 Cost Accumulated amortisation Net book value Year ended 30 June 2011 Purchases Reclassifications at net book value Disposal of businesses at net book value Amortisation expense (Note 3(b)) Impairment (Note 4) Net foreign currency exchange differences at net book value Closing net book value At 30 June 2011 Cost Accumulated amortisation and impairment Closing net book value 2010 $’000 At 1 July 2009 Cost Accumulated amortisation Net book value Year ended 30 June 2010 Purchases Acquisition of businesses (Note 25(a)) Amortisation expense (Note 3(b)) Impairment (Note 4) Net foreign currency exchange differences at net book value Closing net book value At 30 June 2010 Cost Accumulated amortisation Closing net book value Consolidated Intellectual Property/ software 28,523 (22,725) 5,798 1,768 17,894 (214) (2,448) – 114 Goodwill 625,616 (42,000) 583,616 – – (1,990) – (9,770) (5,573) Total 654,139 (64,725) 589,414 1,768 17,894 (2,204) (2,448) (9,770) (5,459) 566,283 22,912 589,195 618,053 (51,770) 566,283 85,166 703,219 (62,254) (114,024) 22,912 589,195 Consolidated Intellectual Property/ software 24,514 (18,956) 5,558 3,985 – (3,724) – (21) 5,798 28,523 (22,725) 5,798 Goodwill 604,412 – 604,412 – 25,440 – (42,000) (4,236) 583,616 625,616 (42,000) 583,616 Total 628,926 (18,956) 609,970 3,985 25,440 (3,724) (42,000) (4,257) 589,414 654,139 (64,725) 589,414 annuaL report 2011 75 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 17. InTangIBlE aSSETS – COnTInuED Allocation of goodwill to cash-generating units (CGUs) Goodwill has been allocated for impairment testing purposes to individual CGUs, taking into consideration geographical spread, resource allocation, how operations are monitored and where independent cash inflows are identifiable. Thirteen independent CGUs have been identified across the Group against which impairment testing has been undertaken: – CPG Australia – CPG Singapore – CPG New Zealand (i) – CPG Resources – Downer Asia – Engineering Contracting – Engineering Projects – Engineering Power Systems – Works Australia – Works New Zealand – Works United Kingdom (i) – Mining – Rail Consolidated 2011 $’000 14,953 31,073 – 20,921 9,271 110,489 25,492 3,870 165,815 49,395 – 65,545 69,459 566,283 2010 $’000 14,953 34,462 8,120 20,921 10,620 111,130 25,492 3,870 169,679 46,900 2,346 65,545 69,578 583,616 (i) Impaired at 30 June 2011 following impairment testing performed by management. reCoveraBLe amount teStInG The carrying amount of goodwill is tested for impairment annually at 30 June and whenever there is an indicator that the asset may be impaired. Where an asset is deemed impaired, it is written down to its recoverable amount. Management identified $9.8 million impairment relating to goodwill in Works UK business and CPG New Zealand (Consulting arm of the Engineering division). The weak UK economy has seen the business underperform and, as a result, a goodwill impairment of $2.0 million has been recognised in the current year. Similarly, the CPG business in New Zealand has underperformed as a result of challenging economic conditions in NZ which led Management to recognise a goodwill impairment of $7.8 million. Impairment testing is typically undertaken one of two ways: – a comparison of asset book values against fair value less costs to sell, or – a comparison of the asset book values to the “value in use” of the assets. In its impairment assessment, the Group determines the recoverable amount based on a value in use calculation, using cash flow projections based on the Group’s budget and financial forecasts including a terminal value. Key assumptions used for impairment testing include: Projected cash flows Cash flow projections are based on the Board approved 2011/12 (FY2012) budget for the year ending 30 June 2012 and the business plan for the subsequent financial years ending 30 June 2013 to 30 June 2016 by applying division specific growth estimates and assuming a 2.5 per cent terminal growth rate to allow for organic growth on the existing asset base. Cash flows are then determined utilising the calculated Earnings Before Interest, Tax and Amortisation (EBITA) less tax, capital maintenance spending and working capital changes to provide a “free cash flow” estimate. This calculated cash flow is then compared against the free cash flow in the business plan to ensure the two are consistent. Growth rate estimates The future annual growth rates for FY2013 onwards are based on expected market and expected business performance rates for each CGU being tested for impairment. 76 downer edI LImIted nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 17. InTangIBlE aSSETS – COnTInuED reCoveraBLe amount teStInG – ContInued Discount rates Discount rates of between 11.2 per cent and 12.6 per cent (2010: between 10.9 per cent and 12.3 per cent) reflect Management’s estimate of the time value of money and risks specific to each CGU. In determining the appropriate discount rate for each CGU, consideration has been given to the estimated weighted average cost of capital (WACC) for the Group adjusted for country and business risk specific to that CGU. Gross margin This has been based on historical margins achieved, with changes where appropriate for expected efficiency improvements. Working capital Working capital has been maintained to support the underlying business plus allowances for growth of each business unit. Capital expenditure Capital expenditure included in the terminal year calculation is for maintenance capital used for existing plant and replacement of plant as it is retired from service. The resulting expenditure has been compared against the annual depreciation charge to ensure that it is reasonable. SenSItIvItIeS Sensitivity analysis has been undertaken for each CGU by varying terminal growth and discount rates. Assuming no material variation in these assumptions compared to those used in the analysis, Management is satisfied that the carrying value of the CGUs not impaired (refer above) exceeds their recoverable amount. nOTE 18. TRaDE anD OThER PayaBlES Consolidated 2011 $’000 2010 $’000 Note Current Trade payables Amounts due to customers under contracts and rendering of services 29 Accruals Goods and services tax payable Other Non-current Other Total trade and other payables 434,047 280,076 321,477 34,155 47,971 1,117,726 2,812 1,120,538 351,753 270,038 300,720 25,097 39,658 987,266 713 987,979 annuaL report 2011 77 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 19. BORROwIngS Current Secured – at amortised cost: – Finance lease liabilities – Hire purchase liabilities – Bank loans – Supplier finance Unsecured – at amortised cost: – Bank loans – Bank overdraft – AUD medium term notes (2009-1) – AUD medium term notes (2010-1) – USD notes – Deferred finance charges Total current borrowings Non-current Secured – at amortised cost: – Finance lease liabilities – Hire purchase liabilities Unsecured – at amortised cost: – Bank loans – USD notes – Works NZ Bonds – AUD medium term notes (2009-1) – AUD medium term notes (2009-2) – AUD medium term notes (2010-1) – Deferred finance charges Note 27(c) 27(d) 26(a) Consolidated 2011 $’000 2010 $’000 16,995 2,206 – 5,127 24,328 112,374 6,343 13,283 12,600 1,862 (5,669) 140,793 8,328 1,337 5,000 – 14,665 240,197 6,744 13,283 – – (2,722) 257,502 35(a) 165,121 272,167 27(c) 27(d) 79,242 4,889 84,131 22,809 71,688 116,081 79,743 152,063 44,100 (2,950) 483,534 39,450 4,413 43,863 116,384 92,701 121,872 93,025 152,571 – (3,404) 573,149 Total non-current borrowings 35(a) 567,665 617,012 Total borrowings 732,786 889,179 78 downer edI LImIted nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 19. BORROwIngS – COnTInuED fInanCInG faCILItIeS At 30 June 2011, the consolidated entity had the following facilities that were not utilised at balance date: Syndicated bank loan facilities Bilateral bank loan facilities Total unutilised loan facilities Syndicated bank bonding facilities Bilateral bank and insurance company bonding facilities Total unutilised bonding facilities Bank LoanS 2011 $’000 420,000 207,075 627,075 7,214 250,881 258,095 2010 $’000 235,624 197,723 433,347 42,374 351,720 394,094 Syndicated loan facilities Syndicated bank loans are unsecured, are subject to certain Group guarantees and have varying maturity dates ranging from May 2012 to November 2014. Bilateral bank loans and overdrafts Bank loans are unsecured, are subject to certain Group guarantees and have varying maturity dates of up to 1.5 years. Included in bank loans is an amount of $27.4 million which is supported by an export credit guarantee, amortises through even semi- annual instalments and matures in May 2017. uSd noteS USD unsecured private placement notes are on issue for a total amount of US$79.0 million and are subject to certain Group guarantee arrangements. The notes mature in various tranches in 2011, 2014 and 2019. The USD principal and interest have been fully hedged against the Australian dollar. The fair value of the USD notes is disclosed in Note 35. aud medIum term noteS (mtns) During 2009 and 2010, three tranches of unsecured MTNs were issued. Series 2009-1 amortises through even semi-annual instalments, until the final maturity date of April 2018 and has a balance of $93.0 million; Series 2009-2 for $150.0 million matures on a bullet basis in October 2013; Series 2010-1 amortises through even semi-annual instalments until the final maturity date of September 2015 and has a balance of $56.7 million. The MTNs were subject to certain Group guarantees. workS new ZeaLand BondS During 2009, unsecured bonds were issued for a total amount of NZ$150.0 million ($116.1 million equivalent). The bonds are subject to certain Group guarantees. The bonds mature in September 2012. fInanCe LeaSe faCILItIeS The Group leases certain of its equipment under finance leases. The average lease term is 3.6 years. The Group’s obligations under finance leases are secured by the lessors’ title to the leased assets. Interest rates underlying all rentals under finance leases are fixed at respective contract dates with a weighted average rate of 8.1 per cent p.a. (2010: 8.2 per cent p.a.). hIre purChaSe and LeaSe faCILItIeS Hire purchase facilities are secured by the specific assets financed. annuaL report 2011 79 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 19. BORROwIngS – COnTInuED CovenantS on fInanCInG faCILItIeS The Group’s financing facilities contain undertakings including an obligation to comply at all times with certain financial covenants (which require the Group to meet certain financial ratios) as well as maintain minimum levels of subsidiaries that are guarantors under various facilities. The main financial covenants to which the Group is subject are net worth, interest service coverage and debt to capitalisation. A compliance certificate must be produced for financial covenants on a semi-annual basis. In addition, the Group’s standard credit platform contains restrictions on the Group including that it is required to observe certain customary undertakings including but not limited to: i) maintenance of authorisation; ii) compliance with laws; iii) disposal of assets; iv) negative pledge (subject to certain “carve-outs”); v) change of business; vi) non-guarantor subsidiaries incurring financial indebtedness; and vii) maintenance of the guarantor group. Formal testing is undertaken monthly, reporting of financial covenant compliance takes place twice yearly for the rolling 12 month periods to 30 June and 31 December. The Group was in compliance with its financial covenants as at 30 June 2011. BondInG The Group has $1,106.8 million of bank guarantee and insurance bond facilities to support its contracting activities. $565.6 million of these facilities are provided to the Group on a committed basis and $541.2 million on an uncommitted basis. Under both committed and uncommitted facilities, the financial institution being requested to provide the guarantee/bond has the discretion as to whether to issue the instrument depending on factors such as the form of the guarantee/bond, the underlying contract of work being undertaken by the Group and potential concentration limits the financial institution may have on the industry where the work is being conducted. Furthermore, in the case of uncommitted facilities, the financier has the discretion to cancel any unutilised balance of a facility at any time or to suspend utilisation of the facility for a given period. The Group’s committed facilities have varying maturity dates which range from November 2011 to June 2012 and July 2011 to September 2012 for uncommitted facilities. The Group’s facilities are provided by a number of different banks and insurance companies on an unsecured basis and are subject to certain Group guarantees. $848.7 million of these facilities were utilised as at 30 June 2011 with $258.1 million unutilised as at that date. $260.0 million of the current committed facility is made up of a syndicated bonding facility referrable to the Waratah Train Project which is due to be refinanced on 1 December 2011. As with all performance bonds, the risk being assumed under these bonds is Downer credit risk rather than project specific risk. Management has commenced engagement with key financiers to refinance this facility. Subsequent to 30 June 2011, an additional bonding facility of $30 million was approved by an insurance company. The Group has the flexibility in respect of a committed facility amount of $81.1 million (shown as part of the unutilised bilateral bank loan facilities) which can, at the request of the Group, also be utilised for bonding purposes. refInanCInG requIrementS Where existing facilities either approach or reach maturity, the Group will seek to re-negotiate with existing and new financiers to extend the maturity date of those facilities. The Group’s earnings profile, credit rating, state of the economy, conditions in financial markets and other factors may influence the outcome of those negotiations. CredIt ratInGS The Group currently has an Investment Grade credit rating of BBB- (Outlook Stable) from Fitch Ratings. Where the credit rating is reduced, or placed on negative watch, customers and suppliers may be less willing to contract with the Group. Banks and other lending institutions may demand more stringent terms (including increased pricing) on debt and bonding facilities to reflect the higher credit risk profile. 80 downer edI LImIted nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 20. OThER fInanCIal lIaBIlITIES Current Foreign currency forward contracts Cross currency and interest rate swaps Advances from joint venture entities Non-current Foreign currency forward contracts Cross currency and interest rate swaps Consolidated 2011 $’000 2010 $’000 55,256 6,564 12,809 74,629 35,427 36,288 71,715 24,243 1,260 16,010 41,513 27,333 12,264 39,597 Total other financial liabilities 146,344 81,110 nOTE 21. PROvISIOnS At 1 July 2010 Current Non-current Total At 1 July 2010 Additional provisions recognised Unused provision reversed Utilisation of provision Disposal of businesses Net foreign currency exchange differences At 30 June 2011 Current Non-current Total Consolidated ($’000) Employee benefits Decom- missioning Contract claims/ warranties 139,196 19,996 159,192 159,192 230,422 (204) (200,175) (29) (1,024) 188,182 176,854 11,328 188,182 6,403 6,837 13,240 13,240 2,956 (2,695) (634) (237) (89) 12,541 5,180 7,361 12,541 27,660 – 27,660 27,660 9,687 (2,040) (9,670) – (52) 25,585 25,585 – 25,585 Other Total 26,155 329 26,484 26,484 84,541 (3,137) 199,414 27,162 226,576 226,576 327,606 (8,076) (75,620) (286,099) – (108) (266) (1,273) 32,160 258,468 32,040 120 32,160 239,659 18,809 258,468 (i) employee benefits comprise provision for annual leave, long service leave and other employee entitlements. (ii) (iii) the provision for decommissioning includes obligations relating to environmental remediation and leasehold make good cost based on the Group’s best estimate of the present value of the expenditure required to settle the restoration obligation. provisions for contract and claims warranty is made for the estimated liability on all products still under warranty at balance sheet date, and known claims arising under service and construction contracts. the provision is estimated having regard to previous claims experience. (iv) other provisions include return conditions for leased assets. the Group has leases that require the asset to be returned to the lessor in a certain condition. a provision has been raised for the present value of the future expected cost at lease expiry. annuaL report 2011 81 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 22. Tax lIaBIlITIES Current Current tax overseas entities Non-current a) Deferred tax liability Consolidated 2011 $’000 2010 $’000 Note 3,866 5,012 6,279 23,293 b) Movement in deferred tax liability for the financial year Balance at the beginning of the financial year Charged to income statement as deferred expense/(benefit) 22(d) Charged to equity Net foreign currency exchange differences Transfers Balance at the end of the financial year (gross) Set-off of deferred tax assets within the same tax jurisdiction 22(c) 13(b) Net deferred tax liability c) Deferred tax liabilities at the end of the financial year (prior to offsetting balances within the same tax jurisdiction) are attributable to: Property, plant and equipment Inventories Intangible assets Trade and other receivables Other current assets Equity-accounted investments Trade and other payables Provisions Borrowings Hedges and foreign exchange movements Other Total deferred tax liabilities (gross) d) Amounts charged to income statement as deferred income tax expense/(benefit): Property, plant and equipment Inventories Intangible assets Trade and other receivables Other assets Trade and other payables Borrowings Provisions Equity-accounted investments Hedges and foreign exchange movements Deferred tax liabilities in relation to prior years Charged to income statement as deferred income tax expense/(benefit) 82 downer edI LImIted 92,578 32,385 (5,543) (2,502) 4,483 121,401 (115,122) 6,279 3,137 (1,188) (361) 91,150 6,163 5,235 2,980 363 212 11,272 2,438 121,401 (5,413) (411) (98) 26,207 7,292 (2,861) (8) 43 3,513 4,331 (210) 111,341 (15,480) 3,994 5 (7,282) 92,578 (69,285) 23,293 9,014 (2,159) (156) 63,462 2,551 1,722 3,599 138 199 9,568 4,640 92,578 5,750 (7,379) (241) (2,133) (3,135) (6,588) 60 (2,524) 1,722 (2,251) 1,239 32,385 (15,480) nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 23. ISSuED CaPITal Ordinary shares – 429,100,296 ordinary shares (2010: 336,582,351) Unvested executive incentive shares – 6,844,719 ordinary shares (2010: 7,891,599) 200,000,000 Redeemable Optionally Adjustable Distributing Securities (ROADS) (2010: 200,000,000) Consolidated 2011 $’000 2010 $’000 1,278,564 978,960 (33,270) (38,888) 178,603 1,423,897 178,603 1,118,675 Changes to the Corporations Law abolished the authorised capital and par value concept in relation to share capital from 1 July 1998. Therefore, the Company does not have a limited amount of authorised capital and issued shares do not have a par value. fuLLy paId ordInary Share CapItaL Fully paid ordinary shares carry one vote per share and carry the right to dividends. Consolidated 2011 2010 Fully paid ordinary share capital Balance at the beginning of the financial year Issue of shares through Dividend Reinvestment Plan election Issue of shares under terms of Employee Share Plan (i) Issue of shares under renounceable entitlement offer (ii) Payment of share issue costs 000’s 336,582 4,712 1,884 85,922 – $’000 978,960 20,027 7,574 279,307 (7,304) 000’s 331,077 5,505 – – – $’000 937,259 41,701 – – – Balance at the end of the financial year 429,100 1,278,564 336,582 978,960 (i) under the terms of the offer, a $1,000 discount was provided in recognition of each employee’s contribution to the Company’s performance. under a-IfrS, the value of the discount is recognised as an expense with a corresponding increase in share capital of $7.6 million. (ii) during march 2011, the Company undertook a capital raising by way of a fully underwritten one for four accelerated renounceable entitlement offer. net proceeds of $272.0 million were raised in the entitlement offer. Unvested executive incentive shares Balance at the beginning of the financial year Unvested executive incentive shares transactions Vested executive incentive shares transactions Balance at the end of the financial year Consolidated 2011 2010 000’s 7,892 – (1,047) 6,845 $’000 (38,888) – 5,618 (33,270) 000’s 7,726 557 (391) 7,892 $’000 (37,071) (4,476) 2,659 (38,888) Unvested executive incentive shares are stock market purchases and are held by the Executive Employee Share Plan Trust under the Long Term Incentive Plan. Dividends from the unvested executive incentive shares accrue to the benefit of executives from the time they are purchased up until when vesting occurs or until the shares are forfeited. annuaL report 2011 83 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 23. ISSuED CaPITal – COnTInuED Redeemable Optionally Adjustable Distributing Securities (ROADS) Balance at the beginning of the financial year ROADS issued during the year Consolidated 2011 2010 000’s 200,000 – $’000 178,603 – 000’s 200,000 – $’000 178,603 – Balance at the end of the financial year 200,000 178,603 200,000 178,603 ROADS are perpetual, redeemable, exchangeable preference shares. During the year ended 30 June 2007, Works Infrastructure Finance (NZ) Limited (a wholly-owned subsidiary of Downer EDI Limited) issued 200 million ROADS, each having a face value of NZ$1 for a total of NZ$200 million. Each ROADS entitles holders to a non-cumulative fully imputed dividend which is in preference to any dividends paid on ordinary shares. ROADS rank in priority to ordinary shares for payment of dividends and for a return of capital on winding up. The ROADS dividend may be increased or decreased on reset dates, the first of which occurs on 15 June 2012. On that date, the ROADS will be either reset for a further period or at the election of the issuer will be either redeemed or exchanged into ordinary shares of Downer EDI Limited at a 2.5 per cent discount to the weighted average sale price of ordinary shares traded on the ASX during the 20 business days immediately preceding the date of exchange. The non-cumulative dividend is paid quarterly on the ROADS. Payment of dividends is at the discretion of Directors and is subject to the Directors declaring or otherwise resolving to pay a dividend and there being no impediment under the Corporations Act 2001 to the payment. Share optIonS and performanCe rIGhtS During the financial year, no performance rights (2010: nil) or performance options (2010: nil) were granted to senior executives of the Group under the Long Term Incentive Plan. Further details of the key management personnel Long Term Incentive Plan are contained in the remuneration report. nOTE 24. RESERvES Available-for-sale investment reserve Hedge reserve Foreign currency translation reserve Employee benefits reserve Total reserves hedGe reServe Consolidated 2011 $’000 – (77,673) (58,683) 14,775 (121,581) 2010 $’000 (2,816) (84,642) (39,945) 19,510 (107,893) The hedge reserve included a balance of $73.8 million representing the equity-accounted share of the historical movements of Reliance Rail’s hedge reserve. The hedge reserve is being amortised on a straight line basis over 30 years, being the contracted term of the Waratah Public-Private Partnership (PPP) Through-Life Support contract. In the current year, $2.8 million has been amortised and reflected as an expense in the income statement. 84 downer edI LImIted nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 25. aCquISITIOn Of BuSInESSES a) Summary of acquisitions 2011 The Group did not acquire any businesses during the financial year ended 30 June 2011. 2010 Name of businesses acquired Principal activity Date of acquisition Businesses: Western Construction Co. Mechanical, construction and maintenance business 10 September 2009 Berry Pipelines Pty Ltd Water main renewals 15 January 2010 Purchase consideration: Cash paid Purchase price adjustment Total purchase consideration Less: fair value of net identifiable assets acquired Goodwill Proportion of shares acquired % – – Note 17 Cost of acquisition $’000 34,258 4,507 38,765 Consolidated 2010 $’000 32,675 6,090 38,765 13,325 25,440 Goodwill has arisen on acquisitions because the cost of the combination includes amounts in relation to the benefit of expected synergies, revenue growth and future market development. These benefits are not recognised separately from goodwill because they do not meet the recognition criteria for identifiable intangible assets. b) Purchase consideration Outflow of cash to acquire businesses, net of cash acquired: Cash consideration Cash received post-acquisition settlement Outflow of cash nOTE 26. STaTEmEnT Of CaSh flOwS – aDDITIOnal InfORmaTIOn a) Reconciliation of cash and cash equivalents For the purpose of the statement of cash flows, cash and cash equivalents comprises: Cash Short-term deposits Bank overdrafts Note 35(a) 19 Consolidated 2010 $’000 32,675 (339) 32,336 Consolidated 2011 $’000 2010 $’000 286,395 2,180 288,575 (6,343) 282,232 381,776 3,350 385,126 (6,744) 378,382 annuaL report 2011 85 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 26. STaTEmEnT Of CaSh flOwS – aDDITIOnal InfORmaTIOn – COnTInuED b) Non-cash financing and investing activities During the current financial year, $27.6 million (2010: $41.7 million) in equity was issued in respect of: i) Dividend Reinvestment Plan elections $20.0 million (2010: $41.7 million); and ii) Issue of shares under the terms of Employee Share Plan $7.6 million (2010: $nil). During the financial year, the Group acquired $58.3 million (2010: $0.5 million) of equipment under finance leases. This acquisition will be reflected in the statement of cash flows over the term of the finance lease via lease repayments. c) Reconciliation of profit after tax to net cash flows from operating activities (Loss)/profit after tax for the year Adjustments for: Share of joint ventures and associates’ profits net of distributions Depreciation and amortisation of non-current assets Impairment of assets held for sale Amortisation of deferred costs Net gain on sale of property, plant and equipment Loss/(profit) on disposal of businesses Foreign exchange (gain)/loss Decrease in income tax payable Movement in deferred tax balances Equity-settled share-based transactions Payments for unvested executive incentive shares Settlement of operational foreign exchange contracts Impairment of goodwill Impairment of assets Other Changes in net assets and liabilities, net of effects from acquisition and disposal of businesses: (Increase)/decrease in assets: Current trade and other receivables Current inventories Other current assets Other financial assets Other non-current assets Increase/(decrease) in liabilities: Current trade and other payables Current provisions Non-current trade and other payables Non-current provisions Net cash generated by operating activities 86 downer edI LImIted Consolidated 2011 $’000 2010 $’000 (27,700) 3,052 (13,728) 210,494 – 3,582 (8,490) 441 (172) (1,439) (27,867) 3,779 – – 9,770 2,277 4,505 183,152 (113,202) (26,371) (14,092) – (598) 148,276 41,575 2,733 (8,148) 30,173 185,625 (5,314) 160,159 25,871 2,870 (27,700) (2,350) 527 (4,641) (20,668) 6,261 (4,476) (34,882) 42,000 – 1,838 139,495 2,000 5,048 3,211 (83) 781 55,663 (3,065) (1,796) (40) 61,719 204,266 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 27. COmmITmEnTS a) Capital expenditure commitments Plant and equipment: Within one year Between one and five year(s) b) Operating lease commitments Non-cancellable operating leases relate to premises and plant and equipment with lease terms of between one and 15 year(s). Within one year Between one and five year(s) Greater than five years c) Finance lease commitments Finance leases relate to plant and equipment with lease terms of between one and five year(s). Within one year Between one and five year(s) Minimum finance lease payments Future finance charges Finance lease liabilities Included in the financial statements as: Current borrowings Non-current borrowings d) Other expenditure commitments Hire purchase liabilities Within one year Between one and five year(s) Greater than five years Minimum hire purchase payments Future finance charges Hire purchase liabilities Included in the financial statements as: Current borrowings Non-current borrowings 19 19 19 19 Consolidated 2011 $’000 2010 $’000 Note 155,283 72,589 227,872 226,967 – 226,967 134,035 264,550 130,202 528,787 122,880 233,843 103,628 460,351 23,924 91,777 115,701 (19,464) 96,237 16,995 79,242 96,237 2,241 4,254 670 7,165 (70) 7,095 2,206 4,889 7,095 12,367 44,953 57,320 (9,542) 47,778 8,328 39,450 47,778 1,344 4,469 54 5,867 (117) 5,750 1,337 4,413 5,750 annuaL report 2011 87 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 28. COnTIngEnT lIaBIlITIES Consolidated 2011 $’000 2010 $’000 The consolidated entity has bid bonds and performance bonds issued in respect of contract performance in the normal course of business for wholly-owned controlled entities 848,715 834,798 In the ordinary course of business: i) the Company and certain controlled entities are called upon to give guarantees and indemnities in respect of the performance by counterparties, including controlled entities and related parties, of their contractual and financial obligations. Other than as noted above, these guarantees and indemnities are indeterminable in amount; ii) some entities in the Group are subject to normal design liability in relation to completed design and construction projects. The Directors are of the opinion that there is adequate insurance to cover this area and accordingly, no amounts are recognised in the financial statements; iii) controlled entities have entered into various partnerships and joint ventures under which the controlled entity could ultimately be jointly and severally liable for the obligations of the partnership or joint venture; iv) Group companies have the normal contractor’s liability in relation to services and construction contracts. This liability may include claims, disputes and/or litigation by or against Group companies and/or joint venture arrangements in which the Group has an interest. The Group is currently managing a number of claims/disputes in relation to contracts, the most significant of which are: – a claim by SP PowerAssets Ltd in relation to the construction of an electrical services tunnel in Singapore; – a claim by Siemens Ltd in relation to remediation works on the exhaust system of the Laverton Power Station, Victoria; – in December 2009, Patrick Stevedore Operations Pty Limited has adjoined Emoleum Road Services Pty Limited and Emoleum Roads Group Pty Limited (acquired by Downer on 28 February 2006) as fifth and sixth defendants in a matter related to its Port Botany Terminal, Sydney; and – some entities in the Group have been named as co-defendants in several proceedings with projects associated with the “weathertight” homes issue in New Zealand. In relation to the Siemens Ltd claim, the Directors are of the opinion that adequate provisions have been established. Insufficient information currently exists to reliably assess the liability that may arise as a consequence of the claims made by SP PowerAssets Ltd and Patrick Stevedore Operations Pty Limited’s actions. The Directors are of the opinion that disclosure of any further information related to these or other claims would be prejudicial to the interests of the Group. v) IMF (Australia) Ltd has announced to the ASX that it proposes to fund claims of certain current and former Downer EDI shareholders against Downer EDI. The claim relates to Downer EDI’s $190.0 million impairment to its Waratah rolling stock manufacturing contract announced on 1 June 2010. No claim has been issued. However, Downer EDI is aware that a Government Information Public Access request (freedom of information) was made on behalf of IMF against RailCorp seeking information about the project. Downer EDI does not currently have sufficient information to make any meaningful assessment of the potential claims. No provision has been made in the financial statements. 88 downer edI LImIted nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 29. REnDERIng Of SERvICES anD COnSTRuCTIOn COnTRaCTS Cumulative contracts in progress as at reporting date: Cumulative costs incurred plus recognised profits less recognised losses to date Less: progress billings Less: provision for Waratah train project(i) Net amount Recognised and included in the financial statements as amounts due: From customers under contracts-current To customers under contracts-current Net amount Consolidated 2011 $’000 2010 $’000 Note 10,187,145 8,484,934 (9,509,730) (7,951,447) 11 (254,598) (190,000) 422,817 343,487 11 18 702,893 613,525 (280,076) (270,038) 422,817 343,487 (i) provision for waratah train project includes $185.4 million of provision utilised during the financial year ended 30 June 2011. nOTE 30. SuBSEquEnT EvEnTS SeCond waratah traIn preSented to raILCorp On 28 July 2011, Downer presented the second Waratah train to Reliance Rail and RailCorp for Practical Completion. A certificate of Practical Completion is expected to be received in late August 2011 prior to putting the train into passenger service. The third Waratah train is undergoing testing and is expected to be submitted for Practical Completion in early September 2011. revIew of CpG ConSuLtInG BuSIneSSeS On 3 August 2011, Downer announced it was conducting a review of its general consultancy practices – CPG Asia, CPG Australia and CPG New Zealand – as part of its ongoing focus on optimising the Group portfolio. Downer has been approached by third parties interested in acquiring these businesses and consequently Management is considering the divestment option. The review will include the potential divestment of these businesses, but will exclude the resource focused consultancy businesses (Snowden, QCC and Mineral Technologies). The review is ongoing at the date of issuing this financial report. annuaL report 2011 89 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 31. COnTROllED EnTITIES Name of controlled entity Advanced Separation Engineering Australia Pty Ltd CA Facilities Pte Ltd Century Administration Pty Limited (x) Chan Lian Construction Pte Ltd Chang Chun Ao Da Technical Consulting Co Ltd Choad Pty Ltd Construction Professionals Pte Ltd Coomes AC Consulting Pty Ltd Coomes Consulting Group Unit Trust Corke Instrument Engineering (Australia) Pty Ltd CPG Advisory (Shanghai) Co. Ltd CPG Australia Pty Ltd CPG Consultants (Macau) Pte Ltd CPG Consultants India Pvt Ltd CPG Consultants Pte Ltd CPG Consultants Qatar W.L.L CPG Corporation Pte Ltd CPG Environmental Engineering Co. Ltd CPG Facilities Management Pte Ltd CPG Holdings Pte. Ltd. CPG Hubin (Suzhou) Pte Ltd CPG Investments Pte Ltd CPG Laboratories Pte Ltd (xi) CPG New Zealand Limited CPG Resources – Mineral Technologies Pty Ltd (i) CPG Resources – MT Holdings Pty Ltd (ii) CPG Resources – QCC Pty Ltd (iii) CPG Resources Pty Ltd CPG Resources – Mineral Technologies (Proprietary) Ltd (iv) CPG Resources – Mineral Technologies (USA) Inc (v) CPG Resources – Mining and Mineral Services (Proprietary) Ltd (vi) South Africa CPG Traffic Pty Ltd CPG Vietnam Co Ltd CPGCorp Philippines Inc. CPGreen Pte. Ltd. DCE Limited Dean Adams Consulting Pty Ltd DGL Investments Limited DJC & Associates Limited DMQA Technical Services (UK) Limited DMQA Training Limited Downer Australia Pty Ltd 90 downer edI LImIted Australia Vietnam Philippines Singapore New Zealand Australia New Zealand New Zealand United Kingdom United Kingdom Australia Country of incorporation Ownership interest 2011 % 2010 % Australia Singapore Australia Singapore China Australia Singapore Australia Australia Australia China Australia Macau India Singapore Qatar Singapore China Singapore Singapore Singapore Singapore Singapore New Zealand Australia Australia Australia Australia South Africa USA 100 51 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 75 100 100 100 100 – 100 100 100 100 100 100 100 70 100 100 100 100 100 100 100 90 100 100 100 100 51 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 75 100 100 100 100 100 100 100 100 100 100 100 100 70 100 100 100 100 100 100 100 80 100 100 100 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 31. COnTROllED EnTITIES – COnTInuED Name of controlled entity Downer Bitumen Surfacing Limited Downer Construction (Fiji) Limited Downer Construction (New Zealand) Limited Downer Construction PNG Ltd Downer EDI (UK) Limited Downer EDI (USA) Inc. Downer EDI (USA) Pty Ltd Downer EDI Consulting Pty Ltd Downer EDI Engineering – Projects Pty Ltd Country of incorporation New Zealand Fiji New Zealand PNG United Kingdom USA Australia Australia Australia Downer EDI Engineering Communications Limited New Zealand Downer EDI Engineering Company Pty Limited Downer EDI Engineering Construction (Australia) Pty Ltd Downer EDI Engineering CWH Pty Limited Downer EDI Engineering Electrical Pty Ltd Downer EDI Engineering Group Limited Downer EDI Engineering Group Pty Limited Downer EDI Engineering Holdings (Thailand) Limited Downer EDI Engineering Holdings Pty Ltd Downer EDI Engineering Limited Downer EDI Engineering Power Limited Downer EDI Engineering Power Pty Ltd Downer EDI Engineering Pty Limited Downer EDI Engineering Thailand Limited Downer EDI Engineering (M) Sdn Bhd Downer EDI Engineering (S) Pte Ltd Downer EDI Engineering Transmission Pty Ltd Downer EDI Finance (NZ) Limited Downer EDI Group Finance (NZ) Limited Downer EDI Group Insurance Pte. Ltd. Downer EDI Limited Downer EDI Mining NZ Limited Downer EDI Mining Pty Ltd Downer EDI Mining – Blasting Services Pty Ltd Downer EDI Mining – Minerals Exploration Pty Ltd Downer EDI Properties Limited Downer EDI Rail (Hong Kong) Limited Downer EDI Rail (USA) LLC Downer EDI Rail Pty Ltd Downer EDI Rail V/Line Maintenance Pty Ltd (xi) Downer EDI Resource Holdings Limited Downer EDI Services Pty Ltd Downer EDI Works (Hong Kong) Limited (vii) Australia Australia Australia Australia New Zealand Australia Thailand Australia New Zealand New Zealand Australia Australia Thailand Malaysia Singapore Australia New Zealand New Zealand Singapore United Kingdom New Zealand Australia Australia Australia New Zealand Hong Kong USA Australia Australia Australia Australia Hong Kong Ownership interest 2011 % 2010 % 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 – 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 – 100 100 100 100 100 100 100 100 100 100 100 100 100 annuaL report 2011 91 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 31. COnTROllED EnTITIES – COnTInuED Name of controlled entity Downer EDI Works Limited Downer EDI Works Pty Ltd Downer EDI Works Vanuatu Limited Downer Energy Systems Pty Limited Downer Group Finance International Pty Ltd Downer Group Finance Pty Limited Downer Holdings Pty Ltd Downer MBL Limited Downer MBL Pty Limited Downer Number 1 Limited Downer Number 2 Limited (viii) Downer NZ Finance Pty Ltd (x) Downer PPP Investments Pty Ltd Downer Pte Ltd (ix) Duffill Watts Pte Ltd Duffill Watts Vietnam Ltd EDI Rail (Maryborough) Pty Ltd EDI Rail Investments Pty Ltd EDI Rail PPP Maintenance Pty Ltd EDICO Pty Ltd Emoleum Road Services Pty Ltd Emoleum Roads Group Pty Limited Emoleum Services Pty Limited Evans Deakin Industries Pty Ltd Faxgroove Pty Limited Gaden Drilling Pty Limited (x) H.R.S. New Zealand Limited Indeco Consortium Pte Ltd Kiwi Pacific Investments Limited (x) Locomotive Demand Power Pty Ltd Lowan (Management) Pty Ltd Country of incorporation New Zealand Australia Vanuatu Australia Australia Australia Australia New Zealand Australia New Zealand New Zealand Australia Australia Singapore Singapore Vietnam Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia New Zealand Singapore New Zealand Australia Australia Miningtek Consultants and Services Limited British Virgin Islands Otraco Brasil Gerenciamento de Pneus Ltda Otraco Canada Inc Otraco Chile SA Otraco International Pty Ltd Otracom Pty Ltd Peridian Asia Pte Ltd Peridian India Pvt Ltd PM Link Pte Ltd Primary Producers Improvers Pty Ltd PT Duffill Watts Indonesia 92 downer edI LImIted Brazil Canada Chile Australia Australia Singapore India Singapore Australia Indonesia Ownership interest 2011 % 2010 % 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 31. COnTROllED EnTITIES – COnTInuED Name of controlled entity PT Otraco Indonesia PT QDC Technologies Rail Services Victoria Pty Ltd REJV Services Pty Ltd Reussi Pty Limited Richter Drilling (PNG) Limited Rimtec Pty Ltd Rimtec USA Inc. Roche Bros. (Hong Kong) Limited Roche Bros. Superannuation Pty Ltd Roche Castings Pty Limited (x) Roche Contractors Pty Ltd Roche Highwall Mining Pty Ltd Roche Mining (MT) Brasil Ltda Roche Mining (PNG) Ltd Roche Mining MT India Pvt Ltd Roche Services Pty Ltd RPC Roads Pty Ltd Sach Infrastructure Pty Ltd Shanghai CPG Architectural Design Co. Ltd Sillars (B. & C.E.) Ltd Sillars (FRC) Ltd Sillars (TMWC) Limited Sillars (TMWD) Limited Sillars Holdings Limited Sillars Road Construction Limited Singleton Bahen Stansfield Pty Ltd SIP-CPG Facilities Management Co. Ltd Snowden Consultoria do Brasil Limitada Snowden Mining Industry Consultants (Pty) Ltd Snowden Mining Industry Consultants Inc. Snowden Mining Industry Consultants Limited Snowden Mining Industry Consultants Pty Ltd Snowden Mining Technologies Limited Snowden Technologies Pty Ltd Snowden Training (Pty) Ltd Southern Asphalters Pty Ltd Starblake Pty Limited (xi) Suzhou PM Link Co Ltd TSE Wall Arlidge Limited TSG Architects Pte. Ltd. Underground Locators Limited Country of incorporation Ownership interest 2011 % 2010 % Indonesia Indonesia Australia Australia Australia PNG Australia USA Hong Kong Australia Australia Australia Australia Brazil PNG India Australia Australia Australia China United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom Australia China Brazil South Africa Canada United Kingdom Australia British Virgin Islands Australia South Africa Australia Australia China New Zealand Singapore New Zealand 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 – 60 100 100 100 100 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 60 100 100 100 annuaL report 2011 93 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 31. COnTROllED EnTITIES – COnTInuED Name of controlled entity Country of incorporation Ownership interest New Zealand Australia New Zealand United Kingdom New Zealand United Kingdom 2011 % 100 100 100 100 100 100 2010 % 100 100 100 100 100 100 Waste Solutions Limited Welshpool Engineering Pty Ltd (x) Works Finance (NZ) Limited Works Infrastructure (Holdings) Limited Works Infrastructure Harker Underground Construction Joint Venture Limited Works Infrastructure Limited (i) formerly downer edI mining-mineral technologies pty Ltd (ii) formerly roche mining (mt) holdings pty Ltd (iii) formerly downer edI engineering – qCC pty Ltd (iv) formerly downer edI mining – mineral technologies (Sa) (proprietary) Ltd (v) formerly downer edI mining – mineral technologies (uSa) Inc (vi) formerly downer edI mining Services (proprietary) Ltd (vii) formerly downer Construction (hong kong) Limited (viii) formerly downer Signs Limited (ix) formerly downer edI works pte Ltd (x) Indicates entities currently undergoing liquidation (xi) Indicates entities disposed during the financial year ended 30 June 2011 nOTE 32. RElaTED PaRTy InfORmaTIOn anD kEy managEmEnT PERSOnnEl DISClOSuRES a) Key management personnel Directors R M Harding, Chairman, appointed 3 November 2010 P E J Jollie AM, Chairman, resigned 3 November 2010 G A Fenn, Managing Director and Chief Executive Officer, appointed 30 July 2010, Finance Director and Chief Financial Officer, 1 July 2010 to 29 July 2010 G H Knox, Managing Director and Chief Executive Officer, to 30 July 2010 S A Chaplain, Non-executive Director L Di Bartolomeo, Non-executive Director J S Humphrey, Non-executive Director C J S Renwick AM, Non-executive Director, resigned 9 December 2010 C G Thorne, Non-executive Director Key Management Executives P Borden, Chief Executive Officer – Downer Rail C Bruyn, Chief Executive Officer – Downer New Zealand & United Kingdom D Cattell, Chief Executive Officer – Downer Australia, appointed 22 February 2011, Chief Operating Officer 1 July 2010 to 21 February 2011 S Cinerari, Chief Executive Officer – Downer Works Australia K Fletcher, Chief Financial Officer E Kolatchew, Chief Executive Officer – Downer Engineering, resigned 21 February 2011 D Overall, Chief Executive Officer – Downer Mining 94 downer edI LImIted nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 32. RElaTED PaRTy InfORmaTIOn anD kEy managEmEnT PERSOnnEl DISClOSuRES – COnTInuED b) Key management personnel compensation Details of key management personnel compensation are disclosed in Note 33. c) Other transactions with Directors A Director of the Company, J S Humphrey, has an interest as a partner in the firm Mallesons Stephen Jaques, solicitors. This firm renders legal advice to the consolidated entity in the ordinary course of business under normal commercial terms and conditions. The amount of fees paid and recognised was $817,244 (2010: $737,818). d) Transactions with other related parties: Transactions with other related parties are made on normal commercial terms and conditions. The following transactions with other related parties, where a Director of the Company has also a directorship, occurred during the financial year ended 30 June 2011: Director Entity R M Harding Santos Ltd L Di Bartolomeo Australian Rail Track Corporation Limited Macquarie Generation Australian Super Limited S A Chaplain Australian Youth Orchestra G A Fenn KDR Victoria Pty Ltd Coal & Allied Industries e) Transactions within the wholly-owned Group Transaction type Sales of goods and services Purchase of goods $’000 – 155,334 1,377 389 – 3,242 – $’000 1 643 – – – – 3,310 Sponsorship $’000 – – – – 28 – – Aggregate amounts receivable from and payable to wholly-owned subsidiaries are included within total assets and liabilities balances as disclosed in Note 36. Amounts contributed to the defined contribution plan are disclosed in Note 3. Other transactions occurred during the financial year between entities in the wholly-owned Group on normal arm’s length commercial terms. f) Equity interests in related parties Equity interests in subsidiaries Details of the percentage of ordinary shares held in controlled entities are disclosed in Note 31. Equity interests in associates and joint ventures Details of interests in associates and joint ventures are disclosed in Note 15. g) Controlling entity The parent entity of the Group is Downer EDI Limited. annuaL report 2011 95 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 32. RElaTED PaRTy InfORmaTIOn anD kEy managEmEnT PERSOnnEl DISClOSuRES – COnTInuED h) Key management personnel equity holdings Key management personnel equity holdings in fully paid ordinary shares issued by Downer EDI Limited are as follows: 2011 R M Harding S A Chaplain L Di Bartolomeo J S Humphrey C G Thorne G A Fenn (i) P Borden C Bruyn D Cattell S Cinerari K Fletcher D Overall Balance at 1 July 2010 Net change Balance at 30 June 2011 No. – 19,609 47,959 54,226 – – 1,000 500 9,059 1,843 3,000 – No. – 30,528 12,944 13,756 13,750 80,959 500 300 129,886 (1,043) 32,000 – No. – 50,137 60,903 67,982 13,750 80,959 1,500 800 138,945 800 35,000 – 137,196 313,580 450,776 (i) excludes 250,525 sign-on shares and 14,577 shares acquired under the accelerated renounceable rights offer attached to those shares that vested on 1 July 2011. 2010 P E J Jollie L Di Bartolomeo S A Chaplain R M Harding J S Humphrey C J S Renwick C G Thorne G A Fenn G H Knox C Bruyn D Cattell S Cinerari E Kolatchew D Overall P Reichler(i) G Wannop Balance at 1 July 2009 Net change Balance at 30 June 2010 No. 86,333 47,206 13,000 – 54,069 30,000 – – No. 103,334 753 6,609 – 157 – – – No. 189,667 47,959 19,609 – 54,226 30,000 – – 600,000 200,000 800,000 500 57,809 1,843 – – 200,256 47,064 1,138,080 – (48,750) – – – (66,602) (14,458) 181,043 500 9,059 1,843 – – 133,654 32,606 1,319,123 (i) Included in comparatives to acknowledge kmp status for one quarter of the year ended 30 June 2010. 96 downer edI LImIted nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 32. RElaTED PaRTy InfORmaTIOn anD kEy managEmEnT PERSOnnEl DISClOSuRES – COnTInuED Key management personnel equity holdings in performance options issued by Downer EDI Limited are as follows: 2011 D Cattell C Bruyn S Cinerari P Borden 2010 D Cattell C Bruyn S Cinerari P Reichler(i) G Wannop Balance at 1 July 2010 Net change Balance at 30 June 2011 No. 34,863 24,481 19,016 5,140 83,500 No. (34,863) (24,481) (19,016) (5,140) (83,500) No. – – – – – Balance at 1 July 2009 Net change Balance at 30 June 2010 No. 34,863 24,481 19,016 16,082 25,106 119,548 No. – – – - – – No. 34,863 24,481 19,016 16,082 25,106 119,548 (i) Included in comparatives to acknowledge kmp status for one quarter of the year ended 30 June 2010. Key management personnel equity holdings in performance rights issued by Downer EDI Limited are as follows: 2011 D Cattell C Bruyn S Cinerari P Borden 2010 D Cattell C Bruyn S Cinerari P Reichler(i) G Wannop Balance at 1 July 2010 Net change Balance at 30 June 2011 No. 11,000 7,724 6,000 1,622 26,346 No. (11,000) (7,724) (6,000) (1,622) (26,346) No. – – – – – Balance at 1 July 2009 Net change Balance at 30 June 2010 No. 11,000 7,724 6,000 5,074 7,921 37,719 No. – – – – – – No. 11,000 7,724 6,000 5,074 7,921 37,719 (i) Included in comparatives to acknowledge kmp status for one quarter of the year ended 30 June 2010. annuaL report 2011 97 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 33. kEy managEmEnT PERSOnnEl COmPEnSaTIOn Key management personnel compensation Short-term employee benefits Post-employment benefits Share-based payments Consolidated (i) 2011 $ 2010 $ 9,959,936 12,737,853 3,757,805 1,392,499 1,196,921 3,725,571 15,110,240 17,660,345 (i) Comparative balances restated to reflect kmps for the year ended 30 June 2010. nOTE 34. EmPlOyEE ShaRE Plan An employee discount share plan was instituted in June 2005. In accordance with the provisions of the plan, as approved by shareholders at the 1998 Annual General Meeting, permanent full and part-time employees of Downer EDI Limited and its subsidiary companies who have completed six months service may be invited to participate. In the current year, 6,280 employees accepted the offer to participate in the Employee Share Plan, which allowed them to acquire up to 300 of the Company’s shares with a $1,000 discount. A total of 1,884,000 shares for a total value of $7.6 million were issued under the plan (Refer to Note 23). nOTE 35. fInanCIal InSTRumEnTS (a) Capital risk management The capital structure of the consolidated entity consists of debt and equity. The consolidated entity may vary its capital structure by adjusting the amount of dividends, returning capital to shareholders, issuing new shares or increasing or reducing debt. The consolidated entity’s objectives when managing capital are to safeguard its ability to operate as a going concern so that it can meet all its financial obligations when they fall due, to provide adequate returns to shareholders and to maintain an appropriate capital structure to optimise its cost of capital. The consolidated entity’s capital management strategy remains unchanged from 2010. The consolidated entity monitors its gearing ratio determined as the ratio of net debt to total capitalisation. During the years ended 30 June 2011 and 30 June 2010, the gearing ratios were as follows: Current borrowings Non-current borrowings Gross debt (i) Adjustment for the mark to market of cross currency and interest rate swaps and deferred finance charges Adjusted gross debt Less: cash and cash equivalents Net debt Equity (ii) Total capitalisation (Net debt + Equity) Gearing ratio (iii) Off balance sheet debt Operating leases (iv) Gearing ratio (including off balance sheet debt) (i) Gross debt is defined as all borrowings. (ii) equity consists of all capital and reserves. (iii) net debt/total capitalisation. Note 19 19 9 Consolidated 2011 $’000 165,121 567,665 732,786 48,286 781,072 (288,575) 492,497 1,442,385 1,934,882 25.5% 2010 $’000 272,167 617,012 889,179 26,644 915,823 (385,126) 530,697 1,242,851 1,773,548 29.9% 241,299 33.7% 179,621 36.4% (iv) the Group enters into operating leases in respect of plant and equipment (excluding real property) utilised in its businesses. the present value of these leases at 30 June 2011 discounted at 10 per cent p.a. (discount rate prescribed by the loan covenant) was $241.3 million (June 2010: $179.6 million). 98 downer edI LImIted nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 35. fInanCIal InSTRumEnTS – COnTInuED (b) Financial risk management objectives The consolidated entity’s Group Treasury function provides treasury services to the business, co-ordinates access to domestic and international financial markets and manages the financial risks relating to the operations of the consolidated entity. These financial risks include foreign exchange, interest rate and commodity market risk, counterparty credit risk and liquidity risk. The consolidated entity’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. The consolidated entity may enter into a variety of derivative financial instruments to manage its exposure to foreign exchange rate and interest rate risk, including: i) forward foreign exchange contracts (outright forwards and options) to hedge the exchange rate risk arising from cross border trade flows, foreign income and debt service obligations; ii) cross currency interest rate swaps to manage the foreign currency risk associated with foreign currency denominated borrowings; and iii) interest rate swaps to mitigate the risk of rising interest rates. The consolidated entity does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes. The use of financial derivatives is governed by the consolidated entity’s Treasury Policies, which provide written principles on the use of financial derivatives. (c) Accounting policies Details of the accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in Note 1. (d) Foreign currency risk management The consolidated entity undertakes certain transactions denominated in foreign currencies; hence, exposures to exchange rate fluctuations arise. Exchange rate exposures are managed within approved policy parameters, utilising forward foreign exchange contracts, options and cross currency swap agreements. The carrying amounts of the consolidated entity’s significant foreign currency denominated financial assets and financial liabilities at the reporting date are as follows: Consolidated US dollar (USD) New Zealand dollar (NZD) Great British pound (GBP) Euro (EUR) Chinese yuan (CNY) Singapore dollars (SGD) Financial assets(i) Financial liabilities(i) 2011 $’000 2010 $’000 2011 $’000 2010 $’000 23,608 395 710 4,125 – 236 62,906 16,802 1,800 23,794 3,689 234 2,026 1,449 162 454 – 9 41,831 26,104 479 998 100 123 29,074 109,225 4,100 69,635 (i) the above table shows foreign currency financial assets and liabilities in australian dollar equivalent. The above table excludes foreign currency financial assets and liabilities which have been hedged back into Australian dollars. annuaL report 2011 99 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 35. fInanCIal InSTRumEnTS – COnTInuED foreIGn CurrenCy forward ContraCtS The following table summarises by currency the Australian dollar (AUD) value (unless otherwise stated) of major forward exchange contracts outstanding as at reporting date: Outstanding contracts Weighted average exchange rate Foreign currency Contract value Fair value 2011 2010 2011 FC’000 2010 FC’000 2011 $’000 2010 $’000 2011 $’000 2010 $’000 57,007 43,298 79,818 24,617 62,492 49,375 97,689 31,778 (8,793) (8,287) 200,360 239,966 241,098 310,592 (42,935) (2,997) (2,176) (8,451) 300,665 344,401 352,965 440,059 (60,015) (13,624) 7,150 5,801 7,401 20,352 8,117 31,986 60,692 100,795 1,873 4,005 13,422 19,300 14,180 14,715 64,657 93,552 7,396 6,328 8,468 22,192 15,068 50,769 2,127 4,475 15,660 22,262 23,191 24,135 652 791 1,228 2,671 (105) (331) (1,103) (1,539) (4,031) (6,887) (2,545) (2,479) 100,691 119,428 (15,261) (18,298) 166,528 166,754 (26,179) (23,322) 0.9122 0.8769 0.8310 0.9668 0.9167 0.8740 0.5386 0.6300 0.6028 6.5193 6.4543 6.2460 0.8171 0.7746 0.7726 0.8807 0.8949 0.8570 0.6115 0.6097 0.5414 6.7325 6.6849 6.3703 139,480 101,957 101,422 134,861 21,395 15,714 15,144 20,174 588,933 1,032,385 94,290 162,062 829,835 1,269,203 131,399 197,380 1,374.0 1,383.5 1,373.5 6,583,000 6,265,000 1,376.4 6,583,000 19,588,000 13,166,000 25,853,000 0.5311 0.5166 0.5038 0.5439 0.5379 0.5129 7.0101 7.3268 6.5970 6.6240 0.7831 0.7836 0.7844 0.7173 0.7157 0.7243 1,016 918 4,369 6,303 1,412 1,770 3,182 1,100 2,200 600 3,900 918 765 8,043 9,726 1,115 988 2,103 1,700 2,550 3,350 7,600 4,791 4,758 9,549 1,912 1,778 8,673 12,363 201 242 443 1,405 2,807 765 4,977 4,561 14,232 18,793 1,689 1,423 15,681 18,793 169 149 318 2,370 3,563 4,625 10,558 184 35 (1,529) (1,310) 1,242 1,220 2,462 (383) (377) (1,740) (2,500) 7 (2) 5 41 81 22 144 (138) (286) (5,681) (6,105) 645 2,017 2,662 (56) (47) (471) (574) (3) (3) (6) (5) – (44) (49) Buy USD / Sell AUD Less than 3 months 3 to 6 months Later than 6 months Buy AUD / Sell USD Less than 3 months 3 to 6 months Later than 6 months Buy EUR / Sell AUD Less than 3 months 3 to 6 months Later than 6 months Buy CNY / Sell USD Less than 3 months 3 to 6 months Later than 6 months Buy KRW / Sell USD 3 to 6 months Later than 6 months Buy GBP / Sell AUD Less than 3 months 3 to 6 months Later than 6 months Buy AUD / Sell ZAR Less than 3 months 3 to 6 months Buy SGD / Sell USD Less than 3 months 3 to 6 months Later than 6 months 100 downer edI LImIted nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 35. fInanCIal InSTRumEnTS – COnTInuED CroSS CurrenCy IntereSt rate SwapS Under cross currency interest rate swap contracts, the consolidated entity has agreed to exchange certain foreign currency loan principal and interest amounts at agreed future dates at fixed exchange rates. Such contracts enable the consolidated entity to eliminate the risk of adverse movements in foreign exchange rates related to foreign currency denominated borrowings. The following table details the Australian dollar equivalent of cross currency interest rate swaps outstanding as at reporting date: Outstanding contracts Weighted average interest rate Weighted average exchange rate Contract value Fair value 2011 % 2010 % 2011 2010 2011 $’000 2010 $’000 2011 $’000 2010 $’000 Buy USD / Sell AUD Less than 1 year 2 to 5 years 5 years or more Buy SGD / Sell AUD Less than 1 year 1 to 2 year(s) 6.8 8.0 6.8 8.8 – 6.8 8.0 6.8 – 8.7 0.7217 0.6787 0.7220 0.7217 0.6787 0.7220 2,772 2,772 (898) (325) 103,141 103,141 (33,387) (11,611) 9,695 9,695 (1,935) 393 115,608 115,608 (36,220) (11,543) 1.1845 – 50,654 – (5,546) – 1.1845 – 50,654 50,654 50,654 – (5,546) – (312) (312) The above cross currency interest rate swap contracts are designated and effective as cash flow hedges. Outstanding contracts Weighted average interest rate Weighted average exchange rate Contract value Fair value 2011 % 2010 % 2011 2010 2011 $’000 2010 $’000 2011 $’000 2010 $’000 Buy NZD / Sell AUD 1 to 2 year(s) 2 to 5 years Total 10.0 – – 9.7 1.2384 – 28,887 – 1.2384 – 28,887 – 28,887 28,887 (873) – (873) – 484 484 The above cross currency interest rate swap contracts are designated and effective as cash flow hedges. annuaL report 2011 101 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 35. fInanCIal InSTRumEnTS – COnTInuED foreIGn CurrenCy SenSItIvIty anaLySIS The Group is mainly exposed to the following foreign currencies: Australian dollar (AUD), United States dollar (USD), Euro (EUR), Chinese yuan (CNY), New Zealand dollar (NZD) and Great British pound (GBP). The following table details the Group’s sensitivity to movement in the Australian dollar against relevant foreign currencies. The percentages disclosed below represent Management’s assessment of the possible changes in spot foreign exchange rates (i.e. forward exchange points and discount factors have been kept constant). The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a given percentage change in foreign currency rates. A positive number indicates a before-tax increase in profit and equity and a negative number indicates a before-tax decrease in profit and equity. Consolidated USD impact – 10% rate change + 10% rate change – 20% rate + 20% rate EUR impact – 10% rate change + 10% rate change – 15% rate change + 15% rate change CNY impact – 10% rate change + 10% rate change NZD impact – 10% rate change + 10% rate change GBP impact – 10% rate change + 10% rate change – 15% rate change + 15% rate change Profit/(loss)(i) Equity(ii) 2011 $’000 2010 $’000 2011 $’000 2010 $’000 – – 7,871 (6,440) – – 38,759 (31,712) 5,396 (3,597) – – 67,707 (45,138) – – – – 648 (479) – – (117) 96 – – 97 (71) 2,533 (2,072) – – 13,434 (13,434) – – 20,088 (20,088) – – 399 (326) 13,591 25,659 (11,092) (20,880) (1,034) 846 147 (120) – – 317 (388) – – 1,411 (1,411) – – 1,700 (1,700) – – (i) this is mainly a result of the changes in the value of forward foreign exchange contracts not designated in a hedge relationship, foreign currency investments, receivables and payables at year end in the consolidated entity. (ii) this is a result of the changes in the value of forward foreign exchange contracts designated as cash flow hedges. In Management’s opinion, the sensitivity analysis is not fully representative of the inherent foreign exchange risk as the year end exposure does not necessarily reflect the exposure during the course of the year. 102 downer edI LImIted nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 35. fInanCIal InSTRumEnTS – COnTInuED (e) Interest rate risk management The consolidated entity is exposed to interest rate risk as entities borrow funds at both fixed and floating interest rates. The risk is managed by maintaining an appropriate mix between fixed and floating rate borrowings and hedging is undertaken through interest rate swap contracts or the issue of fixed rate MTNs or bonds. The consolidated entity’s exposure to interest rates on financial assets and financial liabilities is detailed in the table below: Weighted average effective interest rate Consolidated 2011 % 2010 % 2011 $’000 2010 $’000 Floating interest rates – cash flow exposure Bank overdrafts (i) Bank loans AUD (ii) GBP SGD USD THB AUD medium term notes: Series 2009-2 (iii) Series 2010-1 Cash and cash equivalents Cash flow exposure – total Fixed interest rates – fair value exposure Bank loans AUD SGD (iv) USD notes AUD medium term notes: Series 2009-1 Series 2009-2 (iii) NZD Works Bonds NZD (v) Finance lease and hire purchase liabilities Fair value exposure – total 2.6 7.6 2.6 3.2 – 3.4 – 7.9 4.3 2.9 5.1 7.8 7.2 9.8 9.7 8.5 3.6 8.4 2.2 3.4 1.6 – 8.4 – 3.7 6.3 5.0 7.8 7.2 9.8 9.7 8.2 6,343 6,435 78,022 12,244 38,970 – 3,633 71,832 31,296 11,735 22,882 – – 100,000 56,700 (288,575) (92,663) – (385,126) (140,946) 5,126 7,687 109,769 92,292 150,000 116,954 103,332 585,160 211,933 12,573 115,608 106,308 50,000 121,693 53,528 671,643 All interest rates in the above table reflect rates in the currency of the relevant loan. (i) Bank overdrafts located in uk (GBp denominated) and India (Inr denominated). the value of the interest rate and cross currency swaps have been included in the debt numbers above. (ii) Includes a bank loan amount that has been swapped from floating rate SGd to floating rate aud. (iii) aud150.0 million mtn Series 2009-2 fixed rate note; aud100.0 million swapped from fixed rate to floating rate in 2009 and swapped back to fixed rate in 2011. (iv) part of SGd bank loan swapped from floating rate to fixed rate. (v) nZd Bonds 150.0 million fixed rate; partial amount swapped from fixed rate nZd to fixed rate aud. annuaL report 2011 103 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 35. fInanCIal InSTRumEnTS – COnTInuED IntereSt rate Swap ContraCtS The consolidated entity uses interest rate swap contracts to manage interest rate exposures. Under the interest rate swap contracts, the consolidated entity agrees to exchange the differences between fixed and floating rate interest amounts calculated on agreed notional principal amounts. The fair values of interest rate swaps are based on market values of equivalent instruments at the reporting date. The following tables detail the interest rate swap contracts and related notional principal amounts as at the reporting date: Outstanding floating for fixed contracts AUD interest rate swaps Less than 1 year(i) 2 to 5 years SGD interest rate swaps Less than 1 year(ii) 1 to 2 year(s) Weighted average interest rate (including margin) Notional principal amount Fair value 2011 % 2010 % 2011 $’000 2010 $’000 2011 $’000 2010 $’000 – 5.1 2.2 – 5.2 5.1 1.8 2.2 – 180,000 120,397 138,242 120,397 318,242 7,567 – 4,191 8,382 7,567 12,573 – 1,028 1,028 (121) – (121) (598) 496 (102) (33) (176) (209) (i) aud 180.0 million swaps matured in June 2011. (ii) SGd 5.0 million swap matured in may 2011. The above interest rate swap contracts exchanging floating rate interest for fixed rate interest are designated as effective cash flow hedges. Outstanding fixed for floating contracts AUD interest rate swaps 2 to 5 years Weighted average interest rate (including margin) Notional principal amount Fair value 2011 % 2010 % 2011 $’000 2010 $’000 2011 $’000 2010 $’000 – 8.4 – – 100,000 100,000 – – 2,672 2,672 The above interest rate swap contracts exchanging fixed rate interest for floating rate interest are designated as effective fair value hedges. 104 downer edI LImIted nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 35. fInanCIal InSTRumEnTS – COnTInuED IntereSt rate SenSItIvIty anaLySIS The sensitivity analysis below has been determined based on the exposure to interest rates at the reporting date and assuming that the rate change occurs at the beginning of the financial year and is then held constant throughout the reporting year. The selected percentage increase or decrease represents Management’s assessment of the possible change in interest rates. A positive number indicates a before-tax increase in profit and equity and a negative number indicates a before-tax decrease in profit and equity. Increase in rate Profit or loss (i) Equity (ii) Decrease in rate Profit or loss Equity Consolidated 2011 $’000 918 4,368 (918) (4,563) 2010 $’000 1,707 6,672 (1,834) (6,824) (i) this is mainly attributable to the consolidated entity’s exposure to interest rates on its unhedged variable rate borrowings. (ii) this is mainly on account of the change in valuation of the interest rate swaps and cross currency interest rate swaps held by the consolidated entity and designated as cash flow hedges. Sensitivities have been based on an increase in interest rates by 1.0 per cent p.a. and a decrease by 1.0 per cent p.a. across the yield curve. (f) Equity price risk management The consolidated entity is exposed to equity price risks arising from equity investments. Equity investments are held for trading purposes and are categorised as fair value through profit and loss investments. Equity price risk sensitivity The sensitivity analysis below has been determined based on the exposure to equity price risks at the reporting date. Impact on Equity Fair value through equity Consolidated 2011 $’000 2010 $’000 – 156 annuaL report 2011 105 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 35. fInanCIal InSTRumEnTS – COnTInuED (g) Credit risk management Credit risk refers to the risk that a counterparty will default on its contractual obligations, resulting in financial loss to the consolidated entity. The consolidated entity has adopted the policy of only dealing with highly rated counterparties. The consolidated entity’s exposure and the credit ratings of its counterparties are continuously monitored and transactions are spread among approved counterparties. Trade receivables consist of a large number of customers, spread across diverse industries and geographical areas. Ongoing credit evaluation is performed on the financial condition of trade receivables counterparties and where appropriate insurance cover is obtained. Refer to Note 11 for details on credit risk arising from trade and other receivables. The credit risk on derivative financial instruments is limited to counterparties that have minimum long-term credit ratings of no less than single A – (or equivalent) other than one counterparty that is rated BBB+. Credit risk arising from cash balances held with banks and financial institutions is managed by Group Treasury in accordance with Treasury Policies. Investments of surplus funds are made only with approved counterparties (with credit ratings of no less than AA-) and within approved credit limits assigned to each counterparty. Counterparty credit limits are reviewed by the Board from time to time. The limits are set to minimise the concentration of risks and therefore mitigate financial loss through potential counterparty default. No material exposure is considered to exist by virtue of the non-performance of any financial counterparty. The carrying amount of financial assets recorded in the financial statements, net of any allowances for losses, represents the consolidated entity’s maximum exposure to credit risk. (h) Liquidity risk management Liquidity risk arises from the possibility that the consolidated entity is unable to settle a transaction on the due date. The ultimate liquidity risk management rests with the Board of Directors, which has built an appropriate risk management framework for the consolidated entity’s funding and liquidity management requirements. The consolidated entity manages liquidity risk by maintaining adequate cash reserves and committed undrawn debt facilities, by continuously monitoring forecast and actual cash flows and by matching the maturity profiles of financial assets and liabilities. Included in Note 19 is a listing of committed undrawn debt facilities. 106 downer edI LImIted nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 35. fInanCIal InSTRumEnTS – COnTInuED LIquIdIty rISk taBLeS The following tables detail the consolidated entity’s contractual maturity for its financial liabilities. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on contractual maturities. The tables include both interest and principal cash flows. Less than 1 year 1 to 2 years 2 to 3 years 3 to 4 years 4 to 5 years More than 5 years $’000 Consolidated 2011 Financial liabilities Trade payables Bank overdrafts Supplier finance Bank loans USD notes AUD medium term notes (Series 2009-1) AUD medium term notes (Series 2009-2) AUD medium term notes (Series 2010-1) 434,047 6,343 5,276 115,207 7,056 19,530 14,625 16,762 – – – 5,719 5,138 18,664 14,625 15,783 – – – 5,564 5,138 18,031 157,313 – – – 5,359 68,039 17,265 – – – – 5,084 424 – – – 4,789 8,012 16,245 29,361 – 14,931 13,964 6,582 – – – 42,162 670 NZD Bonds 11,173 118,632 – – Total borrowings including interest 195,972 178,561 200,977 104,627 Finance lease and hire purchase liabilities 26,165 25,413 23,931 22,678 – 28,335 24,009 Derivative instruments(i) Cross currency interest rate swaps – Receive leg – Pay leg Interest rate swaps Foreign currency forward contracts (56,564) (33,484) (5,132) (67,953) (424) (8,002) 69,506 38,519 8,865 107,201 346 103 46,827 39,731 (301) 71 (522) – 659 (411) – 12,007 (396) – Total 716,299 248,843 228,411 166,031 52,168 46,441 (i) Includes assets and liabilities. annuaL report 2011 107 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 35. fInanCIal InSTRumEnTS – COnTInuED LIquIdIty rISk taBLeS – ContInued $’000 Consolidated 2010 Financial liabilities Trade payables Bank overdrafts Bank loans USD notes AUD medium term notes (Series 2009-1) AUD medium term notes (Series 2009-2) NZD Bonds Total borrowings including interest Less than 1 year 1 to 2 years 2 to 3 years 3 to 4 years 4 to 5 years More than 5 years 351,753 6,744 268,069 7,815 20,257 14,625 – – 97,609 10,513 19,532 14,625 11,761 130,692 329,271 272,971 – – 5,761 7,656 18,682 14,625 – 46,724 12,039 – – 5,509 7,656 18,118 157,313 – – – 5,256 101,376 17,152 – – – – 9,755 12,570 45,499 – – 188,596 123,784 67,824 11,601 11,895 54 Finance lease and hire purchase liabilities 14,761 12,837 Derivative instruments (i) Cross currency interest rate swaps – Receive leg – Pay leg Interest rate swaps Foreign currency forward contracts (11,428) (64,570) (36,355) (6,524) (86,392) (10,712) 16,313 69,518 38,519 8,865 107,201 12,666 88 (658) 17,773 19,663 (859) 7,384 (634) – (378) – (687) – Total 718,531 309,761 67,452 201,904 156,110 69,145 (i) Includes assets and liabilities. (i) Fair value of financial instruments The financial liability disclosed below is recorded in the financial statements at its carrying amount. Its fair value is shown in the table below: Total borrowings (i) (i) total borrowings exclude finance leases. Carrying amount Fair value 2011 $’000 2010 $’000 2011 $’000 2010 $’000 629,454 835,651 657,608 859,693 The fair values and net fair values of financial assets and financial liabilities are determined as follows: i) the fair values of financial assets and financial liabilities with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market prices; ii) the fair values of other financial assets and financial liabilities are determined in accordance with generally accepted pricing models based on discounted cash flow analysis; and iii) the fair values of derivative instruments included in hedging assets and liabilities are calculated using quoted prices. Where such prices are not available, the fair values are calculated using discounted cash flow analysis and based on the applicable yield curve for the duration of the term of the instruments. Transaction costs are included in the determination of net fair value. 108 downer edI LImIted nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 35. fInanCIal InSTRumEnTS – COnTInuED (i) Fair value of financial instruments – continued Fair value measurements recognised in the statement of financial position The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable. – Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities. – Level 2 fair value measurements are those derived from inputs other than quoted prices included within 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 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). 2011 $’000 Financial assets in designated hedge accounting relationships Foreign currency forward contracts Cross currency and interest rate swaps Financial assets at fair value through profit and loss Unquoted equity investments Available-for-sale financial assets Unquoted equity investments Financial liabilities in designated hedge accounting relationships Foreign currency forward contracts Cross currency and interest rate swaps 2010 $’000 Financial assets in designated hedge accounting relationships Foreign currency forward contracts Cross currency and interest rate swaps Financial assets at fair value through profit and loss Unquoted equity investments Listed equity investments Available-for-sale financial assets Listed equity investments Unquoted equity investments Financial liabilities in designated hedge accounting relationships Foreign currency forward contracts Cross currency and interest rate swaps Financial liabilities at fair value through profit and loss Foreign currency forward contracts There were no transfers between Level 1 and Level 2 during the year. Level 1 Level 2 Level 3 Total – – – – – – – – 5,786 1,122 – – 6,908 90,683 42,852 133,535 – – 5,786 1,122 5,373 5,373 13,750 19,123 – – – 13,750 26,031 90,683 42,852 133,535 Level 1 Level 2 Level 3 Total – – – 39 2,149 – 2,188 – – – – 9,019 4,513 – – – – 13,532 50,224 13,524 1,352 65,100 – – 6,291 – – 15,236 21,527 – – – – 9,019 4,513 6,291 39 2,149 15,236 37,247 50,224 13,524 1,352 65,100 annuaL report 2011 109 nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 35. fInanCIal InSTRumEnTS – COnTInuED Reconciliation of Level 3 fair value measurements of financial assets 2011 $’000 Opening balance Total gains or losses: – in profit or loss – in other comprehensive income Settlements Purchases Closing balance 2010 $’000 Opening balance Total gains or losses: – in profit or loss – in other comprehensive income Purchases Closing balance Fair value through profit or loss Unquoted equity Available- for-sale Unquoted equity investments investments Total 6,291 15,236 21,527 (500) – (1,918) 1,500 5,373 – (1,486) – – 13,750 Fair value through profit or loss Unquoted equity Available- for-sale Unquoted equity investments investments (500) (1,486) (1,918) 1,500 19,123 Total 3,147 15,527 18,674 109 – 3,035 6,291 – (319) 28 15,236 109 (319) 3,063 21,527 The table above only includes financial assets. There are no financial liabilities measured at fair value which are classified as Level 3. Fair value of financial assets and liabilities Unquoted equity investments The fair value of the unquoted equity investments were determined based on the consolidated entity’s interest in the net assets of the unquoted entities. 110 downer edI LImIted nOTES TO ThE fInanCIal STaTEmEnTS for the year ended 30 June 2011 nOTE 36. PaREnT EnTITy DISClOSuRES (a) Financial position Assets Current assets Non-current assets Total assets Liabilities Current liabilities Non-current liabilities Total liabilities Net assets Equity Issued capital Retained earnings Reserves Employee benefit reserve Total equity (b) Financial performance Profit for the year Other comprehensive income Total comprehensive income Company 2011 $’000 2010 $’000 603,975 1,119,009 1,722,984 26,874 353,771 380,645 470,464 912,230 1,382,694 16,327 358,745 375,072 1,342,339 1,007,622 1,245,294 82,270 940,072 48,040 14,775 19,510 1,342,339 1,007,622 87,996 – 87,996 89,625 – 89,625 (c) Guarantees entered into by the parent entity in relation to debts of its subsidiaries The parent entity has, in the normal course of business, entered into guarantees in relation to the debts of its subsidiaries during the financial year. (d) Contingent liabilities of the parent entity The parent entity has no contingent liabilities as at 30 June 2011. (e) Commitments for the acquisition of property, plant and equipment by the parent entity The parent entity does not have any commitments for acquisition of property, plant and equipment as at 30 June 2011. annuaL report 2011 111 DIRECTORS’ DEClaRaTIOn for the year ended 30 June 2011 In the opinion of the Directors of Downer EDI Limited: (a) the financial statements and notes set out on pages 34 to 111 are in accordance with the Australian Corporations Act 2001, including: (i) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and (ii) the financial statements and notes thereto give a true and fair view of the financial position and performance of the Company and the consolidated entity; (b) there are reasonable grounds to believe that Downer EDI will be able to pay its debts as and when they become due and payable; (c) the Directors have been given the declarations required by s.295A of the Corporations Act 2001; and (d) the attached financial statements are in compliance with International Financial Reporting Standards, as noted in Note 1 to the financial statements. Signed in accordance with a resolution of the Directors made pursuant to s.295(5) of the Corporations Act 2001. On behalf of the Directors R M Harding Chairman Sydney, 24 August 2011 112 downer edI LImIted InDEPEnDEnT auDITOR’S REPORT for the year ended 30 June 2011 Deloitte Touche Tohmatsu ABN 74 490 121 060 Grosvenor Place 225 George Street Sydney NSW 2000 PO Box N250 Grosvenor Place Sydney NSW 1220 Australia DX 10307SSE Tel: +61 (0) 2 9322 7000 Fax: +61 (0) 2 9322 7001 www.deloitte.com.au Independent Auditor’s Report to the Members of Downer EDI Limited Report on the Financial Report We have audited the accompanying financial report of Downer EDI Limited, which comprises the statement of financial position as at 30 June 2011, and the income statement, the statement of comprehensive income, the statement of cash flows and the statement of changes in equity for the year ended on that date, notes comprising a summary of significant accounting policies and other explanatory information, and the directors’ declaration of the consolidated entity, comprising the company and the entities it controlled at the year’s end or from time to time during the financial year as set out on pages 34 to 112. Directors’ Responsibility for the Financial Report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the consolidated financial statements comply with International Financial Reporting Standards. Auditor’s Responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control, relevant to the entity’s preparation of the financial report that gives a true and fair view, in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited annuaL report 2011 113 InDEPEnDEnT auDITOR’S REPORT for the year ended 30 June 2011 Auditor’s Independence Declaration In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of Downer EDI Limited, would be in the same terms if given to the directors as at the time of this auditor’s report. Opinion In our opinion: (a) the financial report of Downer EDI Limited is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2011 and of its performance for the year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and (b) the consolidated financial statements also comply with International Financial Reporting Standards as disclosed in Note 1. Report on the Remuneration Report We have audited the Remuneration Report included in pages 9 to 31 of the directors’ report for the year ended 30 June 2011. The directors of the company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Opinion In our opinion, the Remuneration Report of Downer EDI Limited for the year ended 30 June 2011, complies with section 300A of the Corporations Act 2001. DELOITTE TOUCHE TOHMATSU AV Griffiths Partner Chartered Accountants Sydney, 24 August 2011 114 downer edI LImIted 114 downer edI LImIted SuSTaInaBIlITy PERfORmanCE SummaRy 2010/2011 SuSTaInaBIlITy aT DOwnER peopLe and CommunIty For our business, sustainability means being a valued contributor to the communities in which we operate, demonstrating sound environmental performance and being a responsible employer, while delivering excellence to our customers and rewarding our shareholders. We continually strive to achieve this by understanding and responding to emerging global risks and opportunities, engaging with our stakeholders and developing proactive partnerships within our value chain. We are committed to tracking and disclosing our sustainability impacts, challenges and opportunities through our annual Sustainability Report. This report supplements our 2011 Annual Report and Annual Review, and provides a summary of our non-financial, sustainability-related performance for the year ended 30 June 2011. Our 2011 Sustainability Report will be available on the Downer website in December 2011. A summary of our approach to the management of sustainability-related issues is provided below. manaGement SyStemS Our Zero Harm Management System (ZHMS) has been developed to ensure that all our activities are carried out in a manner that will not result in harm to the people associated with our operations, to the communities in which we work, or to the environment. The ZHMS also endeavours to ensure Downer’s compliance with relevant international and Australian standards, conventions, statutes, regulations and codes of practice including: – Australian standards referenced in legislation; – statutory licences and industry codes; – responsible care; and – Downer’s Zero Harm policies, standards and procedures. heaLth and Safety We aspire to create a Zero Harm environment which, in the context of health and safety, means caring for and protecting our people with a goal of zero injuries or health impacts. Our health and safety performance is monitored through the measure of Lost Time Injury Frequency Rate (LTIFR)1 and Total Recordable Injury Frequency Rate (TRIFR)2. As at 30 June 2011, we maintained a LTIFR below one, with a result of 0.93, and a TRIFR reduction of 11.8%, with a result of 7.17. With over 21,500 people in a diverse range of roles around the world, our goal is to empower our people to enable them to deliver improved value to our clients and shareholders, communities and themselves. We are committed to diversity and providing equal opportunities for all our people. We believe our diversity makes us stronger and we welcome different views from all our people, as these help us to improve the quality of our services. We aim to ensure equal treatment and equal employment opportunities for all our people, regardless of gender, race, ethnicity, religion, age, national origin or ancestry, physical or mental disability or sexual orientation. We understand the value of strong and enduring relationships with the communities in which we operate and we are committed to engaging with these important stakeholders. Our community relations principles are to provide appropriate and tangible social benefits, while ensuring that all community initiatives are aligned with Company values. envIronmentaL SuStaInaBILIty Effective management of environmental issues is fundamental to the way we do business and embedded into our overall risk management processes. Our objective is to achieve an appropriate balance between economic and environmental sustainability outcomes. We recognise that climate change presents a serious challenge to business, society and the natural environment. We are committed to participating in climate change solutions by developing processes and technology to reduce our emissions and overall energy consumption. We also embrace the opportunity to assist our clients to manage the challenges that climate change represents for the global community. Further information about Downer’s approach to sustainability is available in our Annual Review and our Sustainability Reports, which are available on the Downer website at www.downergroup.com. 1 Lost time injuries (LtIs) are defined as diseases or occurrences that result in a fatality, permanent disability or time lost from one day/shift or more. the LtIfr is the number of LtIs per million hours worked. 2 trIfr is the number of fatal injuries + lost-time injuries + medically treated injuries per million hours worked. annuaL report 2011 115 CORPORaTE gOvERnanCE for the year ended 30 June 2011 OvERvIEw Downer’s corporate governance framework provides the platform from which: – the Board is accountable to shareholders for the operations, performance and growth of the Company; – Downer management is accountable to the Board; – the risks of Downer’s business are identified and managed; and The performance of Downer’s senior executives is regularly reviewed against appropriate measures, including individual performance targets linked to the business plan and overall corporate objectives. Downer’s senior executives participate in periodic performance evaluations where they receive feedback on progress against these targets. The most recent performance evaluation of Downer’s senior executives was undertaken in 2011. – Downer effectively communicates with its shareholders and the investment community. PRInCIPlE 2: STRuCTuRE ThE BOaRD TO aDD valuE Downer continues to enhance its policies and processes to promote leading corporate governance practices. Throughout the 2011 financial year, the Board was comprised of a majority of independent Directors. The Board endorses the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (ASX Principles). PRInCIPlE 1: lay SOlID fOunDaTIOnS fOR managEmEnT anD OvERSIghT The Downer Board Charter sets out the functions and responsibilities of the Board and is available on the Downer website at downergroup.com. The Board Charter states that the role of the Board is to provide strategic guidance for the Company and to effectively oversee management of the Company. Among other things, the Board is responsible for: – overseeing the Company, including its control and accountability systems; – appointing and removing the Group CEO and senior executives; – monitoring performance of the Group CEO and senior executives; and – reviewing, ratifying and monitoring systems of risk management and internal control, codes of conduct and legal compliance. Directors receive formal letters of engagement setting out the key terms, conditions and expectations of their engagement. The Board Charter also describes the functions delegated to management, which is led by the Group CEO. The primary goal set for management by the Board is to focus on enhancing shareholder value, and includes responsibility for Downer’s economic, environmental and social performance. The Group CEO is responsible for the day-to-day management of Downer and his authority is delegated and authorised by the Board. Details of the Downer Executive Leadership Team are available on the Downer website at downergroup.com. The Board has formal induction procedures for both Directors and senior executives. These procedures have been developed to enable new Directors and senior executives to gain an understanding of: The Board is currently comprised of the Chairman (Mike Harding, an independent, Non-executive Director), five independent, Non-executive Directors and an Executive Director (the Group CEO, Grant Fenn). Details of the members of the Board, including their skills, experience, status and terms of office are set out in the Directors’ Report on page 2 and are also available on the Downer website at downergroup.com. The composition of the Board is assessed by the Nominations and Corporate Governance Committee to ensure the Board is of a composition, size and commitment to effectively discharge its responsibilities and duties. Directors are required to bring an independent judgement to bear on all Board decisions. To facilitate this, it is Downer’s policy to provide Directors with access to independent professional advice at the Company’s expense in appropriate circumstances. Downer’s Non-executive Directors recognise the benefit of conferring regularly without management present, and they do so at various times throughout the year. The Board considers that an independent Director is a Non- executive Director who is not a member of management and who is free of any business or other relationship that could (or could reasonably be perceived to) materially interfere with the independent exercise of their judgement. Downer regularly assesses the independence of each Director. Downer’s governance framework requires each Director to promptly disclose actual and possible conflicts of interest, interests in contracts, other directorships or offices held, related party transactions and any dealings in the Company’s securities. Each Director is required to retire by rotation, with one third of the Board retiring at each Annual General Meeting (AGM). No Non-executive Director can serve more than three years without offering themselves for re-election. The chairman of the Board (Chairman) is an independent, Non-executive Director. He is responsible for leadership of the Board and for the efficient organisation and functioning of the Board. The Chairman is appointed by the Board to ensure that a high standard of values, governance and constructive interaction is maintained. – Downer’s financial position, strategies, operations and risk management policies; and – the respective rights, duties and responsibilities and roles of the Board and senior executives. The Chairman facilitates the effective contribution of all Directors and promotes constructive and respectful relations between Directors and the Board and management. He also represents the views of the Board to Downer’s shareholders and conducts the AGM. 116 downer edI LImIted CORPORaTE gOvERnanCE for the year ended 30 June 2011 The roles of Chairman and Group CEO are not exercised by the same person and the division of responsibilities between the Chairman and the Group CEO have been agreed by the Board and are set out in the Board Charter and Downer’s delegations policy. The Board has established a number of sub-committees to assist the Board to effectively and efficiently execute its responsibilities (Board Committees). A list of the main Board Committees and their membership is set out in the table below. Board Committee Audit Committee Chairman Members Annabelle Chaplain John Humphrey Zero Harm Committee Grant Thorne Nominations and Corporate Governance Committee Mike Harding Grant Thorne Mike Harding Grant Fenn Annabelle Chaplain Lucio Di Bartolomeo John Humphrey Remuneration Committee Lucio Di Bartolomeo Annabelle Chaplain Risk Committee Grant Thorne Disclosure Committee Mike Harding Mike Harding Mike Harding Grant Fenn Annabelle Chaplain Lucio Di Bartolomeo John Humphrey John Humphrey Grant Fenn The names of members of each Board Committee, the number of meetings and the attendances by each of the members of the various Board Committees to which they are appointed are set out in the Directors’ Report on pages 7 and 8. The Board has established the Nominations and Corporate Governance Committee to oversee the selection and appointment practices of the Company. The Nominations and Corporate Governance Committee’s primary purpose is to support and advise the Board on fulfilling its responsibilities to shareholders by ensuring that the Board is comprised of individuals who are best able to discharge the responsibilities of Directors having regard to the law and leading governance practice. The Nominations and Corporate Governance Committee has a charter which sets out its roles and responsibilities, composition, structure, membership requirements and the procedures for inviting non-Committee members to attend meetings. The Nominations and Corporate Governance Committee Charter gives the Committee access to internal and external resources, including access to advice from external consultants and specialists. The Nominations and Corporate Governance Committee Charter is available on the Downer website at downergroup.com. The Nominations and Corporate Governance Committee consists of a majority of independent Directors, is chaired by an independent Director and has a minimum of three members. The Nominations and Corporate Governance Committee’s responsibilities include: – assessing the skills and competencies required on the Board; – assessing the extent to which the required skills are represented on the Board; – establishing processes for the review of the performance of individual Directors and the Board as a whole; – establishing processes for identifying suitable candidates for appointment to the Board; and – recommending the engagement of nominated persons as Directors. When appointing Directors, the Nominations and Corporate Governance Committee aims to ensure that an appropriate balance of skills, experience, expertise and diversity is represented on the Board. The Company recognises the value of diversity and diversity has been a component of the appointment process over the past few years. From time to time, Downer engages external specialists to assist with the selection process as necessary, and the Chairman and Group CEO meet with nominees as part of the appointment process. Nominations for re-election of Directors are reviewed by the Nominations and Corporate Governance Committee and Directors are re-elected in accordance with the Downer Constitution and the ASX Listing Rules. annuaL report 2011 117 CORPORaTE gOvERnanCE for the year ended 30 June 2011 As part of its commitment to leading corporate governance practice, the Board undertakes improvement programs, including periodic review of its performance in consultation with an external consultant. The most recent external review was conducted in 2009. Downer’s Director and senior executive induction program was implemented in the previous financial year to enable new Directors and senior executives to gain an understanding of, among other things, Downer’s culture and values and the Company’s financial, strategic, operational and risk management position. – securities trading (stipulating ‘trading windows’ for designated employees and a formal process which all employees must adhere to when dealing in securities); – the Company’s disclosure obligations (including continuous disclosure); – communicating with shareholders and the general investment community; and – privacy. These policies are available on the Downer website at downergroup.com. Directors are given an induction briefing by the Company Secretariat and an induction pack containing information about Downer and its business, Board and Board Committee charters and Downer group policies. New Directors also meet with key senior executives to gain an insight into the Company’s business operations and the Downer group structure. Downer has a proud history of diversity and inclusiveness and is a member of the Diversity Council of Australia. The Company has recently formalised its practices in a Diversity and Inclusiveness Policy and has convened a Diversity and Inclusiveness Committee made up of senior executives across the Group. Directors are encouraged to continually build on their exposure to the Company’s business and a formal program of Director site visits has been in place since 2009. Downer has reported on diversity in its annual Sustainability Report since 2009 and is currently in the process of formalising reporting on diversity in line with the amended ASX Principles for the 2012 financial year. Directors are also encouraged to attend appropriate training and professional development courses to update and enhance their skills and knowledge and the Company Secretariat regularly organises governance and other continuing education sessions for the Board. The Board is provided with the information it needs to discharge its responsibilities effectively. The Directors also have access to the Company Secretary for all Board and governance-related issues and the appointment and removal of the Company Secretary is determined by the Board. The Company Secretary is accountable to the Board on all governance matters. PRInCIPlE 3: PROmOTE EThICal anD RESPOnSIBlE DECISIOn-makIng Downer strives to attain the highest standards of behaviour and business ethics when engaging in corporate activity. Following an extensive review of its codes of conduct, Downer adopted a new code, the Downer Standards of Business Conduct. The Standards of Business Conduct sets the ethical tone and standards of the Company and deals with matters such as: – compliance with the letter and the spirit of the law; – prohibition against bribery; – protection of confidential information; – engaging with stakeholders; – workplace safety; – sustainability; and – conflicts of interest. Downer has also implemented a formal whistleblower policy and procedures for reporting and investigating breaches of the Standards of Business Conduct. The Standards of Business Conduct applies to all officers and employees and is available on the Downer website at downergroup.com. Downer endorses leading governance practices and has in place policies setting out the Company’s approach to various matters, including: 118 downer edI LImIted The Diversity and Inclusiveness Policy and Downer’s Sustainability Reports are available on the Downer website at downergroup.com. PRInCIPlE 4: SafEguaRD InTEgRITy In fInanCIal REPORTIng The Company has in place a structure of review and authorisation which independently verifies and safeguards the integrity of its financial reporting. The Audit Committee assists the Board to fulfil its responsibility relating to the quality and integrity of the accounting, auditing and reporting practices of the Company and its role includes a particular focus on the qualitative aspects of financial reporting to shareholders. The Audit Committee is structured so that it: – consists of only Non-executive Directors; – consists of a majority of independent Directors; – is chaired by an independent chairman (who is not the Chairman of the Board); – has at least three members. The Audit Committee currently comprises of only independent Directors, includes members who are financially literate and has at least one member who has relevant qualifications and experience. The Audit Committee Charter sets out the Audit Committee’s role and responsibilities, composition, structure and membership requirements and the procedures for inviting non-Committee members to attend meetings. The Audit Committee Charter is available on the Downer website at downergroup.com. The Audit Committee is responsible for reviewing the integrity of Downer’s financial reporting and overseeing the independence of the Company’s external auditors. The Audit Committee reports to the Board on all matters relevant to its role and responsibilities. CORPORaTE gOvERnanCE for the year ended 30 June 2011 PRInCIPlE 5: makE TImEly anD BalanCED DISClOSuRE The Company’s Disclosure Policy sets out processes which assist the Company to ensure that all investors have equal and timely access to material information about the Company and that Company announcements are factual and presented in a clear and balanced way. A copy of the Disclosure Policy is available on the Downer website at downergroup.com. The Disclosure Policy also sets out the procedures for identifying and disclosing material and price-sensitive information in accordance with the Corporations Act 2001 (Cth) and the ASX Listing Rules. Downer’s Disclosure Committee consists of two independent, Non-executive Directors (one of which is the Chairman) and the Group CEO. The Disclosure Committee oversees disclosure of information by the Company to the market and the general investment community. PRInCIPlE 6: RESPECT ThE RIghTS Of ShaREhOlDERS Downer empowers its shareholders by: – communicating effectively with shareholders; – giving shareholders ready access to balanced and understandable information about the Company; and – making it easy for shareholders to participate in general meetings. The Downer Communication Policy sets out the Company’s approach to communicating with shareholders and is available on the Downer website at downergroup.com. Downer has an established corporate compliance team to monitor risk management and uses external consultants to assist with the ongoing review of risk management across the Downer group. Downer has also established principles for the Company to follow to ensure that contract formation and contract management processes are maintained and improved. Management reports regularly to the Board on the effectiveness of Downer’s management of its material business risks. The Board regularly reviews the effectiveness of the Company’s systems for the management of material business risks and the implementation of these systems. The Company’s internal audit team analyses and undertakes independent appraisal of the adequacy and effectiveness of Downer’s risk management and internal control system. Downer’s internal audit team is independent of the external auditor and has access to the Audit Committee and to management. Downer has established a Risk Committee to assist the Board in its oversight of Downer’s risk profile and risk policies, the effectiveness of the systems of internal control and framework for risk management and Downer’s compliance with applicable legal and regulatory obligations. The Risk Committee Charter is available on the Downer website at downergroup.com. The Board receives assurances from the Group CEO and the Group CFO that the declaration provided in accordance with section 295A of the Corporations Act 2001 (Cth) is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial reporting risks. The Company publishes corporate information on its website, including Annual and Half Year Reports, ASX announcements and media releases. PRInCIPlE 8: REmunERaTE faIRly anD RESPOnSIBly Downer encourages shareholder participation at AGMs through its use of electronic communication, including by making notices of meetings available on its website and audio casting of general meetings and significant Group presentations. Downer’s external auditor attends the Company’s AGMs and is available to answer any questions which shareholders may have about the conduct of the external audit for the relevant financial year and the preparation and content of the Audit Report. PRInCIPlE 7: RECOgnISE anD managE RISk To mitigate the risks that arise through its activities, Downer has various risk management policies and guidelines in place that cover (among other matters) interest rate management, foreign exchange risk management, credit risk management and operational and decision-making risk management. Downer has controls at the Board, executive and business unit levels that are designed to safeguard Downer’s interests and ensure the integrity of reporting (including accounting, financial reporting, environment and workplace health and safety policies and procedures). These controls are designed to ensure that Downer complies with legal and regulatory requirements as well as community standards. The Board has established a Remuneration Committee and has adopted the Remuneration Committee Charter which sets out its role and responsibilities, composition, structure and membership requirements and the procedures for inviting non-Committee members to attend meetings. The Remuneration Committee is responsible for reviewing and making recommendations to the Board about: – executive remuneration and incentive policies; – the remuneration, recruitment, retention, performance measurement and termination policies and procedures for all senior executives reporting directly to the Group CEO, including the Group CFO and the Company Secretary; – executive and equity-based incentive plans; and – superannuation arrangements and retirement payments. Remuneration of the Group CEO, Executive Directors and Non-executive Directors forms part of the responsibilities of the Nominations and Corporate Governance Committee. Downer’s remuneration policy is designed to motivate senior executives to pursue the long term growth and success of the Company and prescribes a relationship between the performance and remuneration of senior executives. The Remuneration Committee consists of a majority of independent Directors, is chaired by an independent Director and has at least three members (currently, no Executive Director is a member of the Remuneration Committee). annuaL report 2011 119 CORPORaTE gOvERnanCE for the year ended 30 June 2011 The maximum aggregate fee approved by shareholders that can be paid to Non-executive Directors is $2 million per annum. This cap was approved by shareholders on 30 October 2008. Further details about remuneration paid to Non-executive Directors are set out in the Remuneration Report at page 13. The Company’s previous Constitution allowed for retiring Non- executive Directors to receive a retiring allowance, subject to the limitations set out in the Corporations Act 2001 (Cth). Consistent with the ASX Principles, the right to retirement benefits was frozen in 2005. However, because remuneration arrangements for some Non-executive Directors were in place prior to 2005, where such retirement benefits have been paid, information about any payments has been fully provided in the financial statements. Directors entitled to a retirement benefit were paid a reduced fee and once a Director’s accumulated reduction in base fees has reached the value of the retirement benefit, the applicable base fee reverts to the general fee level. This has been applied to Mr Humphrey from 1 July 2009. The retirement benefit has not been offered to Non-executive Directors appointed subsequently. Non-executive Directors do not participate in any equity incentive schemes. The remuneration structure for Executive Directors and senior executives is designed to achieve a balance between fixed and variable remuneration taking into account the performance of the individual and the performance of the Company. Executive Directors receive payment of equity- based remuneration as short and long-term incentives. Executive Directors and senior executives are prohibited from entering into transactions in associated products which limit the economic risk of participating in unvested entitlements under any of the Company’s equity-based remuneration schemes. Further details about the remuneration of Executive Directors and senior executives are set out in the Remuneration Report at page 13 and key features of the current Downer employee share plans and details of Downer shares beneficially owned by Directors are provided in the Directors’ Report at pages 7 and 3, respectively. 120 downer edI LImIted InfORmaTIOn fOR InvESTORS for the year ended 30 June 2011 downer shareholders Downer had 25,846 ordinary shareholders as at 31 July 2011. The largest shareholder, J P Morgan Nominees Australia Limited, holds 25.67% of the 429,100,296 fully paid ordinary shares issued at that date. Downer has 22,900 shareholders with registered addresses in Australia. Securities exchange listing Downer is listed on the Australian Securities Exchange (ASX) under the ‘Downer EDI’ market call code 3965, with ASX code DOW, and is secondary listed on the New Zealand Exchange with the ticker code DOW NZ. Company information The Company’s website downergroup.com offers comprehensive information about Downer and its services. The website also contains news releases and announcements to the ASX, financial presentations, Annual Reports, Half Year Reports and company newsletters. Downer printed communications for shareholders include the Annual Report and Half Year Report. These are available on request. dividends Dividends are determined by the Board having regard to a range of circumstances within the business operations of Downer including operating profit and capital requirements. The level of franking on dividends is dependent on the level of taxes to be paid in future years to the Australian Taxation Office. International shareholders can use Computershare’s Global Payments System to receive dividend payments in the currency of their choice at a nominal cost to the shareholder. dividend reinvestment plan Downer’s Dividend Reinvestment Plan (DRP) is a mechanism to allow shareholders to increase their shareholding in the Company without the usual costs associated with share acquisitions, such as brokerage. Details of the DRP are available from the Company’s website or the Easy Update website at www.computershare.com.au/easyupdate/dow. Share registry Shareholders and investors seeking information about Downer shareholdings or dividends should contact the Company’s share registry, Computershare Investor Services Pty Ltd (Computershare): Level 5 115 Grenfell Street Adelaide SA 5000 GPO Box 1903 Adelaide SA 5001 Tel: 1300 556 161 (within Australia) +61 3 9415 4000 (outside Australia) Fax: 1300 534 987 (within Australia) +61 3 9473 2408 (outside Australia) www.computershare.com Shareholders must give their holder number (SRN/HIN) when making inquiries. This number is recorded on issuer sponsored and CHESS statements. updating your shareholder details Shareholders can update their details (including bank accounts, DRP elections, tax file number and email addresses) online at www.computershare.com.au/easyupdate/dow. Shareholders will require their holder number (SRN/HIN) and postcode to access this site. tax file number information Providing your tax file number to Downer is not compulsory. However, for shareholders who have not supplied their tax file number, Downer is required to deduct tax at the top marginal rate plus Medicare levy from unfranked dividends paid to investors residing in Australia. For more information please contact Computershare. Lost issuer sponsored statement You are advised to contact Computershare in writing immediately if your issuer sponsored statement has been lost or stolen. annual report mailing list Shareholders must elect to receive a Downer Annual Report and Half Year Report by writing to Computershare at the address provided above. Alternatively, shareholders may choose to receive these publications electronically. Change of address So that we can keep you informed and protect your interests in Downer, it is important that you inform Computershare of any change of your registered address. auditor Deloitte Touche Tohmatsu Level 3/225 George Street Sydney NSW 2000 registered office and principal administration office Downer EDI Limited Level 2, Triniti III Triniti Business Campus 39 Delhi Road North Ryde NSW 2113 Tel: +61 2 9468 9700 Fax: +61 2 9813 8915 annuaL report 2011 121 InfORmaTIOn fOR InvESTORS for the year ended 30 June 2011 australian Securities exchange information as at 31 July 2011 Number of holders of equity securities Ordinary share capital 429,100,296 fully paid listed ordinary shares were held by 25,846 shareholders. All issued ordinary shares carry one vote per share. Substantial shareholders The following shareholders have notified that they are substantial shareholders of Downer as at 31 July 2011. Shareholders Ordinary shares held % of issued shares Schroder Investment Management Australia Limited Franklin Resources Inc JCP Investment Partners Ltd 31,814,069 28,239,397 26,810,977 7.41 6.58 6.21 distribution of holders of quoted equity securities Shareholder distribution of quoted equity securities as at 31 July 2011 is set out in the table below. Range of holdings 1–1,000 1,001–5,000 5,001–10,000 10,001–100,000 100,001 and over Total Holding less than a marketable parcel of shares Number of shareholders 13,983 9,216 1,581 1,000 66 25,846 1,129 Shareholders % Ordinary shares held Shares % 54.1 35.7 6.1 3.9 0.3 100.0 6,319,687 21,301,297 11,241,513 21,569,146 368,668,653 429,100,296 1.47 4.96 2.62 5.03 85.92 100.00 twenty largest shareholders Downer’s 20 largest shareholders of ordinary fully paid shares as at 31 July 2011 are set out in the table below. Shareholder J P Morgan Nominees Australia Limited HSBC Custody Nominees (Australia) Limited National Nominees Limited Citicorp Nominees Pty Ltd Cogent Nominees Pty Limited Computershare Plan Co Pty Ltd Australian Reward Investment Alliance JP Morgan Nominees Australia Limited Tasman Asset Management Ltd – Cash Income A/C Queensland Investment Corporation – Tyndall Australian Share Whole AMP Life Ltd Argo Investments Ltd Cogent Nominees Pty Limited – SMP Accounts Citicorp Nominees Pty Limited – Colonial First State Inv A/C Citicorp Nominees Pty Limited – Cfsil Cwlth Aust Shs 5 A/C Masfen Securities Limited Mr Barry Sydney Patterson + Mrs Glenice Margaret Patterson Tasman Asset Management Ltd – Tyndall Australian Share Conce RBC Dexia Investor Services Australia Nominees Pty Limited – MLCI A/C HSBC Custody Nominees (Australia) Limited – A/C 2 Shares held % of issued shares 110,156,275 88,995,157 68,092,564 35,820,232 10,580,546 8,308,086 7,597,279 6,928,180 4,271,974 3,919,454 2,492,897 2,392,527 2,038,982 2,035,653 1,759,712 1,171,647 891,642 874,806 546,359 456,897 25.67 20.74 15.87 8.35 2.47 1.94 1.77 1.61 1.00 0.91 0.58 0.56 0.48 0.47 0.41 0.27 0.21 0.20 0.13 0.11 Total for top 20 shareholders 359,330,869 83.75 On-market buy-back There is no current on-market buy-back. 122 downer edI LImIted This page has been left blank intentionally This page has been left blank intentionally InfORmaTIOn fOR InvESTORS for the year ended 30 June 2011 DOwnER gROuP OffICE ShaRE REgISTRy Shareholders and investors seeking information about Downer shareholdings or dividends should contact the Company’s share registry, Computershare Investor Services Pty Ltd: Level 5 115 Grenfell Street Adelaide SA 5000 GPO Box 1903 Adelaide SA 5001 Tel: 1300 556 161 (within Australia) +61 3 9415 4000 (outside Australia) Fax: 1300 534 987 (within Australia) +61 3 9473 2408 (outside Australia) www.computershare.com downer edI LImIted Level 2, Triniti III Triniti Business Campus 39 Delhi Road North Ryde NSW 2113 Australia T +61 2 9468 9700 F +61 2 9813 8915 ABN 97 003 872 848 downer auStraLIa Level 11 468 St Kilda Road Melbourne VIC 3004 Australia T +61 3 9864 0800 F +61 3 9864 0801 downer new ZeaLand 14 Amelia Earhart Avenue Airport Oaks Auckland 2022 New Zealand T +64 9 256 9810 F +64 9 256 9811 downer mInInG Level 7, 104 Melbourne Street South Brisbane QLD 4101 Australia T +61 7 3026 6666 F +61 7 3026 6060 downer raIL 2B Factory Street Granville NSW 2142 Australia T +61 2 9637 8288 F +61 2 9897 2305 www.DOwnERgROuP.COm