2014 Annual Report
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This Annual Report includes Downer EDI Limited Directors’
Report, the Annual Financial Report and Independent
Audit Report for the financial year ended 30 June 2014.
The Annual Report is available on the Downer website
www.downergroup.com.
CONTENTS
Directors’ Report
Auditor’s Independence Declaration
Consolidated Statement of Profit or Loss
Consolidated Statement of Profit or Loss and Other Comprehensive Income
Consolidated Statement of Financial Position
Consolidated Statement of Changes in Equity
Consolidated Statement of Cash Flows
Notes to the financial statements:
1.
2.
Summary of accounting policies
Segment information
3. Profit from ordinary activities
4.
Individually significant item
5. Remuneration of auditors
6.
Income tax
7.
Earnings per share
8. Dividends
9. Cash and cash equivalents
10.
Trade and other receivables
11. Other financial assets
12.
Inventories
13.
Tax assets
14. Other assets
15.
Joint arrangements and associate entities
16. Property, plant and equipment
17.
Intangible assets
18.
Trade and other payables
19.
Borrowings
20.
Financing facilities
21. Other financial liabilities
22. Provisions
23.
Tax liabilities
24.
Issued capital
25. Reserves
26. Acquisition of business
27. Disposal of subsidiary
28.
Statement of cash flows – additional information
29. Commitments
30. Contingent liabilities
31. Rendering of services and construction contracts
32.
Subsequent events
33. Controlled entities
34. Related party information
35. Key management personnel compensation
36. Employee discount share plan
37.
Financial instruments
38. Parent entity disclosures
39.
Impact on Group’s historical financial statements on adoption of AASB 11 Joint Arrangements
Directors’ Declaration
Independent Auditor’s Report
Sustainability Performance Summary 2014
Corporate Governance
Information for Investors
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The Directors of Downer EDI Limited submit the Annual
Financial Report of the Company for the financial year
ended 30 June 2014. In compliance with the provisions of
the Corporations Act 2001 (Cth), the Directors’ Report is set
out below.
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 a Masters of Business
Administration (MBA) from the University of Melbourne.
Ms Chaplain lives on the Gold Coast.
P S GARLING (60)
Independent Non-executive Director since November 2011
Mr Garling has over 30 years’ experience in the infrastructure,
construction, development and investment sectors. He was
most recently the Global Head of Infrastructure at AMP
Capital Investors, a role he held for nine years. Prior to this, Mr
Garling was CEO of Tenix Infrastructure and a long term senior
executive at the Lend Lease Group, including five years as
CEO of Lend Lease Capital Services.
Mr Garling is currently the Chairman of Australian Renewable
Fuels Limited and a Director of Charter Hall Limited, Networks
NSW and Tellus Holdings Limited. Mr Garling is also the
President of Water Polo Australia Limited. Mr Garling is a
former Director of DUET Group, of which he was inaugural
Chairman for seven years, the Infrastructure Fund of India and
is former Chairman of the Asian Giants Infrastructure Fund.
Mr Garling holds a Bachelor of Building from the University
of New South Wales and the Advanced Diploma from the
Australian Institute of Company Directors. He is a Fellow of the
Australian Institute of Building, Australian Institute of Company
Directors and Institution of Engineers Australia.
Mr Garling lives in Sydney.
E A HOWELL (68)
Independent Non-executive Director since January 2012
Ms Howell has over 40 years of experience in the oil and gas
industry in a number of technical and managerial roles. She
was most recently Executive Vice President for Health, Safety
& Security at Woodside Energy Ltd and served as Executive
Vice President of North West Shelf at Woodside. Before joining
Woodside she was Managing Director of Apache Energy Ltd.
Ms Howell is currently a Director of Mermaid Marine Australia
Ltd, Buru Energy Ltd and EMR Resources Pty Ltd. She is also on
the Senior Advisory Board of Miro Advisors Ltd.
She has previously served on a number of boards, including
Tangiers Petroleum Limited where she held the position of
Executive Chair, the Fremantle Port Authority, the Australian
Petroleum Production & Exploration Association where she
chaired the Environmental Affairs Committee and as a
board member and President of the Australian Mines and
Metals Association.
Ms Howell holds a Bachelor of Science (with Honours in
Geology and Mathematics) from the University of London, an
MBA from Edinburgh Business School and is a Member of the
Australian Institute of Company Directors.
Ms Howell lives in Perth.
BOARD OF DIRECTORS
R M HARDING (65)
Chairman since November 2010, Independent Non-executive
Director since July 2008
Mr Harding has held management positions around the world
with British Petroleum (BP), including President and General
Manager of BP Exploration Australia. Mr Harding is currently
the Chairman of Roc Oil Company Limited, a Director of
Transpacific Industries Group Ltd and is a former Director of
Santos Limited.
Mr Harding holds a Masters in Science, majoring in
Mechanical Engineering.
Mr Harding lives in Sydney.
G A FENN (49)
Managing Director and Chief Executive Officer since
July 2010
Mr Fenn has over 20 years’ experience in operational and
financial management as well as strategic development. He
joined Downer in October 2009 as Chief Financial Officer and
was appointed Chief Executive Officer in July 2010.
Prior to joining Downer, Mr Fenn had a 14 year career at
Qantas Airways Limited during which he held a number of
senior roles and was a Member of the Executive Committee
for ten years. These roles included Executive General
Manager of Strategy and Investments and Executive General
Manager – Associated Businesses, responsible for the Airports,
Freight, Flight Catering and Qantas Holidays businesses.
He was also previously Chairman of Star Track Express and a
Director of Australian Air Express.
Mr Fenn holds a Bachelor of Economics from Macquarie
University and is a member of the Australian Institute of
Chartered Accountants. He worked at KPMG for eight years
before he joined Qantas.
Mr Fenn lives in Sydney.
S A CHAPLAIN (56)
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 local and
state government-owned corporations involved in road,
water and port infrastructure.
Ms Chaplain is a Director of PanAust Ltd, Chair of Queensland
Airports Limited and a member of the Board of Export
Finance and Insurance Corporation. Ms Chaplain is the
Chair of the Council of St Margaret’s Anglican Girls School in
Brisbane and KDR Gold Coast Pty Ltd and a Director of Keolis
Downer Pty Ltd and KDR Victoria Pty Ltd. Ms Chaplain is a
former director of Coal & Allied Industries Limited and former
member of the Board of Taxation.
2 DOWNER EDI LIMITED
DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2014 J S HUMPHREY (59)
C G THORNE (64)
Independent Non-executive Director since April 2001
Independent Non-executive Director since July 2010
Dr Thorne 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. Dr Thorne has
previously held a number of senior roles at Rio Tinto, including
as a group executive reporting to the Chief Executive Officer,
as head of its 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 and JK Tech. He is a Fellow of both the Australasian
Institute of Mining and Metallurgy and the Australian
Academy of Technological Science 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 and is a Graduate of the
Australian Institute of Company Directors.
Dr Thorne lives on the Sunshine Coast.
Mr Humphrey is currently the Executive Dean of the Faculty
of Law at Queensland University of Technology and a Legal
Consultant to King & Wood Mallesons of which he is a former
Deputy Chairman, and partner specialising in corporate,
mergers and acquisitions 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 former member of
the Australian Takeovers Panel.
Mr Humphrey holds a Bachelor of Laws from the University
of Queensland.
Mr Humphrey lives in Brisbane.
K G SANDERSON AO (63)
Independent Non-executive Director since January 2012
Ms Sanderson is an experienced executive and was most
recently Agent General for the Government of Western
Australia, based in London. In this role, Ms Sanderson
represented the Government of Western Australia in Europe
and Russia and promoted investment in Western Australia
and Western Australian exports to Europe. She was previously
Chief Executive Officer of Fremantle Ports for 17 years, and
prior to that was Deputy Director General of Transport and
worked for the Western Australian Department of Treasury for
17 years.
Ms Sanderson is currently the Chair of the State Emergency
Management Committee, Gold Corporation and a Director
of Atlas Iron Limited, St John of God Health Care, Paraplegic
Benefit Fund, Senses Australia and the International Centre
for Radio Astronomy Research. Ms Sanderson was appointed
to the position of Adjunct Professor in Curtin University
Business School in February 2013 (having previously been a
member of the Advisory Council) and has previously served
as a Director of Austrade, the Australian Wheat Board, the
Rio Tinto WA Future Fund and the Western Australian Lands
Authority (LandCorp) as well as having served as President of
Ports Australia.
Ms Sanderson holds a Bachelor of Science and a Bachelor
of Economics from the University of Western Australia. She
received an Honorary Doctorate of Letters from the University
of Western Australia in 2005 and was named an Officer
of the Order of Australia (AO) in 2004 for services to the
development and management of the port and maritime
industries in Australia, and to public sector governance in the
areas of finance and transport.
Ms Sanderson lives in Perth.
ANNUAL REPORT 2014 3
DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2014 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*
S A Chaplain
P S Garling
E A Howell
J S Humphrey
K G Sanderson
C G Thorne
Number of Fully Paid
Ordinary Shares
Number of Fully Paid
Performance Rights
Number of Fully Paid
Performance Options
10,150
346,061
64,142
12,100
–
68,367
10,000
59,230
–
445,682
–
–
–
–
–
–
–
–
–
–
–
–
–
–
* Mr Fenn’s holding of ordinary shares 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 474,600 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 are subject to performance and/or
service period conditions over the period 2012 to 2016. Performance rights granted to Mr Fenn are subject to performance and/or service
period conditions over the period 2013 to 2017. Further details regarding the conditions relating to these restricted shares and performance
rights 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.
Mr Peter Tompkins was appointed Company Secretary on 27 July 2011. He has qualifications in law and commerce from Deakin
University and corporate governance from the Governance Institute of Australia and is an admitted solicitor in New South Wales.
Mr Tompkins joined Downer in 2008 and was appointed General Counsel in 2010.
Mr Peter Lyons was appointed joint Company Secretary on 27 July 2011. A member of CPA Australia and the Governance
Institute of Australia (formerly Chartered Secretaries Australia), he has qualifications in commerce from the University of Western
Sydney and corporate governance from the Governance Institute of Australia. Mr Lyons was previously Deputy Company
Secretary and has been in financial and secretarial roles in Downer’s corporate office for over ten years.
REVIEW OF OPERATIONS
PRINCIPAL ACTIVITIES
Downer provides comprehensive engineering, construction and asset management services to customers in the Minerals
& Metals, Oil and Gas, Power, Transport, Telecommunications, Water and Property sectors. Downer employs approximately
19,000 people primarily in Australia and New Zealand but also in the Asia-Pacific region, South America and Southern Africa.
DIVISIONAL ACTIVITIES
Downer operates through three divisions – Downer Infrastructure, Downer Mining and Downer Rail.
4 DOWNER EDI LIMITED
DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2014 DOWNER INFRASTRUCTURE
Total revenue1 (FY14)
EBIT (FY14)
61.4%
49.7%
Downer Infrastructure
Downer Infrastructure
Downer Infrastructure operates predominantly in Australia
and New Zealand and is one of the largest providers
of engineering services for critical infrastructure in both
countries, employing more than 8,500 people in Australia and
more than 5,000 in New Zealand.
Key capabilities include road infrastructure construction and
maintenance; electrical and instrumentation (E&I) services;
civil, structural and mechanical services; power, transmission
and electricity distribution market services; and services to
the telecommunications and water infrastructure sectors.
Downer Infrastructure offers one of the largest non-
government owned road infrastructure services businesses
in both Australia and New Zealand, maintaining more than
40,000 kilometres of road in Australia and more than 32,000
kilometres in New Zealand. The road infrastructure market
in both countries is evolving from pure road maintenance
activity to the provision of efficient road network
infrastructure management solutions. Downer has responded
successfully to this evolution by investing in technology and
forming strategic partnerships, for example with the UK-based
company Mouchel. Downer has a vertically integrated model
and is a leading producer of asphalt in Australia. Downer’s
road infrastructure customers include all of Australia’s State
road authorities and the New Zealand Transport Agency.
As one of Australia’s leading providers of E&I services, Downer
Infrastructure has over 70 years’ experience in this field and
the services it offers cover the full asset lifecycle including
concept development, design, engineering, procurement
and project management as well as maintenance activities
to both private and public sector customers.
Downer Infrastructure has also been providing engineering,
construction, commissioning and maintenance services to
the power, transmission and electricity distribution markets for
more than 50 years. These services cover the whole lifecycle
of customers’ assets, from design and planning through to
operation and maintenance in areas including transmission
lines, substations, distribution and renewable energy.
A substantial portion of revenue in New Zealand is derived
from government customers including the New Zealand
Transport Agency, local councils, government-owned
businesses and agencies. Downer Infrastructure is a
member of the Stronger Christchurch Infrastructure Rebuild
Team (SCIRT) that is rebuilding Christchurch’s earthquake-
damaged roads, sewerage, water supply pipes and parks.
In the Australian telecommunications sector, Downer
Infrastructure builds, operates and maintains network
and wireless infrastructure for customers including Foxtel,
Telstra and the National Broadband Network (NBN). In New
Zealand, Downer is a major supplier to New Zealand’s main
telecommunication providers.
For public sector and industrial water customers in Australia,
Downer Infrastructure provides design and construction,
operations and maintenance services for water and waste
water infrastructure. The New Zealand business offers
complete asset lifecycle solutions (design, build, operate
and maintain) for municipal and industrial water, wastewater
treatment plants and reticulation networks.
Downer Infrastructure also operates three subsidiary
companies that offer innovative services to customers in the
mining and resources sector:
– Mineral Technologies is a leading provider of mineral
separation and mineral processing solutions worldwide,
delivering a comprehensive range of integrated
equipment and services that cost-effectively transform ore
bodies into high grade mineral products;
– QCC Resources delivers process and materials handling
solutions for all stages of the project lifecycle from
initial concept, prefeasibility and feasibility studies, to
innovative coal handling preparation plant (CHPP)
design and engineering, which leads to procurement
and construction management (EPCM) services being
provided by the Downer Group; and
– Snowden provides consultancy services on a wide range
of mineral commodities to customers around the world.
DOWNER MINING
Total revenue1 (FY14)
EBIT (FY14)
25.7%
44.6%
Downer Mining
Downer Mining
Downer Mining has been delivering contract mining and
civil earthmoving services to its customers for over 90 years.
It is one of Australia’s most diversified mining contractors,
employing more than 3,500 people across approximately
50 sites in Australia, New Zealand, Papua New Guinea,
South America and Southern Africa.
Downer Mining’s services include:
Open-cut mining
– Downer Mining is one of Australia’s largest open-cut
mining service contractors, working in a range of
commodities including coal, iron ore, gold and base
metals. Its capabilities include mine planning and
design, mine operation and management, mobile plant
maintenance, construction of mine-related infrastructure
and crushing.
Underground mining and exploration drilling
– Downer Mining’s highly skilled and experienced hard
rock underground mining team offers services including
exploration, resource and de-watering hole drilling,
underground diamond drilling, drill rig maintenance and
heli-portable rigs.
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. Due to rounding, Divisional percentages do not add up precisely to 100%.
ANNUAL REPORT 2014 5
DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2014 Blasting services
– Downer Blasting Services (DBS) is one of the largest
blasting services providers in the Australian mining industry.
It provides innovative blasting solutions to over 15 projects
across Australia with a fleet of over 50 Mobile Processing
Units and four state-of-the-art emulsion manufacturing
facilities. Its capabilities include down-the-hole and total
loading services, emulsion manufacturing, supply and
delivery of bulk explosives and accessories, shotfiring and
blast management.
Tyre management
– Otraco International provides off-the-road tyre
management services at over 35 mine sites in Australia,
New Zealand, Asia, South America and Southern
Africa. Its capabilities include the provision of expert
labour, engineering, web-based, real-time software
solutions, electronic tread-depth and pressure metering,
distribution and supply of rim and wheel accessories and
specialised equipment.
Mine reclamation and land rehabilitation services
– Downer Mining’s mine reclamation and land rehabilitation
services business, ReGen, offers the mining industry
complete solutions for mine closure, as well as progressive
rehabilitation and stand-alone water infrastructure.
Downer Mining’s customers include Fortescue Metals Group,
Idemitsu Australia Resources, Karara Iron Ore Project, BHP
Mitsubishi Alliance, TEC Coal, Roy Hill Iron Ore, Millmerran
Power Partners, Crocodile Gold Corp, Jellinbah Resources,
Solid Energy, Yallourn Energy, Yancoal Australia and
AngloGold Ashanti.
DOWNER RAIL
Total revenue1 (FY14)
EBIT (FY14)
5.7%
13.0%
Downer Rail
Downer Rail
Downer Rail employs approximately 1,400 people and is a
leading Australian rail transport solutions provider. Downer
Rail’s capabilities include the provision, maintenance and
overhaul of passenger and freight rolling stock and the
development of innovative solutions for passenger cars,
freight wagons, locomotives and light rail.
Downer’s key freight rail customers include Pacific National,
BHP Billiton, GWA, Aurizon, Fortescue Metals Group, SCT
Logistics, TasRail and CFCLA.
Downer’s passenger rail customers include Sydney Trains
(formerly RailCorp), Public Transport Authority (Western
Australia), Queensland Rail, MTM (Victoria) and VLine
(Victoria).
Downer has formed strategic joint ventures (JVs) with
leading technology and knowledge providers to support its
growth objectives in the passenger market. These include
partnerships with:
– Keolis, one of Europe’s leading public transport operators.
The Keolis Downer JV operates and maintains Yarra Trams
in Melbourne and began operating and maintaining the
Gold Coast Light Rail in July 2014;
– Bombardier, an international rolling stock supplier.
The Downer Bombardier JV has been supplying both
Queensland Rail and the Public Transport Authority of
Western Australia with trains for a number of years and
also provides maintenance services for all of the Public
Transport Authority of Western Australia’s metropolitan
fleet; and
– Hitachi, a leading supplier of railway systems. Downer’s
partnership with Hitachi includes the supply of electric
multiple units and electric and diesel tilt trains.
GROUP FINANCIAL PERFORMANCE
For the year ended 30 June 2014, Downer reported a decline
in revenue and earnings before interest and tax (EBIT) and an
increase in net profit after tax (NPAT). The Company reported
a significant reduction in net debt and gearing.
Following the adoption of AASB11 Joint Arrangements in the
current year, prior year comparatives have been re-stated.
Accordingly, certain amounts and subsequent variance
analysis disclosed in the following pages are based on
the re-stated figures rather than to those disclosed in the
consolidated Financial Report as at 30 June 2013.
REVENUE
Total revenue1 for the Group decreased by 15.3%, or
$1.4 billion, to $7.7 billion, including $0.4 billion of contributions
from joint ventures.
Downer Infrastructure’s revenue decreased by 9.5%, or
$500.6 million, to $4.7 billion. This was due to the decline in
mining-based capital expenditure, particularly in Western
Australia, a highly competitive tendering environment and
challenging conditions for the consulting businesses. A solid
performance in New Zealand helped to offset the decline
with higher levels of construction work in a recovering
economy and favourable foreign exchange movements.
Downer Mining’s revenue decreased by 22.3%, or
$569.0 million, to $2.0 billion due to the completion of the
Peabody coal mining contracts at Wambo and Millennium
in March 2013 and the reduction in scope at the Christmas
Creek, Boggabri and Goonyella mines. In addition, resource
owners continued to reduce ancillary works in an attempt
to mitigate the financial effects of falling commodity prices.
During the second half of the year work began at Roy Hill and
Cosmo Deeps, helping to offset some of the revenue decline.
Downer Rail’s revenue (excluding Waratah Train Project (WTP)
RSM) decreased by 7.2%, or $65.6 million, to $845.1 million
with performance affected by lower revenue from
freight build projects and a decline in demand for freight
maintenance services.
1
Total revenue is a non-statutory disclosure and includes revenue, other income and notional revenue from joint ventures and other alliances
not proportionally consolidated. Due to rounding, Divisional percentages do not add up precisely to 100%.
6 DOWNER EDI LIMITED
DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2014 Revenue from JVs increased by 3.4%, or $11.9 million, to
$363.0 million reflecting Downer’s increased use of JVs to
partner with organisations that have complementary skills
and so better deliver customer requirements.
EXPENSES
Employee benefits expenses decreased by 12.6% to
$2.6 billion and represent 37.4% of Downer’s cost base.
This decrease is broadly in line with the reduction in Group
revenue and is after impacts of restructuring costs associated
with efficiency programs and contract completions/
variations requiring reduced staffing levels.
Subcontractor costs also decreased by 13.5% to $1.6 billion
and represent 23.2% of Downer’s cost base. This decrease
corresponds with the reduction in Group revenue. Downer
maintains a strategic intent to retain cost base variability,
allowing the various businesses to ramp up or down more
quickly via the utilisation of sub-contract labour without
imposing a permanent fixed cost structure on the business.
Raw materials and consumables used decreased by 27.5%
to $1.3 billion and represent 18.2% of Downer’s cost base. This
reduction reflects the lower volumes of work and benefits
derived through Fit 4 Business procurement initiatives.
Plant and equipment costs decreased by 17.1% to
$845.4 million and represent 12.0% of Downer’s cost base.
This largely reflects reduced reliance upon operating leased
assets with Downer having elected to directly acquire assets
in recent years where it was believed to be the whole of life
owner of the assets coupled with increased utilisation of
owned assets and more efficient maintenance practices as
Fit 4 Business plant opportunities are leveraged.
Depreciation and amortisation decreased by 9.6% to
$266.4 million and represents 3.8% of Downer’s cost base.
This reduction reflects the lower capital intensity of the
mining business, as total volumes have declined from peaks
experienced during the 2013 financial year, and the sale
of equipment back to Downer’s mining customers during
the year.
Other expenses, communication, travel, occupancy and
professional fees have decreased by 15.4% to $393.9 million
and represent 5.6% of Downer’s cost base.
EARNINGS
Net Profit After Tax (NPAT) for the Group increased 5.9% to
$216.0 million and EBIT decreased by 4.9% to $341.1 million.
Each of Downer’s divisions continued to rationalise its
operations in response to softer market conditions, while
simultaneously driving productivity improvements to minimise
margin decline.
The contribution from the Infrastructure business in Australia
was substantially lower than the prior year due to the decline
in resources-based capital investment and restructuring costs
incurred across the business. This was partially offset by the
New Zealand business which delivered a higher contribution
due to robust levels of activity across all areas of operations
and continued business improvement.
Mining delivered a marginally lower contribution
off a significantly lower revenue base as a result of
ongoing productivity improvements and changes to
equipment financing.
The Rail division delivered a substantially lower EBIT due
to reduced demand for locomotives and significant
restructuring costs.
Reported net interest decreased by 35.9% to $43.1 million due
to lower base interest rates and lower drawn debt balances
due to the Company’s strong operating cash performance.
The effective tax rate (ETR) of 27.5% for the underlying result
approximates with the statutory rate of 30% due to the
majority of the Group’s profits being derived in Australia.
The prior year’s NPAT and EBIT were affected by an
Individually Significant Item (ISI), being $11.5 million relating
to the settlement of a dispute in Singapore (announced on
11 December 2012).
A reconciliation of the underlying result to the statutory result
is set out in the table below:
($m)
Underlying EBIT
Individually Significant Item
(SPPA settlement)
FY14
341.1
–
FY13
370.3
(11.5)
Statutory EBIT
341.1
358.8
Underlying NPAT
Individually Significant Item
(SPPA settlement)
216.0
–
215.4
(11.5)
Statutory NPAT
216.0
204.0
ANNUAL REPORT 2014 7
DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2014 DIVISIONAL FINANCIAL PERFORMANCE
DOWNER INFRASTRUCTURE
$’m
6,000
5,000
4,000
3,000
2,000
1,000
0
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
FY10
FY11
FY12
FY13
FY14
Revenue
EBIT margin
– Total revenue of $4.7 billion, down 9.5%;
– EBIT of $191.1 million, down 17.0%;
– EBIT margin of 4.0%, down 0.4 ppts;
– ROFE of 21.0%, down from 25.8%; and
– Work-in-hand of $9.9 billion.
The 2014 financial year was challenging for the Infrastructure
business in Australia due to the decline in resources-
based capital expenditure and increased competition
for engineering construction work. The road infrastructure
business continued to perform strongly across all regions, with
solid contributions from the outsourced road maintenance
contracts in Western Australia, New South Wales
and Queensland.
In a lower demand environment, Downer Infrastructure
continued to focus on delivering for its customers while
improving efficiencies and reducing costs.
The Australian business won several large contracts during
the year which will start to contribute to revenue in 2015.
This included the electrical and instrumentation work on
the Wheatstone LNG Project in Western Australia, valued at
$400 million, and the Stewardship Maintenance Contract for
the Sydney West Zone road network, which Downer won in
a JV with Mouchel, valued at $700 million over seven years.
Other successful tenders during the period included:
– $100 million contract for civil, mechanical, electrical
and instrumentation services on the Maules Creek Coal
Handling and Processing Plant (Whitehaven Coal);
– $80 million contract for electrical work on the Yandi
Sustaining Project (Hamersley Iron);
– $75 million, five-year Intelligence Transport System (ITS)
Maintenance Contract (in JV with Mouchel) for the
western areas of Sydney and regional areas of New South
Wales (Roads and Maritime Services);
– $70 million contract for structural, mechanical, piping and
electrical and instrumentation services for the Technical
Ammonium Nitrate Plant project (Tecnicas Reunidas S.A.);
– $65 million contract for civil and electrical balance of
plant infrastructure work on the Taralga Wind Farm Project
(Vestas Australian Wind Technology); and
– $40 million rail infrastructure contract on the Ore Car
Repair Workshop and $60 million contract on the
Shiploaders 1 and 2 Project (BHP Billiton Iron Ore).
8 DOWNER EDI LIMITED
The New Zealand business had a strong year which
helped to partially offset the decline in Australia with solid
contributions from all operational areas. The New Zealand
business also won a number of contracts during the year
in road and transport infrastructure, water infrastructure
and telecommunications.
The majority of Downer Infrastructure’s work comprises
contracts that are valued at less than $30 million and are
recurring in nature. This makes the business more resilient
through economic cycles.
DOWNER MINING
$’m
3,000
2,500
2,000
1,500
1,000
500
0
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
FY10
FY11
FY12
FY13
FY14
Revenue
EBIT margin
– Total revenue of $2.0 billion, down 22.3%;
– EBIT of $171.4 million, down 1.6%;
– EBIT margin of 8.6%, up 1.8 ppts;
– ROFE of 20.9%, up from 20.3%; and
– Work-in-hand of $4.2 billion.
Revenue for Downer Mining was 22.3% lower than last year
due to the completion of two Peabody contracts in March
2013 and reductions in scope at Goonyella, Boggabri and
Christmas Creek. The Division’s EBIT performance was 1.6%
lower due to the reduction in revenue partially offset by
reduced operating costs.
The mining industry remains under intense pressure due to
subdued commodity prices, particularly coal and iron ore.
In this environment there are fewer new contract mining
opportunities and increased price pressure on existing
contracts. In addition to the scope reduction experienced
at the three sites referred to above, in June 2014 Downer was
advised its contract with BHP Mitsubishi Alliance (BMA) at the
Goonyella coal mine in Queensland would be terminated
two years early, effective September 2014. While the decision
had no financial impact on the 2014 financial year, it will
reduce Downer’s work-in-hand by around $360 million over
the 2015 and 2016 financial years.
New contracts and contract extensions won by Downer
Mining during the year included:
– A new 4.5 year, $500 million contract with Roy Hill Iron Ore
for early mining services at the Roy Hill open cut iron ore
mine in the Pilbara, Western Australia;
– A new two-year, $70 million contract with Crocodile Gold
Corp for underground mining services at the Cosmo Gold
Mine in the Northern Territory;
DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2014 – A five-year, $200-250 million contract extension with
Millmerran Power Partners for mining services at
the Commodore open cut coal mine in South East
Queensland; and
– A one-year contract extension with Idemitsu Australia
Resources for mining services at Boggabri open-cut coal
mine in New South Wales.
Both Roy Hill and Cosmo Deeps commenced during the
second half of the financial year, helping to offset some of
the Division’s revenue decline.
Downer Blasting Services and Otraco International (Downer’s
tyre management business) both continued to win new work.
Downer Rail continues its transition to being a 365 days a
year, 24/7 services provider for rolling stock across Australia
and New Zealand. Its focus is now on integrating its service
and maintenance activities with those of its customers, the
provision of new rolling stock, overhauls and refurbishment
packages and technical support.
Downer continues to build its partnership with French company
Keolis, one of Europe’s leading public transport operators. The
joint venture currently operates and maintains the Melbourne
tram system, Yarra Trams, and began the operations and
maintenance of the Gold Coast Light Rail in July 2014.
GROUP FINANCIAL POSITION
DOWNER RAIL
$’m
1,600
1,400
1,200
1,000
800
600
400
200
0
FY10
FY11
FY12
FY13
FY14
Revenue
EBIT margin
– Total revenue of $1.0 billion, down 24.9%;
– EBIT of $22.1 million, down 62.6%;
– EBIT margin of 2.2%, down 2.2 ppts;
– ROFE of 4.7%, down from 12.5%; and
– Work-in-hand of $3.5 billion.
Revenue was down 24.9% to $1.0 billion due to lower demand
for locomotives and freight maintenance services and the
ramping down of the Waratah Rolling Stock Manufacture
(RSM) Project.
The Waratah RSM Project was completed in May 2014 with
the 78th train entering into passenger service on the Sydney
rail network. After experiencing significant challenges on
the project, which led to considerable delays and financial
losses for Downer, the project was completed in line with
the revised schedule and with $17.0 million of contingency
released. In the process, the project broke records for train
delivery in Australia and set a new benchmark for program
recovery worldwide.
Downer Rail’s lower EBIT performance was largely due to the
drop in demand for freight locomotives and the significant
restructuring costs ($16.9 million) incurred across the business.
Downer Rail continued its transformation during the year
with the consolidation of several sites, staff redundancies,
changes to the organisational design and targeted
capital investment.
Funding, liquidity and capital are managed at Group level
within Downer, with Divisions focused on working capital and
operating cash flow management within their responsibilities.
The following financial position commentary relates to the
Downer Group.
8.0%
6.0%
OPERATING CASH
4.0%
2.0%
0.0%
Operating cash flow was very strong at $583.4 million, up
30.2% on the prior year due to the ongoing rigorous focus on
cash and working capital management. This was achieved
by working with customers to ensure payment terms were met
and disputed claims resolved.
Net debt reduced from $242.7 million to $32.7 million and
gearing (net debt to net debt plus equity) reduced from 11.7%
to 1.6%. When off balance sheet debt is included, gearing
reduced from 20.6% to 9.2%.
The operating cash flow after adjusting for the $93.0 million
of cash inflows relating to the Waratah RSM contract and
interest and tax payments reflects an EBITDA conversion
ratio of 94.7%, consistent with last year and reflecting the
continued focus on optimisation of working capital.
Operating cash flow ($m)
EBIT
Add: Depreciation and Amortisation
EBITDA
Operating cash flow
Add: Net interest paid
Tax paid
Waratah Train Project net cash
(inflow)/outflow
Singapore Tunnel Settlement
FY14
341.1
266.4
607.5
FY13
358.8
294.8
653.6
583.4
448.1
43.3
41.7
(93.0)
–
60.6
14.3
63.3
39.3
Adjusted Operating cash flow
575.4
625.6
EBITDA conversion
94.7%
95.7%
INVESTING CASH
The business continued to invest in capital equipment to
support existing contracted operations resulting in net capital
of $249.5 million being invested, down 11.7% on the prior year.
The reduction in investment was predominantly due to lower
activity in the contract mining business with net investing
cash including $104.0 million in inflows from the sale of mining
equipment to Idemitsu Australia Resources.
ANNUAL REPORT 2014 9
DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2014
DEBT AND BONDING
In April 2014, Downer extended its $400 million Syndicated Credit Facility for a further year to April 2018. The facility was
completed with a 23% reduction in the credit margin and a 30% reduction in the commitment fee payable on any undrawn
balance. This facility also contains a one year extension option permitting Downer to potentially further extend the duration to
April 2019.
Downer also refinanced its bilateral bank facilities during the year and took the opportunity to build further tenor into these
facilities from 12 months to periods of up to 24 months.
Having successfully refinanced or extended its debt facilities during the year, Downer believes it has sufficient debt and bonding
headroom available given the challenging economic environment expected in the 2015 financial year.
Debt Maturity Profile by limit – as at 30 June 2014
A$m Equivalent
ECA Finance
Other secured
borrowings
Syndicated Facility
Syndicated Facility Extension Option
Bilateral Loans
A$MTN
US Pte Placements
Finance Leases
500
400
300
200
100
0
4
1
-
c
e
D
5
1
-
n
u
J
5
1
-
c
e
D
6
1
-
n
u
J
6
1
-
c
e
D
7
1
-
n
u
J
7
1
-
c
e
D
8
1
-
n
u
J
8
1
-
c
e
D
9
1
-
n
u
J
9
1
-
c
e
D
0
2
-
n
u
J
BALANCE SHEET
The net assets of Downer increased by 7.4% to $2.0 billion. This increase was substantially reflected in net non-current assets
which increased by $192.3 million reflecting the Group’s continued focus on cash conversion and the pay down of debt.
Cash and cash equivalents decreased by $48.1 million or 10.0% to $431.8 million as excess cash was applied to debt reduction
as described below. Trade and other receivables decreased by $323.2 million or 21.3% to $1.2 billion reflecting continued focus
on cash collections and converting Work-in-Progress (WIP) amounts to Trade Receivables. Trade Debtor days (excluding WIP) for
the Group increased 4.4 days, from 24.2 to 28.6 days, predominantly due to the reduction in revenue during the period and the
focus on converting WIP to trade debtors. Trade Debtor days (including WIP) for the Group reduced from 62.2 days to 56.3 days.
As a consequence, the net debt of the Group (gross debt less available cash) was reduced from $202.3 million at 30 June 2013
to a net cash position of $8.5 million at 30 June 2014. After including $41.3 million in relation to the out-of-the-money mark-to-
market position of derivatives and deferred finance charges, the Group is in a net debt position of $32.7 million at 30 June 2014.
This translates to an 86.3% reduction in on-balance sheet gearing to 1.6%.
Inventories increased by $34.8 million or 10.0% to $384.7 million. Of this increase, $13.8 million relates to increased inventory
as a result of the completion of the WTP and the increasing volume of the TLS contract. Other assets are substantially current
prepayments and deposits.
The net value of Property Plant and Equipment (including assets held for sale) decreased by $18.2 million. The Group continued
to make significant investments in new plant and equipment ($376.0 million), including the acquisition of previously operating
leased assets, offset by assets disposed (including mining assets sold to customers) and depreciation.
Trade and other payables decreased by $212.8 million, or 16.6%, with creditor days decreasing by 1.6 days to 30.8 days. Trade
creditors represents 56.1% of Downer’s liabilities.
Total drawn borrowings of $423.2 million represents 22.2% of Downer’s liabilities. It decreased by $259.0 million as excess cash was
applied to debt reduction as part of the Group’s strategy to improve balance sheet strength. Current borrowings decreased by
42.1% to $137.7 million and non-current borrowings decreased by 35.7% to $285.5 million.
10 DOWNER EDI LIMITED
DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2014 Other financial liabilities of $51.0 million decreased by $15.4 million and represents 2.7% of Downers’ liabilities. This reflects
reductions in advances from Joint Ventures and the mark-to-market translations of foreign currency and interest rate derivatives
hedging the debt portfolio.
Provisions of $340.8 million decreased by 7.7%, or $28.4 million, and represent 17.9% of Downer’s liabilities. Employee provisions
(annual leave, long service leave and bonus) made up 77.5% of this balance with the remainder covering return conditions
obligation for leased assets, decommissioning costs and property and warranty obligations.
Shareholder equity increased by $135.4 million due predominantly to profit after tax of $216.0 million, Dividend Reinvestment Plan
participation of $8.9 million partially offset by dividends paid of $104.5 million. Net foreign currency gains arising on translation of
Downer Infrastructure’s New Zealand business resulted in an increase in the foreign currency translation reserve by $17.1 million.
CAPITAL MANAGEMENT
The Downer Board resolved to pay a fully franked final dividend of 12.0 cents per share, payable on 17 September 2014 to
shareholders on the register at 19 August 2014. Given Downer’s strong balance sheet, the Company’s Dividend Reinvestment
Plan has been suspended.
This followed the partially franked (70%) interim dividend of 11.0 cents per share paid on 20 March 2014, bringing the total
declared dividend for the year to 23.0 cents per share.
The Board also determined to continue to pay a fully imputed dividend on the ROADS security, which having been reset on
16 June 2014 has a yield of 7.95% per annum payable quarterly in arrears, with the next payment due on 15 September 2014.
As this dividend is fully imputed (the New Zealand equivalent of being fully franked), the actual cash yield paid by Downer will
be 5.72% per annum for the next 12 months.
On 5 August 2014, the Board resolved to undertake an ongoing share buy-back program that will operate from 20 August 2014.
The total number of shares to be purchased under the buy-back will depend on share price levels and capital requirements.
The program is part of Downer’s ongoing capital management strategy and will be managed in conjunction with capital
requirements for growth. Downer has a strong balance sheet and is in a good position to take advantage of growth
opportunities, including mergers and acquisitions, but any prospect will be subject to robust risk assessment. Downer will focus
on opportunities that are strategic, the right price and grow the Company’s capability.
ZERO HARM
Tragically, a Downer employee died in April 2014 while performing stringing work for the construction of a new transmission line
in Western Australia. This death occurred despite a very high level of safety management across the company and a mature
safety culture. It reinforces the need across all Downer’s businesses to focus intensely on understanding and managing the
critical risks that have the potential to cause our people serious injury.
Downer’s goal of Zero Harm requires continuous improvement to achieve zero work-related injuries and environmental
incidents. Downer has improved the Zero Harm culture in recent years. This has included the implementation of systems to
identify foreseeable hazards and to manage the risks associated with them. These systems go beyond safety management to
incorporate safety culture and safety leadership.
Downer’s Lost Time Injury Frequency Rate is just over one incident per million hours worked. Downer’s Total Recordable Injury
Frequency Rate improved, from 5.42 per million hours worked to 4.83.
Downer Group Safety Performance
(12- month rolling frequency rates)
R
F
I
T
L
1.2
1.0
0.8
0.6
0.4
0.2
0.70
5.42
LTIFR
TRIFR
3
1
-
n
u
J
3
1
-
l
u
J
3
1
-
g
u
A
3
1
-
p
e
S
3
1
-
t
c
O
3
1
-
v
o
N
3
1
-
c
e
D
4
1
-
n
a
J
4
1
-
b
e
F
4
1
-
r
a
M
4
1
-
r
p
A
4
1
-
y
a
M
9.0
8.0
7.0
6.0
5.0
4.0
R
F
I
R
T
1.08
4.83
4
1
-
n
u
J
ANNUAL REPORT 2014 11
DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2014 GROUP BUSINESS STRATEGIES AND PROSPECTS FOR FUTURE FINANCIAL YEARS
Downer’s key strategies in recent years have focused on improving business performance through business transformation, cost
efficiencies and productivity in response to changing economic conditions and the outlook for its end markets. Downer intends
to continue focusing on these strategies in future financial years and to also pursue alternate growth opportunities through
potential mergers and acquisitions. The specific strategic objectives, Downer’s prospects of achieving them and the risks that
could adversely affect their achievement are set out in the table below.
Strategic Objective
Prospects
Risks
Maintain focus on
Zero Harm.
The health and safety of Downer’s people is
the Company’s first priority and Downer has
improved its health and safety performance
in recent years. Downer will seek to improve its
health and safety performance continuously to
achieve its goal of zero work-related injuries and
environmental incidents.
Downer’s activities can result in harm to people
and the environment. Downer has sought to
mitigate this risk by assessing, understanding
and mitigating the “critical risks” facing Downer
and implementing Downer’s Cardinal Rules
which provide direction and guidance on these
critical risks.
Continue to drive business
performance.
Downer has taken proactive steps to ‘right-size’
its business in alignment with market conditions.
In FY14 Downer’s total expenses declined by
16.5%, as total revenue declined by 15.3%.
Strengthen the foundations
of Downer’s business.
Downer will continue to pursue initiatives to
strengthen the foundations of its business.
These include:
Failing to take proactive steps to reduce
costs in line with forward revenue projections
would jeopardise the ability to drive further
improvements to business performance. The
focus on business improvement and cost
management is a fundamental part of both
Downer’s formal planning processes and day-to-
day management activities.
The achievement of these strategic objectives
may be affected by macro-economic risks
including China’s slowing growth, volatile
commodity prices, reduced capital expenditure
in the Australian resources sector and
increasing overseas competition. Downer will
continue to manage its exposure to these risks
by implementing:
– Enhancing management capability
to improve operational and financial
performance;
– A succession planning process for
all leadership roles and a leadership
development program;
– Maintaining industry and geographical
– Growth and development strategies to
diversification to achieve greater resilience
through economic cycles;
diversify revenue sources, including through
joint ventures;
– Continuing to improve tender, contract and
project risk management processes; and
– Continuing to improve the balance sheet
and capital management.
– Rigorous tender, contract and project risk
policies and procedures consistently across
the Group; and
– A successful refinancing of the Group,
reducing net debt and gearing and
delivering consistently strong cash flow. These
achievements, combined with significantly
improved risk and project management
processes, were important factors in Fitch
Ratings’ decision to upgrade Downer’s
credit rating in June 2013 to “BBB” with
Stable outlook.
12 DOWNER EDI LIMITED
DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2014 Strategic Objective
Prospects
Risks
Drive growth in core
markets with key
customers.
Downer intends to pursue growth in core
markets with key customers through strategies
which include:
– Continuous improvement of the Company’s
engagement with customers, including
working with them constructively to reduce
costs and improve productivity;
The achievement of these strategic objectives
may be affected by macro-economic risks
including China’s slowing growth, volatile
commodity prices, reduced capital expenditure
in the Australian resources sector, insourcing by
key customers (e.g. rolling stock maintenance
and mining services), early termination or scope
reduction on existing contracts (e.g. contract
mining) and increasing overseas competition.
Downer will continue to manage its exposure to
these risks through:
– Ongoing analysis of markets, customers and
competitors to understand potential impacts
and determine necessary action;
– Leveraging “cross-selling” opportunities;
– Continuing to drive benefits from the
– Developing and growing Asset Management
capabilities;
establishment of Downer Infrastructure
and enhancement of Downer’s Customer
Relationship Management (CRM) tools;
– Forming strategic partnerships and joint
ventures with leading technology and
knowledge providers;
– Focusing more closely on forward revenue
opportunities, including the outsourcing of
road maintenance by State Governments,
large LNG projects and the NBN roll-out;
– Forming strategic partnerships and joint
ventures with leading technology and
knowledge providers and enhancing
Downer’s CRM;
– Expanding into overseas markets selectively
– Rigorous review of all overseas opportunities;
through existing customer relationships;
– Continuing to grow Downer Rail’s locomotive
– Engaging with customers and ongoing
and passenger train maintenance
businesses to replace revenue streams from
manufacturing contracts; and
– Continuing to achieve production and cost
efficiencies in the mining services business.
Assess alternative growth
options.
Downer is assessing alternative growth
opportunities through mergers and acquisitions
(M&A), including:
Simplify, consolidate
and enable the Downer
business.
– bolt-on acquisitions;
– broadening of capabilities;
– transformational mergers; and/or
– geographical expansion.
The establishment of Downer Infrastructure
in May 2012 was an important part of this
strategic objective and it has enabled Downer
to leverage its existing expertise more broadly
and capitalise on growth opportunities.
Downer’s Fit 4 Business program is also a key
driver of this strategy. The program achieved
$375 million in gross benefits over the past four
financial years and is on target to achieve an
additional $125 million in gross benefits in the
2015 financial year.
improvement in best practice maintenance
programs to improve fleet reliability; and
– Continued focus on Downer’s Fit 4 Business
program (refer below), and plant efficiency
to achieve value for money outcomes for key
customers.
Rigorous analysis of potential opportunities to
ensure they fit with Downer’s strategic objectives,
are appropriately valued and are structured
to mitigate downside risks. Ensuring Downer
remains well within its financing covenant and
credit rating metrics.
Failure to achieve its Fit 4 Business targets
would adversely impact Downer’s future
financial performance. Downer has a dedicated
Fit 4 Business team that will continue to
drive initiatives to reduce costs and improve
productivity across the Group.
Downer has various risk management policies and procedures in place to enable the identification, assessment and
mitigation of risks that arise through its activities. These include tender, contracting, project, interest rate, foreign exchange
and credit risks. For further information in relation to Downer’s risk management framework, refer to page 124 of the Corporate
Governance Statement.
ANNUAL REPORT 2014 13
DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2014 OUTLOOK
DIVIDENDS
The forward outlook varies by market. Government related
expenditure on capital and services looks promising while
resources based expenditure is expected to be flat, or
declining, on current low levels.
Underlying mining commodity markets are currently very
difficult for a number of Downer’s major customers. The
short term impact of this pressure on service providers like
Downer is hard to predict. Longer term, this pressure will drive
increased demand for Downer’s services as companies look
for more efficient service delivery.
In respect of the financial year ended 30 June 2014,
the Board:
– declared a partially franked (70%) interim dividend
of 11.0 cents per share, with the unfranked amount
paid from Conduit Foreign Income (CFI) that was paid
on 20 March 2014 to shareholders on the register at
18 February 2014; and
– declared a fully franked final dividend of 12.0 cents per
share, payable on 17 September 2014 to shareholders on
the register at 19 August 2014.
For the 2015 financial year, Downer is targeting NPAT of
around $205 million.
Due to the strength of Downer’s balance sheet,
the Company’s Dividend Reinvestment Plan has
been suspended.
As detailed in the Directors’ Report for the 2013 financial year,
the Board declared a partially franked (70%) final dividend
of 11.0 cents per share, with the unfranked amount paid from
CFI that was paid on 24 September 2013 to shareholders on
the register at 20 August 2013.
EMPLOYEE DISCOUNT SHARE PLAN (ESP)
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.
No shares were issued under the Employee Discount Share
Plan during the years ended 30 June 2014 and 30 June 2013.
There are no performance rights or performance options, in
relation to unissued shares, that are outstanding.
CHANGES IN STATE OF AFFAIRS
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.
ENVIRONMENTAL
Downer recognises its obligation to stakeholders – customers,
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.
Downer’s 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. 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 licence and
regulatory requirements.
14 DOWNER EDI LIMITED
DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2014 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 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.
Downer’s Constitution includes indemnities, to the extent permitted by law, for each Director and Company Secretary of
Downer and its subsidiaries against liability incurred in the performance of their roles as officers. The Directors and the Company
Secretaries listed on pages 2 to 4, 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
2014 financial year and the number of meetings attended by each Director (while they were a Director or Board Committee
member). During the year, nine Board meetings, six Audit and Risk Committee meetings, three Remuneration Committee
meetings, three Zero Harm Committee meetings and two Nominations and Corporate Governance Committee meetings
were held. In addition, ten ad hoc meetings (attended by various Directors) were held in relation to various matters including
tender reviews.
Director
R M Harding
G A Fenn
S A Chaplain
P S Garling
E A Howell
J S Humphrey2
K G Sanderson
C G Thorne3
Director
R M Harding
G A Fenn
S A Chaplain
P S Garling
E A Howell
J S Humphrey2
K G Sanderson
C G Thorne3
Board
Audit and Risk
Committee
Remuneration
Committee
Held1
Attended
Held1
Attended
Held1
Attended
9
9
9
9
9
9
9
9
9
9
8
9
8
8
9
8
–
–
6
6
–
6
6
6
–
–
6
6
–
4
6
6
3
–
–
3
–
3
3
–
3
–
–
3
–
3
3
–
Zero Harm
Committee
Nominations and
Corporate Governance
Committee
Held1
Attended
Held1
Attended
–
3
3
–
3
–
–
3
–
3
3
–
3
–
–
3
2
–
2
–
–
2
2
–
2
–
2
–
–
1
2
–
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.
2 Mr Humphrey is also Chairman of the Disclosure Committee which meets on an unscheduled basis.
3 Mr Thorne is also Chairman of the Tender Risk Evaluation Committee which meets on an unscheduled basis.
ANNUAL REPORT 2014 15
DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2014 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 117 of this Annual Report.
NON-AUDIT SERVICES
Downer is committed to audit independence. The Audit and Risk 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 and Risk 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 auditor’s independence,
based on advice received from the Audit and Risk 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 41 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
Sustainability assurance
Due diligence and other non-audit services
ROUNDING OF AMOUNTS
June 2014
$
June 2013
$
448,305
52,500
103,000
410,880
1,014,685
268,439
119,002
100,000
1,452,254
1,939,695
The Company is of a kind referred to in ASIC Class Order 98/100, dated 10 July 1998, and in accordance with that class order,
amounts in the Directors’ Report and the Financial Report have, unless otherwise stated, been rounded off to the nearest
thousand dollars.
16 DOWNER EDI LIMITED
DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2014 REMUNERATION REPORT – AUDITED
The Remuneration Report provides information about the remuneration arrangements for key management personnel (KMP),
which means Non-executive Directors and the Groups’ most senior executives, for the year to 30 June 2014. The term “executive”
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 required under the Corporations Act 2001 (Cth);
7. Key terms of employment contracts; and
8. Prior equity-based remuneration plans.
SUMMARY OF CHANGES TO REMUNERATION POLICY
Downer has continued to refine its remuneration policy during the period. The refinement considered Company strategy, reward
plans based on performance measurement, competitive position and stakeholder feedback. Changes to policy are noted in
the relevant sections of this Report and are summarised in the table below:
Policy
Change in policy from 2013
Short-term incentive plan
(STIP)
– Introduction of STI payment deferral so that 50% of awards are deferred over a two year period
as foreshadowed in 2013. Further detail is provided in section 5.3.4;
Long-term incentive plan
(LTIP)
– For the 2014 financial year Downer changed its market guidance emphasis from earnings
before interest and tax (EBIT) to net profit after tax (NPAT) to reflect the Company’s broad
focus, including on cash collection and de-leveraging. Accordingly there has been a change
to Group NPAT from Group EBIT for the Group earnings performance condition under the STIP.
Divisional EBIT has been retained as the Divisional earnings performance condition; and
– Addition of two new Zero Harm measures relating to the identification and management of
critical risks to reflect the Company’s focus on critical risks to its people and introduce lead
indicators of safety performance.
The Board completed a review of the LTIP in 2014. The review included benchmarking of Downer’s
LTI policy against a “benchmark group” comprised of sector competitors and other ASX100
companies. The review sought to ensure that the balance between rewarding performance and
motivating and retaining existing senior executives and attracting new executives was effective
and reflected the Company’s business strategies, including the focus on cash and de-leveraging.
Accordingly the review focused on the composition and operation of the performance
conditions. The following changes were made as a result of the review:
– Amendment of the LTIP EPS performance vesting scale so that performance rights qualify for
vesting between 5% and 10% compound annual EPS growth (previously between 6% and 12%),
consistent with sector competitors;
– Amendment of the LTIP vesting profile so that 30% (previously 0%) of performance rights qualify
for vesting at threshold performance with linear increments to 100% at the capped maximum
performance level, remaining conservative compared to sector competitors;
– Transition of the LTIP performance period to a financial year basis from a calendar year basis in
order to improve transparency between performance and reward and ensure consistency with
STI plan outcomes with the LTIP;
– Introduction of a third performance condition, “Scorecard”, based on rolling three-year
average NPAT and Free Cash Flow (FFO) performance relative to budgeted targets to focus
on performance sustainability, increase alignment with the STI and strengthen retention.
The Scorecard measure applies to one third of the performance rights granted to each
executive with equal weighting to NPAT and FFO. This condition will first apply in 2015.
Further detail is provided in section 5.4.3; and
– From 2015, the relative total shareholder return (TSR) and earnings per share (EPS) growth
LTIP measures each apply to one third (previously each one half) of the performance rights
granted to each executive, reflecting the introduction of the Scorecard condition.
ANNUAL REPORT 2014 17
DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2014 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.
1.2 EXECUTIVE REMUNERATION POLICY
Downer’s executive remuneration policy and practices are summarised in the table below.
Policy
Practices aligned with policy
Retain experienced, proven
performers, and those
considered to have high
potential for succession
– Provide remuneration that is internally fair;
– Ensure remuneration is competitive with the external market; and
– Defer a substantial part of pay contingent on continuing service and sustained performance.
Focus performance
– Provide a substantial component of pay contingent on performance against targets;
Provide a Zero Harm
environment
Manage risk
– Focus attention on the most important drivers of value by linking pay to their achievement;
– Require profitability to reach an acceptable level before any bonus payments can be made;
and
– Provide a LTIP component that rewards consistent Scorecard performance over multiple years
and over which executives have a clear line of sight.
– Incorporate measures that embody “Zero Harm” for our employees, contractors, communities
and the environment as a significant component of reward.
– Encourage sustainability by balancing incentives for achieving both short-term and longer-term
results, and deferring equity based reward vesting after performance has been initially tested;
– Set stretch targets that finely balance returns with reasonable but not excessive risk taking and
cap maximum incentive payments;
– Do not provide excessive “cliff” reward vesting that may encourage excessive risk taking as a
performance threshold is approached;
– Diversify risk and limit the prospects of unintended consequences from focusing on just one
measure in both short-term and long-term incentive plans;
– Stagger vesting of deferred short term incentive (STI) payments from 2014 to encourage
retention and allow forfeiture of rewards that are the result of misconduct or
material adjustments;
– Retain full Board discretion to vary incentive payments, including in the event of excessive risk
taking; and
– Restrict trading of vested equity rewards to ensure compliance with the Company’s Securities
Trading Policy.
Align executive interests
with those of shareholders
– Provide that a significant proportion of pay is delivered as equity so part of executive reward is
linked to shareholder value performance;
– Provide a long-term incentive that is based on consistent Scorecard performance
against challenging targets set each year that reflect sector volatility and prevailing
economic conditions;
– Maintain a guideline minimum shareholding requirement for the Managing Director;
– Encourage holding of shares after vesting via a trading restriction for all executives and
payment of deferred STI components in shares after deducting applicable personal taxes; and
– Prohibit hedging of unvested equity and equity subject to a trading lock to ensure alignment
with shareholder outcomes.
Attract experienced,
proven performers
– Provide a total remuneration opportunity sufficient to attract proven and experienced
executives from secure positions in other companies and retain existing executives.
18 DOWNER EDI LIMITED
DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2014 2. RELATIONSHIP BETWEEN REMUNERATION POLICY AND COMPANY PERFORMANCE
2.1 COMPANY STRATEGY AND REMUNERATION
Downer’s business strategy includes:
– Seeking organic growth through focusing on serving existing customers better across multiple products and service offerings
of the Company;
– Paying down debt to improve gearing, reduce risk and enhance the Company’s capability to withstand threats and take
advantage of opportunities;
– Obtaining better utilisation of assets and improved margins through simplifying and driving efficiency;
– Identifying opportunities to manage the Downer portfolio that deliver long-term shareholder value; and
– Being able to adapt to the changing economic and competitive environment to ensure Downer delivers shareholder value.
The Company’s remuneration policy complements this strategy by:
– Incorporating Company-wide performance requirements for both STI and LTI reward vesting to encourage
cross-divisional collaboration;
– Incorporating performance metrics that focus on cash flow to reduce working capital and debt exposure;
– Setting NPAT and EBIT STI performance and gateway requirements based on effective application of funds employed to run
the business for better capital efficiency;
– Employing Free Cash Flow (FFO) as the cash measure for the STI to provide more emphasis on control of capital expenditure;
– Deferring 50% of STI awards to encourage sustainable performance and a longer-term focus;
– Incorporating consistent financial performance in the LTIP Scorecard measure;
– Emphasis on Zero Harm measures in the STI; and
– Encouraging the development of our people to help maintain a sustainable supply of talent.
2.2 REMUNERATION LINKED TO PERFORMANCE
The link to performance is provided by:
– Requiring a significant portion of executive remuneration to vary with short-term and long-term performance;
– Applying a profitability gateway to be achieved 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);
– Group NPAT;
– Divisional EBIT;
– FFO;
– Development of Downer’s 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 four year
period to 30 June 2014.
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160
140
120
100
80
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Downer EDI TSR compared to ASX100 median*
Downer EDI TSR
ASX100 median TSR
*S&P/ASX100 companies as at 30/06/2010
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ANNUAL REPORT 2014 19
DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2014
The table below shows the performance of Downer against key financial indicators over the last five years
Continuing and discontinued operations:
2010
$’000
2011
$’000
2012
$’000
2013
(restated)(i)
$’000
2014
$’000
Total revenue and other income
5,826,664
6,641,847
8,071,333
8,781,238
7,371,560
Share of sales revenue from joint ventures
and associates
Total revenue including joint ventures and
associates and other income (ii)
Earnings before interest and tax –
continuing operations
Earnings before interest and tax –
discontinued operations
Total earnings before interest and tax
Net interest expense
Income tax (expense)/benefit
Net profit/(loss) after tax
Total earnings before interest and tax
Individually significant items
Earnings before interest and tax
(before individually significant items)(iii)
Operating cash flow
Investing cash flow
Free cash flow
Share price at start of the year(iv)
Share price at end of the year
Interim dividend (cents per share)
Final dividend (cents per share)
Total Shareholder Return
Basic earnings/(loss) (cents per share)
Earnings per share growth (%)
Net profit/(loss) after tax growth rate (%)
211,168
319,077
453,236
351,128
362,978
6,037,832
6,960,924
8,524,569
9,132,366
7,734,538
53,362
3,648
261,202
358,812
341,118
–
53,362
(51,295)
985
3,052
53,362
260,000
313,362
204,266
(144,396)
59,870
5.59
3.60
13.1
16.0
(30%)
(2.4)
(104%)
(98%)
22,015
25,663
(64,309)
10,946
(27,700)
25,663
266,573
292,236
185,625
(319,573)
(133,948)
3.48
3.70
–
–
6%
(10.5)
(338%)
(1,008%)
3,002
264,204
(71,531)
(79,778)
112,895
264,204
82,279
346,483
364,471
–
358,812
(67,123)
(87,703)
203,986
358,812
11,456
370,268
448,094
(202,990)
(288,356)
161,481
159,738
3.70
3.13
–
–
(15%)
23.7
326%
508%
3.13
3.59
10.0
11.0
21%
45.7
93%
81%
–
341,118
(43,055)
(82,070)
215,993
341,118
–
341,118
583,427
(278,754)
304,673
3.59
4.52
11.0
12.0
32%
48.3
6%
6%
(i) Certain amounts shown here do not correspond to the consolidated Annual Financial Report as at 30 June 2013 and reflect adjustments
made as detailed in Note 39: Impact on Group’s historical financial statements on adoption of AASB 11 Joint Arrangements.
(ii) Total revenue comprises revenue from ordinary activities, other income and sales revenue from joint ventures and associates. The Company
considers Total Revenue to be an appropriate measure of revenue as joint venture models are seen as an appropriate industry response to
meet the needs of engineering, procurement and construction (EPC) customers with regard to large scale integrated projects.
(iii) Earnings before interest and tax (before individually significant items) is determined as the statutory profit before tax and interest, excluding
any items that have been classified as individually significant to the financial statements. The presentation of earnings before interest and
tax (before individually significant items) is a non-International Financial Reporting Standards (IFRS) disclosure.
(iv) 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
four years.
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20 DOWNER EDI LIMITED
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DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2014
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 policies
and practices.
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 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 plans;
– Equity-based incentive plans;
– 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 for all key management
personnel and senior executives reporting directly to the
Managing Director.
The Nominations and Corporate Governance Committee is
responsible for recommending and reviewing remuneration
arrangements for the Executive Director and Non-executive
Directors of the Company.
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
Pty Ltd as its adviser. Guerdon Associates Pty Ltd 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
and Risk Committee; and $15,000 for the chair of each of the
Zero Harm Committee, Remuneration Committee and Tender
Risk Evaluation Committee.
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.
In order for maximum STIs to be awarded, performance must
achieve a stretch goal that is a clear margin above 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 executives the
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. The proportions attributable to each
incentive component are as shown in the following table.
ANNUAL REPORT 2014 21
DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2014 Executive position
Managing Director
Executives appointed prior to 2011
Executives appointed from 2011
Target STI %
of fixed
remuneration
Maximum
STI % of fixed
remuneration*
Maximum
LTI % of fixed
remuneration
75
75
56.25
100
100
75
100
75
50
*Prior to the application of any individual performance modifier (IPM), which is described in section 5.3.2.
The proportions of STI to LTI take into account:
– Market practice;
Maximum total
performance
based pay as %
of fixed
remuneration
200
175
125
– The service period before executives can receive equity rewards;
– The behaviours that the Board seeks to encourage through direct key performance indicators; and
– The requirement for the Managing Director 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 retain proven performers and when necessary to attract the most suitable external
candidates from secure employment elsewhere.
Remuneration is benchmarked against a peer group of direct competitors and a sector 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.
No KMP received an adjustment in the 2014 financial year.
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 2014.
The basis of the plan is designed to align STI outcomes with financial results. No STI is paid unless a minimum profit gateway is met.
For corporate executives, the gateway is based on the Group budgeted profit target. For divisional executives, the gateway
is based on the division budgeted profit target. Profit for this purpose is defined as NPAT for corporate executives and EBIT for
divisional executives. This minimum must be of a materially sufficient size to justify the payment of STI to an executive, and deliver
an acceptable return for the funds employed in running the business.
As noted in section 5.1, the maximum STI that can be earned is capped to minimise excessive risk taking.
Commencing with the 2014 financial year, the Board has introduced deferral as part of the STI structure. Payment of 50 per cent
of the award is paid at the time of award in cash and the remaining 50 per cent of the award earned is deferred over two years.
The value of deferred components will be settled in shares, net of applicable personal tax. This is designed to encourage
executive share ownership, and not adversely impact executives who have to meet their taxation obligations arising from the
vesting of the deferred components.
No dividend entitlements are attached to the deferred components during the vesting period.
The details of the arrangements are set out in section 5.3.4 and 5.3.5 below.
22 DOWNER EDI LIMITED
DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2014 5.3.2 HOW STI PAYMENTS ARE ASSESSED
Target STI plan percentage 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. Thresholds 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 maximum STI plan per cent x scorecard result x IPM.
5.3.3 STI PERFORMANCE REQUIREMENTS
Overall performance is assessed on NPAT, EBIT, FFO, Zero Harm and a measure of people development. The move to NPAT for
Group performance in 2014 reflects the executives’ responsibility for financing and tax, and hence the bottom-line as well as
consistency with market guidance. It is expected there will be refinements in the overall measures and weightings from year to
year in order to better align with Company performance.
NPAT and EBIT include joint ventures and associates and includes, inter alia, changes in accounting policy, material asset sales,
acquisitions or divestments.
FFO is defined as net cash from operating activities (i.e. EBIT plus non-cash items in operating profit plus distributions received
from JVs or associates plus movements in working capital plus movements in operating assets less net interest less tax paid), less
Investing Cash Flow.
Zero Harm reflects Downer’s commitment to safety and environmental, social and governance matters. The Zero Harm element
includes safety and environmental measures, underscoring Downer’s commitment to customers, employees, regulators and the
communities in which it operates. The Board introduced additional measures related to the identification and management of
critical Zero Harm risks in order to reward performance on lead indicator safety performance, reducing the weighting applied to
the existing measures. The measures for the Zero Harm element of the scorecard are as follows:
Measure
Target
Safety
TRIFR (total recordable
injury frequency rate)
LTIFR (lost time injury
frequency rate)
Achieve a set reduction in the TRIFR at level of responsibility. Award pro rates linearly. TRIFR is
calculated as the number of recordable injuries x 1,000,000/the hours worked in 12 months.
In addition LTIFR must be retained below a threshold level for area of responsibility. LTIFR is
calculated as the number of lost time injuries x 1,000,000/the hours worked in 12 months.
Critical Risks
Identify critical risks for the area of responsibility and register these risks in the appropriate system.
Action Close Outs
Environmental
Sustainable
development
Achieve minimum periods where there are zero actions that are overdue at the end of each month
arising from Zero Harm incidents, covering high Potentials and actual Injuries (First Aid, Medical
Treatment Injury and Lost Time Injury), recorded.
Achieve energy efficiency initiatives to deliver improvements compared to the previous
financial year.
Should a workplace fatality or serious environmental incident occur, the relevant safety or environmental portion of the STI
is foregone.
People measures include targets for the completion of development and career reviews and succession plans.
Weightings applied to the 2014 STI scorecard measures for all executives, including the Managing Director, are set out in the
table below.
Executive
Corporate
Business unit
Group NPAT
Divisional EBIT
Free cash flow
Zero Harm
People
30%
7.5%
–
22.5%
30%
30%
(7.5% Group,
22.5% division)
30%
30%
10%
10%
The Board has discretion to vary STI payments by up to + or – 100 per cent from the payment applicable to the level of
performance achieved, up to the maximum for that executive.
Specific details of STI performance requirements are set out in section 6.5.
ANNUAL REPORT 2014 23
DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2014 DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2014
5.3.4 INTRODUCTION OF STI DEFERRAL FOR 2014
In 2013, the Board resolved to introduce deferral as part of the short term incentive (STI) structure, commencing from the 2014
financial year. This decision was taken to:
– Strengthen retention, especially for the Company’s best performers, while continuing to weight pay towards performance;
– Increase the alignment between executives’ interests and those of shareholders through payment of a significant portion of
STI awards in equity;
– Manage risk through the provision of deferred rewards that can be forfeited in the event of a material misstatement of
financial results; and
– Focus on performance sustainability through deferring reward value and settling the balance after applicable personal tax in
Company shares, so that only through sustained performance can the original STI value be realised or enhanced.
Accordingly the Board introduced a policy where 50 per cent of the award is paid at the time of award and the remaining 50
per cent of the award earned is deferred over two years.
The first payment will be in cash after finalisation of the annual audited results. The payment of the deferred component of the
award will be in the form of two tranches, each to the value of 25 per cent of the award.
The deferred components represent an entitlement to shares, subject to the satisfaction of a continued employment condition.
The first tranche will vest one year following award and the second tranche will vest two years following award, provided an
executive remains employed by the Group at the time of vesting. No dividend entitlements are attached to the deferred
components during the vesting period.
Where an executive ceases employment with the Group prior to the vesting date, the deferred components will be forfeited.
However, the Board has retained the discretion to vest deferred awards, in the form of shares or cash, in their ordinary course
where the executive is judged to be an eligible leaver.
In implementing STI deferral, the Board addressed two important issues:
– A desire to encourage executives to hold shares in the Company through payment of deferred components in shares while
noting the important requirement of executives to comply with the Company’s Securities Trading Policy which, in the interest
of good corporate governance, restricts the ability of executives to deal in the Company’s securities; and
– Contractual obligations to KMP within their current employment contracts to deliver short-term incentives as a single lump
sum cash payment following the end of the performance year.
The Board determined that the deferred arrangement should encourage executive share ownership, and not adversely impact
executives who have to meet their taxation obligations arising from the vesting of the deferred components. Accordingly, in
order to reduce this impact, any deferred components that vest will be settled in shares net of the value of applicable personal
tax applicable to the vested deferred component.
The Board considered executive contractual entitlements to receive their STI payments in cash with no deferral. To address
the initial loss of value that will be experienced by executives through the introduction of deferral, the full cash element will be
retained in the first year of operation through a one-off transitional payment of 50 per cent of the award. In return, executives
have surrendered their contractual rights that prescribed a 100 per cent cash STI which allowed for introduction of the new
STI policy.
5.3.5 STI TABULAR SUMMARY
The following table outlines the major features of the 2014 STI plan.
Purpose of STI plan
– Focus performance on drivers of shareholder value over 12 month period;
Minimum performance
“gateway” before any payments
can be made
– Improve “Zero Harm” and people related results; and
– Ensure a part of remuneration costs varies with the Company’s 12 month performance.
Achievement of a gateway based on budgeted Group NPAT for corporate executives and
Division EBIT for divisional heads.
Maximum STI that can be earned
– KMP appointed pre 2011: up to 100 per cent of fixed remuneration; and
Percentage of STI that can be
earned on achieving target
expectations
Individual performance modifier
(IPM)
– KMP appointed from 2011: up to 75 per cent of fixed remuneration.
75 per cent of the maximum. For an executive to receive more, performance in excess of
target expectations will be required.
– An IPM may be applied based on an executive’s individual key performance indicators
and relative performance; and
– Moderate individual performance may result in 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.
24 DOWNER EDI LIMITED
Discretion to vary payments
The Board, in its discretion, may vary STI payments by up to + or – 100 per cent from the
payment applicable to the level of performance achieved, up to the maximum for that
executive.
Performance period
1 July 2013 to 30 June 2014.
Performance assessed
August 2014, following audit of accounts.
Additional service period after
performance period for payment
to be made
Payment timing
50 per cent of the award is deferred with the first tranche of 25 per cent vesting one year
following award and the second tranche of 25 per cent vesting two years following award.
August 2014 for the first cash payment of 50 per cent of the award. The deferred components
of the STI payments will be paid one and two years following the award, in equal tranches of
25 per cent of the award.
Form of payment
Cash for initial payment.
The value of deferred components will be settled in shares, net of personal tax. An eligible
leaver’s deferred components will be settled in shares or in cash in the sole and absolute
discretion of the Board.
Performance requirements
Group NPAT and divisional EBIT, FFO, Zero Harm and people measures.
Board discretion
The Board may exercise discretion to:
New participants
Terminating executives
– Reduce partly or fully the value of the deferred components that are due to vest in
certain circumstances, including where an executive has acted inappropriately or
where the Board considers that the financial results against which the STIP performance
measures were tested were incorrect in a material respect or have been reversed
or restated;
– Settle deferred components in shares or cash.
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. Where an executive’s employment terminates prior to the vesting date,
unvested deferred components will be forfeited. However, the Board has retained discretion
to vest deferred awards, in the form of shares or cash, in their ordinary course where the
executive is judged to be an eligible leaver.
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 two variations from policy during the year:
– In recognition of outstanding achievement in completing and delivering the Waratah Train Rolling Stock Manufacturing
contract, the Board exercised its discretion to make an STI award to R A Spicer, notwithstanding that the Rail division EBIT
gateway was not met. The award represents 70% of Mr Spicer’s maximum STI; and
– Alternative arrangements are in place for D A Cattell as part of his fixed term contract. These are outlined in section 7.1.
5.4 LONG-TERM INCENTIVE
5.4.1 LTI OVERVIEW
Executives participate in a 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 and are generally consistent with market
practice in the Company’s sector.
The payment is in the form of performance rights. The performance rights do not have any dividend entitlements or voting
rights. If all the vesting requirements are satisfied, the performance rights will vest and the executives will receive shares in the
Company or cash at the discretion of the Board. For prior years’ plans, for which payment is in the form of restricted shares held
in trust until vesting, dividends on shares are held in trust and distributed to executives after all vesting conditions have been met,
net of applicable taxes.
The Board completed a review of the LTI plan in 2014. The review included benchmarking of Downer’s LTI policy against those of
sector competitors and other ASX100 companies and sought to ensure that the balance between rewarding performance and
motivating and retaining existing senior executives and attracting new executives was effective. Accordingly it focused on the
composition and operation of the performance conditions. Certain changes to the LTI plan arising from the review are effective
from 2014 and others from 2015. All of these changes are outlined in the Summary of Changes to Remuneration Policy and in
further detail in sections 5.4.2 to 5.4.5.
ANNUAL REPORT 2014 25
DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2014 The 2014 LTI will represent an entitlement to performance rights to ordinary shares exercisable subject to satisfaction of both
a performance condition and a continued employment condition. Grants will be in two equal tranches, with each tranche
subject to an independent performance requirement. The performance requirements for both tranches will share two
common features:
– Once minimum performance conditions are met, the proportion of performance rights that qualify for vesting commences
at 30 per cent and gradually increases pro rata with performance. This approach provides a strong motivation for meeting
minimum performance, but avoids a large “cliff” which may encourage excessive risk taking; and
– The maximum reward is capped at a “stretch” performance level that is considered attainable without excessive risk taking.
The Board resolved to change the performance period for the LTIP to a financial year basis from the previous calendar year
basis. This decision was taken to:
– Align with the STI performance period to ensure consistency following introduction of the Scorecard measure;
– Provide greater transparency between performance and reward; and
– Align with market practice amongst ASX100 companies.
In implementing this change, the Board needed to address the transition period of six months between the end of the 2013
calendar year and the commencement of the 2015 financial year (i.e. 1 January 2014 to 30 June 2014). The first full grant under
the new policy will be made in respect of the 2015 financial year.
The Board determined that a transition arrangement in the form of a half value grant be made for the transition period, at half
the value applicable to the executives annual LTI grant. This will be the only grant relating to 2014.
Performance for the 2014 LTI grants will be measured over the 2.5 year period to 30 June 2016. The proportion of performance
rights that can vest will be calculated in September 2016, but executives will be required to remain in service until 30 June 2017
(or, but for payment in lieu of notice, would have remained in service until 30 June 2017) to be eligible to receive any shares.
Where an executive ceases employment with the Group prior to the vesting date, the rights will be forfeited. However, the
Board will retain the discretion to retain executives in the plan in certain circumstances such as the death, total and permanent
disability or retirement of an executive. In these circumstances, the Board will also retain the discretion to vest awards in the form
of cash.
After vesting, any shares will remain subject to a trading restriction that is governed by the Company’s Securities Trading Policy.
All unvested performance rights will be forfeited if the Board determines that an executive has committed an act of fraud,
defalcation or gross misconduct or in other circumstances at the discretion of the Board.
5.4.2 PERFORMANCE REQUIREMENTS
One tranche of performance rights in the 2014 LTI grant will qualify for vesting subject to performance relative
to other companies, while the other tranche of performance rights will qualify for vesting subject to an absolute
performance requirement.
The relative performance requirement will be 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.
Performance rights in the tranche to which the relative TSR performance requirement applies will vest pro rata between the
median and 75th percentile. That is, 30 per cent of the tranche vest at the 50th percentile, 32.8 per cent at the 51st percentile,
35.6 per cent at the 52nd percentile and so on until 100 per cent vest at the 75th percentile.
The comparator group for the 2014 LTI grants will be the companies, excluding financial services companies, in the ASX100 index
as at the start of the performance period on 1 January 2014. Consideration has been given to using a smaller group of direct
competitors for comparison, however:
– Limiting the comparator group to a small number of direct competitors could result in very volatile outcomes from period to
period; 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 was considered desirable.
The absolute performance requirement applicable to the other tranche of performance rights is based on Earnings per Share
(EPS) growth over the 2.5 year performance period to 30 June 2016. The EPS measure conforms to AASB 133 Earnings per Share
and is externally audited.
26 DOWNER EDI LIMITED
DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2014 The tranche of performance rights dependent on the EPS performance condition will vest pro rata between five per cent
compound annual EPS growth and 10 per cent compound annual EPS growth. The Board resolved to make this change from the
previous vesting scale of six per cent to 12 per cent to reflect a challenging target that does not encourage excessive risk taking,
in the context of anticipated market conditions over the plan period and the impact of prudent risk management in recent
years to deleverage the Company’s balance sheet.
Vesting applies on a pro rata basis from 30 per cent upon meeting the minimum compound annual EPS growth performance
level of five per cent to 100 per cent at 10 per cent annual compound annual EPS growth. Capping reduces the tendency for
excessive risk taking and volatility that may be encouraged if the annual compound EPS growth bar is set above 10 per cent.
5.4.3 INTRODUCTION OF SCORECARD CONDITION IN 2015
The Board has resolved to introduce a third performance condition as part of the LTI structure, commencing from the 2015
financial year. This decision was taken to:
– Strengthen retention through the setting of challenging targets on an annual basis that reflect prevailing market conditions,
for a portion of LTI awards;
– Alignment with the STI plan to encourage a long-term approach to achieving annual financial performance targets;
– Improve the line of sight for executives so as to increase motivation and focus on consistent performance; and
– Focus on performance sustainability through reward of consistent achievement of absolute performance targets over the
long term.
The Scorecard condition will apply to one third of the performance rights granted to each executive. This will be of equal
weighting to the TSR and EPS conditions which will also apply to one third of the performance rights granted to each executive.
The Scorecard condition will be comprised of two independent absolute components of equal weighting. These components
will be based on Group NPAT and Group FFO.
The performance of each component will be measured over the three year period to 30 June 2017.
NPAT and FFO targets will be set at the beginning of each of the three financial years. The performance of each component
will be assessed each year relative to the targets. Performance of each component will be determined as the average of the
annual performance assessments for the three years. The performance rights will vest on a pro-rata basis from 30 per cent upon
meeting the minimum three year average component performance level of 90 per cent of target to 100 per cent at the capped
maximum three year average component performance level of 110 per cent of target.
The processes and timing applicable for the Scorecard Measure are outlined below:
Timing
Actions
At the beginning of the plan
– Weighting of components is determined. In 2014 the components are equally weighted.
At the beginning of each
financial year
At the end of each
financial year
– NPAT and FFO target performance levels are set.
– Calculate actual performance; and
– Assess actual performance compared to target to determine performance percentage for
the year.
At the end of 3 years
– Calculate average annual performance for each component; and
– Calculate award based on performance against the vesting range.
At the end of 3 years
– Consider the continued service condition and determine vesting.
5.4.4 POST-VESTING SHAREHOLDING GUIDELINE
The Managing Director is required to continue holding shares after they have vested until the shareholding guideline has been
attained. This guideline requires that the Managing Director holds vested performance shares equal in value to 100 per cent of
his fixed remuneration.
The Remuneration Committee has discretion to allow variations from this guideline requirement.
The guideline requirement has been developed to reinforce alignment with shareholder interests.
ANNUAL REPORT 2014 27
DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2014 5.4.5 LTI TABULAR SUMMARY
The following table outlines the major features of the 2014 LTI plan, which will apply for the transition grant that is designed to
facilitate the move to a financial year basis for future grants.
Purpose of LTI plan
– Focus performance on drivers of shareholder value over three year period (2.5 years for the
2014 transitional plan);
– Manage risk by countering any tendency to over-emphasise 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 (50 per cent for the 2014
transitional plan);
– KMP appointed pre-2011: 75 per cent of fixed remuneration (37.5 per cent for the 2014
transitional plan); and
– KMP appointed from 2011: 50 per cent of fixed remuneration (25 per cent for the 2014
transitional plan).
Performance periods
1 January 2014 to 30 June 2016.
Performance assessed
September 2016.
Additional service period after
performance period for shares
to vest
Performance rights for which the relevant performance vesting condition is satisfied will not vest
unless executives remain employed with the Group on 30 June 2017.
Performance rights vest
1 July 2017.
Form of award and payment
Performance rights.
Performance conditions
There will be two performance conditions. Each applies to half of the performance rights
granted to each executive.
Relative TSR
The relative TSR performance condition will be based on the Company’s 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 2.5 years to 30 June 2016.
The performance vesting scale that will apply to the performance rights subject to the relative
TSR test is shown in tabular and graphic forms below:
Downer EDI Limited’s
TSR Ranking
Percentage of performance rights subject to
TSR condition that qualify for vesting
< 50th percentile
Zero per cent
50th percentile
30 per cent
Above 50th and below
75th percentile
Pro rata so that 2.8 per cent of the performance rights in the tranche
will vest for every 1 per cent increase between the 50th percentile
and 75th percentile
75th percentile and above 100 per cent
100% vest
75% vest
50% vest
30% vest
t
s
e
v
o
t
s
e
i
t
i
r
u
c
e
s
f
t
o
e
g
a
n
e
c
r
e
P
0
50
75
100
Percentile TSR ranking
28 DOWNER EDI LIMITED
DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2014
EPS growth
The EPS growth performance condition will be based on the Company’s compound annual EPS
growth over the 2.5 years to 30 June 2016.
The performance vesting scale that will apply to the performance rights subject to the EPS
growth test is shown in tabular and graphic forms below:
Downer EDI Limited’s EPS
compound annual growth
Percentage of performance rights subject to
EPS condition that qualify for vesting
< 5 per cent
5 per cent
Above 5 per cent to
< 10 per cent
Zero per cent
30 per cent
Pro rata so that 14 per cent of the performance rights in the
tranche will vest for every 1 per cent increase in EPS growth
between 5 per cent and 10 per cent
10 per cent or more
100 per cent
100% vest
75% vest
50% vest
30% vest
0
5%
7.5%
10%
EPS compound annual growth
How performance rights and
shares are acquired
The rights will be issued by the Company and held by the participant subject to the satisfaction
of the vesting conditions.
If the rights vest, executives can exercise them to receive shares that are normally acquired
on-market.
Performance rights will not have voting rights or accrue dividends.
Treatment of dividends
and voting rights on
performance rights
Restriction on hedging
Hedging of entitlements under the plan by executives will not be permitted.
Restriction on trading
New participants
Terminating executives
Change of control
Vested shares arising from the rights may only be traded 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) will be eligible to participate in the
LTI on the first grant date applicable to all executives after they commence in their position. An
additional pro-rata entitlement if their employment commenced after the grant date in the
prior calendar year may be made on a discretionary basis.
Where an executive ceases employment with the Group prior to the vesting date, the rights
will be forfeited. However, the Board will retain the discretion to retain executives in the plan in
certain circumstances such as the death, total and permanent disability or retirement of an
executive. In these circumstances, the Board will also retain the discretion to vest awards in the
form of cash.
On the occurrence of a change of control event, and providing at least 12 months of the grants’
performance period have elapsed, unvested performance rights 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. Vesting will occur to the extent the performance
conditions are met. Performance rights 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.
There have been no variations from policy during this financial year.
ANNUAL REPORT 2014 29
DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2014 6. DETAILS OF DIRECTOR AND EXECUTIVE REMUNERATION REQUIRED UNDER THE CORPORATIONS ACT
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)
G A Fenn
(Managing Director and Chief Executive Officer)
S A Chaplain
P S Garling
E A Howell
J S Humphrey
K G Sanderson AO
C G Thorne
The named persons held their current executive position for the whole of the most recent financial year:
D A Cattell
(Chief Executive Officer – Downer Infrastructure)
K J Fletcher
(Chief Financial Officer)
D J Overall
(Chief Executive Officer – Downer Mining)
R A Spicer
(Chief Executive Officer – Downer Rail)
6.2 RELATED PARTY INFORMATION
6.2.1 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 occurred during the financial year ended 30 June 2014.
KMP
G A Fenn
P S Garling
Entity
Australian Constructors Association Ltd
Ausgrid
Charter Hall Ltd
Endeavour Energy
Essential Energy
R M Harding
Santos Ltd
Transpacific Industries Group Ltd
J S Humphrey
Queensland University of Technology
King & Wood Mallesons
D J Overall
Minerals Council of Australia
K G Sanderson
Advisory Council, Curtin University Business School
First Murdoch Commission
R A Spicer
EDI Rail Bombardier Transportation (Maintenance) Pty Ltd
EDI Rail Bombardier Transportation Pty Ltd
S A Chaplain and
R A Spicer
KDR Gold Coast Pty Ltd
Keolis Downer Pty Ltd
C G Thorne
Downer Clough JV
Transaction type
Sponsorship
$’000
Sales of goods
and services
$’000
Purchase
of goods
$’000
–
–
–
–
–
–
–
–
–
–
1
–
–
–
–
–
–
–
456
797
–
–
15,637
145
–
–
–
46
202
–
34,399
50
–
12,521
41
371
–
17
6
–
311
384
49
387
–
–
456
1,004
–
2,376
–
30 DOWNER EDI LIMITED
DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2014 6.2.2 KEY MANAGEMENT PERSONNEL EQUITY HOLDINGS
Key management personnel equity holdings in fully paid ordinary shares issued by Downer EDI Limited are as follows:
2014
R M Harding
S A Chaplain
G A Fenn
P S Garling
E A Howell
J S Humphrey
K G Sanderson
C G Thorne
D Cattell
K Fletcher
D Overall
R Spicer
Total
2013
R M Harding
S A Chaplain
G A Fenn
P S Garling
E A Howell
J S Humphrey
K G Sanderson
C G Thorne
D Cattell
K Fletcher
D Overall
R Spicer
Total
Balance at
1 July 2013
No.
Net
change
No.
Balance at
30 June 2014
No.
9,680
51,170
346,061
12,100
–
68,095
–
56,486
204,393
55,000
24,801
5,000
832,786
470
12,972
–
–
–
272
10,000
2,744
10,150
64,142
346,061
12,100
–
68,367
10,000
59,230
–
204,393
(35,000)
–
242
20,000
24,801
5,242
(8,300)
824,486
Balance at
1 July 2012
No.
Net
change
No.
Balance at
30 June 2013
No.
5,780
50,137
346,061
–
–
67,982
–
25,750
171,181
55,000
12,216
–
734,107
3,900
1,033
–
12,100
–
113
–
30,736
33,212
–
12,585
5,000
98,679
9,680
51,170
346,061
12,100
–
68,095
–
56,486
204,393
55,000
24,801
5,000
832,786
ANNUAL REPORT 2014 31
DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2014 6.3 REMUNERATION RECEIVED IN RELATION TO THE 2014 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 performance rights that vest four years later, subject to meeting performance and continued employment conditions.
The table below lists the remuneration actually received in relation to the 2014 financial year, comprising fixed remuneration,
cash STIs relating to 2014, deferred STIs that vested during the 2014 financial year and the value of LTI grants that vested during
the 2014 financial year. This information differs to that provided in the statutory remuneration table at section 6.4 which has been
prepared in accordance with accounting standards.
Non-executive Directors
R M Harding
S A Chaplain
J S Humphrey
P S Garling
E A Howell
K G Sanderson AO
C G Thorne
KMP executives
G A Fenn
D A Cattell
K J Fletcher
D J Overall
R A Spicer
Cash Bonus
paid or
payable in
respect of
current year2
$
Deferred
Bonus vested
in current
year
$
Fixed
Remuneration1
$
Other
benefits
$
Total
cash
payments
$
Equity that
vested
during
20143
$
Total
remuneration
received
$
402,534
202,113
163,875
180,263
180,263
163,875
172,069
–
–
–
–
–
–
–
2,030,201
1,598,810
1,616,155
–
1,025,190
783,420
1,255,526
1,155,780
989,093
420,000
8,381,157
3,958,010
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
402,534
202,113
163,875
180,263
180,263
163,875
172,069
3,629,011
1,616,155
1,808,610
2,411,306
1,409,093
–
–
–
–
–
–
–
–
–
–
–
–
402,534
202,113
163,875
180,263
180,263
163,875
172,069
3,629,011
1,616,155
1,808,610
2,411,306
1,409,093
–
12,339,167
–
12,339,167
1
Fixed remuneration comprises salary and fees, non-monetary benefits and superannuation payments.
2 Amounts represent cash payments in relation to the 2014 financial year. These comprise the 50% cash component of the award and the 50%
transitional payment as described in sections 5.3.1 and 5.3.4. The remaining 50% of the total award is deferred as described in sections 5.3.4
and 5.3.5.
3 No restricted shares or performance rights vested during the year.
32 DOWNER EDI LIMITED
DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2014 DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2014
6.4 REMUNERATION OF DIRECTORS AND KEY MANAGEMENT PERSONNEL – STATUTORY
2014
Short-term employee benefits
Post-employment benefits
Cash Bonus
paid or
payable
in respect of
current year2
$
Deferred
Bonus
paid or
payable in
respect of
current year3
$
Non-
monetary
$
Super-
annuation
$
Other
benefits
$
Subtotal
$
Share-
based
payment
transactions4
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
27,534
17,113
13,875
15,263
15,263
13,875
14,569
–
–
–
–
–
–
–
402,534
202,113
163,875
180,263
180,263
163,875
172,069
–
–
–
–
–
–
–
Total
$
402,534
202,113
163,875
180,263
180,263
163,875
172,069
Salary
and fees
$
375,000
185,000
Non-executive
Directors
R M Harding
S A Chaplain5
J S Humphrey
150,000
P S Garling6
E A Howell7
165,000
165,000
K G Sanderson AO 150,000
C G Thorne8
157,500
KMP executives1
G A Fenn
1,877,225
1,598,810
799,405
135,201
17,775
– 4,428,416
290,175
4,718,591
D A Cattell10
1,535,000
–
–
56,155
25,000 1,081,773 2,697,928
29,038
2,726,966
K J Fletcher
935,969
783,420
391,710
64,221
25,000
– 2,200,320
96,479
2,296,799
D J Overall
1,230,225
1,155,780
577,890
7,526
17,775
– 2,989,196
187,193
3,176,389
R A Spicer9
782,225
420,000
210,000
189,093
17,775
– 1,619,093
–
1,619,093
7,708,144
3,958,010
1,979,005
452,196
220,817 1,081,773 15,399,945
602,885 16,002,830
1 Amounts represent the payments relating to the period during which the individuals were key management personnel (KMP).
2 Amounts represent cash payments in relation to the 2014 financial year. These comprise the 50% cash component of the award and the 50%
transitional payment described in sections 5.3.1 and 5.3.4.
3 Amounts represent the deferred component of the bonus awards in relation to the 2014 financial year. 50% of the amount will be paid one
year following award and 50% will be paid two years following award as described in section 5.3.5.
4 Represents the value of vested and unvested equity expensed during the period including reversal for forfeited equity incentives and the
probability of the incentives vesting, in accordance with AASB 2 Share-based Payments, related to grants made to the executive, as outlined
in section 6.6.1 and 6.6.2. 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.
5 S A Chaplain: comprised of $150,000 Board fee and $35,000 Audit and Risk Committee chair fee.
6 P S Garling: comprised of $150,000 Board fee and $15,000 Remuneration Committee chair fee.
7 E A Howell: comprised of $150,000 Board fee and $15,000 Zero Harm Committee chair fee.
8 C G Thorne: comprised of $150,000 Board fee and $7,500 Tender Risk Evaluation Committee chair fee from 1 January 2014.
9 Due to the nature of the Downer business, non-monetary benefits include living away from home expenses.
10 D A Cattell: other benefits represents the accrual of the cash retention benefit payable on 1 July 2014 ($674,362) and at the end of Mr Cattell’s
fixed term contract on 1 July 2015 ($407,411), being nine months’ fixed remuneration in each case.
ANNUAL REPORT 2014 33
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2014
2013
Short-term employee
benefits
Post-employment benefits
Cash Bonus
paid
or payable
in respect
of current
year2
Salary
and fees
$
Non-
monetary
$
Super-
annuation
$
Other
benefits
$
Subtotal
$
Non-executive
Directors
R M Harding
S A Chaplain4
L Di Bartolomeo5
J S Humphrey
P S Garling6
E A Howell7
383,750
185,000
58,288
150,000
159,701
157,500
K G Sanderson AO
150,000
C G Thorne8
165,000
KMP executives
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
G A Fenn
1,878,530
1,523,100
125,717
P H Borden1,9
531,770
281,408
80,093
D A Cattell10
1,535,000
1,129,336
K J Fletcher
D J Overall
R A Spicer1,9
939,212
781,880
1,226,030
1,082,000
171,347
99,514
39,157
17,097
25,094
22,627
25,000
16,650
5,246
13,500
14,373
14,175
13,500
14,850
16,470
18,151
25,000
25,000
21,970
3,614
–
–
–
–
–
–
–
–
–
–
Share-
based
payment
transactions3
$
–
–
–
–
–
–
–
–
Total
$
408,750
201,650
63,534
163,500
174,074
171,675
163,500
179,850
408,750
201,650
63,534
163,500
174,074
171,675
163,500
179,850
3,543,817
578,880
4,122,697
911,422
94,375
1,005,797
873,182
3,601,675
(76,460)
3,525,215
–
–
–
1,763,189
122,194
1,885,383
2,355,094
241,560
2,596,654
297,102
–
297,102
7,691,128
4,897,238
309,785
227,499
873,182
13,998,832
960,549
14,959,381
1 Amounts represent the payments relating to the period during which the individuals were key management personnel (KMP). R A Spicer
became a KMP upon appointment as Chief Executive Officer - Downer Rail on 12 April 2013. Mr Spicer’s package comprises total fixed
remuneration of $800,000 per annum, a living away from home allowance and short-term and long-term incentives.
2 Amounts represent the cash payments that relate to the 2013 financial year. No deferral applied to the award.
3 Represents the value of vested and unvested equity expensed during the period including reversal for forfeited equity incentives and the
probability of the incentives vesting, in accordance with AASB 2 Share-based Payments, related to grants made to the executive, as outlined
in section 6.6.1 and 6.6.2. 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.
4 S A Chaplain: comprised of $150,000 Board fee and $35,000 Audit Committee and Audit and Risk Committee chair fee following the merge
of these two committees on 1 January 2013.
5
L Di Bartolomeo: comprised of $52,989 Board fee and $5,299 Remuneration Committee chair fee.
6 P S Garling: comprised of $150,000 Board fee and $9,701 Remuneration Committee chair fee.
7 E A Howell: comprised of $150,000 Board fee and $7,500 Zero Harm Committee chair fee.
8 C G Thorne: comprised of $150,000 Board fee, $7,500 Risk Committee chair fee and $7,500 Zero Harm Committee chair fee both from 1 July
2012 to 31 December 2012.
9 Due to the nature of the Downer business, non-monetary benefits include living away from home expenses.
10 D A Cattell: other benefits represents the accrual of the cash retention benefit paid on 1 January 2013 ($377,544) and payable at the end of
Mr Cattell’s fixed term contract on 1 July 2014 ($495,638), being nine months’ fixed remuneration.
34 DOWNER EDI LIMITED
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2014
6.5 PERFORMANCE RELATED REMUNERATION
The table below lists the proportions of remuneration paid during the year ended 30 June 2014 that are performance and non-
performance related.
KMP executives
G A Fenn1
R A Spicer1
D A Cattell1
K J Fletcher1
D J Overall1
Performance Related
Non-Performance Related
%
57
39
1
55
60
%
43
61
99
45
40
1
Performance related portion includes the reversal of expense for forfeited equity incentives and
the transitional short-term incentive payment as described in sections 5.3.1 and 5.3.4.
Weightings applied to the 2014 STI scorecard measures for executives are set out below:
Executive
Corporate
Division
Group NPAT
Divisional EBIT
Free cash flow
Zero Harm
30%
7.5%
–
22.5%
30%
30%
(7.5% Group,
22.5% Division)
30%
30%
People
10%
10%
The Zero Harm element of the scorecard comprised measures as follows:
Measure
Target
Safety
TRIFR (total recordable injury
frequency rate) and LTIFR
(lost time injury frequency rate)
Critical Risks
Action Close Outs
Environmental
Sustainable development
Achieve a set reduction in the TRIFR at level of responsibility. Award pro rates linearly
and maintain LTIFR below an established level for area of responsibility.
Identify critical risks for the area of responsibility and register these risks in the
appropriate system.
Achieve minimum periods where there are zero actions that are overdue by more than
60 days at the end of each month arising from Zero Harm incidents, covering high
Potentials and actual Injuries (First Aid, Medical Treatment Injury and Lost Time Injury),
recorded.
Achieve energy efficiency initiatives to deliver improvements compared to previous
financial year for the area of responsibility.
Specific STI financial and commercial targets at division 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. Profit for this purpose is defined as NPAT. For divisional executives, the
hurdle is 90 per cent of the division budgeted profit target. Profit for this purpose is defined as EBIT.
ANNUAL REPORT 2014 35
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2014
The following table summarises the average performance achieved by the KMP across each element of the scorecard.
Weighting of
scorecard element
Performance as a
percentage of the
overall weighting1
Group
NPAT
Divisional
EBIT
Free
Cash Flow
Zero
Harm
People
Corporate
30.0%
30.0%
30.0%
10.0%
Division
7.5%
22.5%
30.0%
30.0%
10.0%
Corporate
22.7%
30.0%
10.0%
10.0%
Division
3.8%
8.2%
20.0%
23.3%
10.0%
1
Performance includes the results for each element, even if the NPAT or EBIT gateway was not achieved.
The following table shows the STIs that were earned during the year ended 30 June 2014 due to the achievement of the relevant
performance targets.
KMP executives
G A Fenn
R A Spicer
D A Cattell
K J Fletcher
D J Overall
Short-term Incentive in respect of 2014 financial year
Paid
Forfeited
%
80
70
–
80
93
%
20
30
100
20
7
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
G A Fenn,
K J Fletcher,
D J Overall
2011 plan
TSR tranche – percentile
ranking of Downer’s TSR
relative to the constituents
of the ASX100 over a three
year period.
EPS tranche – compound
annual earnings per share
growth against absolute
targets over a three
year period.
6.6 SHARE-BASED PAYMENTS
6.6.1 OPTIONS AND RIGHTS
Actual performance ranked at
the 51st percentile.
Four (4) per cent became
provisionally qualified.
Actual performance was
negative 3.1%.
Zero per cent became
provisionally qualified.
The shares were forfeited.
No performance options were granted or exercised during the year ended 30 June 2014.
As outlined in section 5.4.1, the LTI plan for the 2014 calendar year will be in the form of performance rights. Relief from certain
regulatory requirements was applied for and has been received from the Australian Securities and Investments Commission.
While the Board intends to make grants to KMP under the plan, no performance rights have been issued during the period.
The following table shows the number of performance rights granted and percentage of performance rights that vested or were
forfeited during the year for each grant that affects compensation in this or future reporting periods.
36 DOWNER EDI LIMITED
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2014
2013 Plan
Number of
performance
rights1
%
vested
%
forfeited
KMP executives
G A Fenn
D A Cattell
K J Fletcher
D J Overall
R A Spicer
445,682
–
163,788
208,579
–
–
–
–
–
–
–
–
–
–
–
1
Performance rights were granted on 15 October 2013. The fair value of the performance rights was $3.81 per right for the EPS tranche and
$2.26 for the TSR tranche.
The maximum number of performance rights that may vest in future years that will be recognised as share-based payments in
future years is set out in the table below:
Maximum number of performance rights
for the vesting year
2015
2016
2017
–
–
–
–
–
–
–
–
–
–
445,682
–
163,788
208,579
–
KMP executives
G A Fenn
D A Cattell
K J Fletcher
D J Overall
R A Spicer
The maximum value of performance rights that may vest in future years that will be recognised as share-based payments in
future years is set out in the table below. The amount reported is the value of share-based payments calculated in accordance
with AASB 2 Share–based Payment over the vesting period.
Maximum value of shares for
the vesting year ($)
2015
2016
2017
421,248
421,248
210,624
–
154,808
197,143
–
–
154,808
197,143
–
–
77,404
98,572
–
KMP executives
G A Fenn
D A Cattell
K J Fletcher
D J Overall
R A Spicer
6.6.2 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.
2011 Plan
2012 Plan
Number of
shares1
%
vested
%
forfeited
Number of
shares2
%
vested
%
forfeited
480,205
–
160,068
180,077
–
–
–
–
–
–
98%
–
98%
98%
–
464,996
–
154,999
232,498
–
–
–
–
–
–
–
–
–
–
–
KMP executives
G A Fenn
D A Cattell
K J Fletcher
D J Overall
R A Spicer
1 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.
2 Grant date 22 June 2012. The fair value of shares granted was $3.23 per share.
ANNUAL REPORT 2014 37
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2014
The maximum number of restricted shares that may vest in future years that will be recognised as share-based payments in
future years is set out in the table below:
Maximum number of shares
for the vesting year
2015
2016
480,205
464,996
–
160,068
180,077
–
–
154,999
232,498
–
KMP executives
G A Fenn
D A Cattell
K J Fletcher
D J Overall
R A Spicer
The maximum value of restricted shares that may vest in future years that will be recognised as share-based payments in future
years is set out in the table below. The amount reported is the value of share-based payments calculated in accordance with
AASB 2 Share-based Payment over the vesting period.
Maximum value of shares
for the vesting year ($)
2015
2016
521,354
163,012
–
173,783
236,260
–
–
54,337
81,506
–
KMP executives
G A Fenn
D A Cattell
K J Fletcher
D J Overall
R A Spicer
6.7 REMUNERATION CONSULTANTS
Guerdon Associates Pty Ltd was engaged by the Board Remuneration Committee to provide remuneration advice in relation to
KMP, but did not provide the Board Remuneration Committee with remuneration recommendations as defined under Division 1,
Part 1.2, 9B (1) of the Corporations Act 2001 (Cth).
The Board was satisfied that advice received was free from any undue influence by key management personnel to whom the
advice may relate, because strict protocols were observed and complied with regarding any interaction between Guerdon
Associates Pty Ltd and management, and because all remuneration advice was provided to the Board Remuneration
Committee chair.
7. KEY TERMS OF EMPLOYMENT CONTRACTS
7.1 NOTICE AND TERMINATION PAYMENTS
Executives are on contracts with no fixed end date, other than the following:
– D A Cattell who is on a fixed term contract that ends on 1 July 2015; and
– R A Spicer who is on a fixed term contract that ends on 13 April 2017.
The following table captures the notice periods applicable to termination of the employment of executives.
Managing Director
Other Executives
Termination notice
period by Downer
Termination notice
period by employee
Termination payments
payable under contract
12 months
12 months
6 months
6 months
12 months
12 months
38 DOWNER EDI LIMITED
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2014
There has been one variation from policy during this
financial year:
– A fixed term contractual arrangement was entered into on
18 December 2013 with D A Cattell to ensure management
continuity and to guide the Downer Infrastructure business
through a period of significant transition in the sector.
That contract ends on 1 July 2015. Subject to legislative
requirements, Mr Cattell will be entitled to the following
benefits at the end of the contract period: statutory leave
entitlements, and a cash payment equal to nine months
fixed remuneration.
In accordance with his previous contract dated 5 October
2012, Mr Cattell received a cash payment equal to nine
months fixed remuneration on 1 July 2014.
Mr Cattell will participate in the STI plan for the 2014
and 2015 financial years, but the amount payable for
each year will be limited to the amount payable for
performance that exceeds target. This means that the
maximum STI he may receive for the 2015 financial year
is 25 per cent of fixed remuneration if performance on
all measures is at or above the maximum (i.e. the stretch
component up to a total maximum of 100 per cent). In
relation to the 2014 STI, there was no award to Mr Cattell.
In addition, Mr Cattell is not eligible to receive grants
under any LTI plans.
Termination payments are calculated based upon total
fixed remuneration at the date of termination. No payment is
made for termination due to gross misconduct.
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’s remuneration comprises fixed and variable
components.
Mr Fenn’s fixed remuneration is $2.0 million per annum
and this was unchanged during the 2014 financial year.
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 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, people, environmental and
sustainability targets and adherence to risk management
policies and practices. The Board also retains the right to
vary the STI by + or – 100 per cent (up to the 100 per cent
maximum) based on its assessment of performance. The STI
deferral arrangements described in section 5.3.4 apply to
Mr Fenn.
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 change in control or by
mutual agreement.
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.
In the event of a change of control, providing at least
12 months of a grant’s performance period have elapsed,
unvested shares and performance rights pro rated with
the elapsed service period are tested for vesting with
performance against the relevant hurdles for that period and
vest, as appropriate. 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 12 months’ notice.
Downer can terminate Mr Fenn’s employment:
(a)
Immediately for misconduct or other circumstances
justifying summary dismissal; or
(b) By providing 12 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 certain areas where the Downer
Group operates, where he is restricted from working for
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 2014 39
8. PRIOR EQUITY-BASED REMUNERATION PLANS
Prior Downer equity-based remuneration plans in which executives retained an interest during the reporting period are:
– 2012 executive share plan; and
– 2011 executive share plan.
Details of LTI plans from prior years are set out in the table below.
Plan name
Type of award
2012 executive
share plans and
2011 executive
share plans
Grant of restricted
shares delivered in
two equal tranches
Re-test
There is no re-test.
Performance
requirements
Tranche One:
Percentile ranking
of Downer’s TSR
relative to the
constituents of the
ASX100 (excluding
the financial sector)
as at the beginning
of the performance
test period.
Tranche Two: EPS
annual compound
growth to be
within 6 per cent to
12 per cent.
The performance
period for both
tranches is
three years.
Service
requirements
Vesting
schedule
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.
Tranche One: 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 Two: 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.
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, 5 August 2014
40 DOWNER EDI LIMITED
DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2014 AUDITOR’S 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
5 August 2014
Dear Directors
DOWNER EDI LIMITED
In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following
declaration of 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
ended 30 June 2014, I declare that to the best of my knowledge and belief, there have been no
contraventions of:
(i)
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.
Yours sincerely
DELOITTE TOUCHE TOHMATSU
A V Griffiths
Partner
Chartered Accountants
Liability limited by a scheme approved under Professional Standards Legislation.
Member of Deloitte Touche Tohmatsu Limited
ANNUAL REPORT 2014 41
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
FOR THE YEAR ENDED 30 JUNE 2014
Revenue from ordinary activities
Other income
Total revenue and other income
Employee benefits expense
Raw materials and consumables used
Subcontractor costs
Plant and equipment costs
Communication expenses
Occupancy costs
Professional fees (ii)
Travel and accommodation expenses
Other expenses from ordinary activities (ii)
Depreciation and amortisation
Share of net profit of joint ventures and associates
Individually significant item
Earnings before interest and tax
Finance income
Finance costs
Profit before income tax
Income tax expense
Profit after income tax
Profit for the year that is attributable to:
– Non-controlling interest
– Members of the parent entity
Profit for the year
Earnings per share (cents)
– Basic earnings per share
– Diluted earnings per share
2014
$’000
2013
(restated)(i)
$’000
7,365,323
8,776,375
6,237
4,863
7,371,560
8,781,238
Note
3(a)
3(a)
2
3(b)
(2,629,268)
(3,009,369)
(1,276,966)
(1,761,399)
(1,631,794)
(1,887,032)
(845,428)
(1,019,904)
(76,309)
(125,560)
(58,525)
(109,991)
(23,531)
3(b)
(266,421)
2
4
13,351
–
(90,470)
(132,262)
(47,267)
(134,640)
(60,789)
(294,801)
26,963
(11,456)
(7,030,442)
(8,422,426)
3(c)
3(c)
6(a)
341,118
6,627
(49,682)
(43,055)
298,063
(82,070)
215,993
41
215,952
215,993
358,812
4,779
(71,902)
(67,123)
291,689
(87,703)
203,986
7
203,979
203,986
7
7
48.3
46.0
45.7
43.1
(i) Certain amounts shown here do not correspond to the consolidated Annual Financial Report as at 30 June 2013 and reflect adjustments
made as detailed in Note 39: Impact on Group’s historical financial statements on adoption of AASB 11 Joint Arrangements.
(ii) The 2013 balances have 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 statement of profit or loss should be read in conjunction with the accompanying notes on pages 48 to 112.
42 DOWNER EDI LIMITED
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 2014
Profit after income tax
Other comprehensive income
Items that may be reclassified subsequently to profit or loss
– Exchange differences arising on translation of foreign operations
– Net (loss)/gain on foreign currency forward contracts taken to equity
– Net (loss)/gain on cross currency interest rate swaps taken to equity
– Income tax relating to components of other comprehensive income
Other comprehensive income for the year (net of tax)
Total comprehensive income for the year
Total comprehensive income for the year that is attributable to:
– Non-controlling interest
– Members of the parent entity
Total comprehensive income for the year
2014
$’000
2013
$’000
215,993
203,986
17,139
(4,476)
(571)
1,614
13,706
229,699
41
229,658
229,699
16,966
18,212
846
(5,718)
30,306
234,292
7
234,285
234,292
The consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the
accompanying notes on pages 48 to 112.
ANNUAL REPORT 2014 43
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 30 JUNE 2014
ASSETS
Current assets
Cash and cash equivalents
Trade and other receivables
Other financial assets
Inventories
Current tax assets
Other assets
Assets classified as held for sale
Total current assets
Non-current assets
Trade and other receivables
Interest in joint ventures and associates
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
30 June
2014
$’000
Note
30 June
2013
(restated)(i)
$’000
1 July
2012
(restated)(i)
$’000
9
10
11
12
13
14
16
10
15
16
17
11
13(a)
14
18
19
21
22
23
18
19
21
22
23(a)
24
25
431,767
1,193,364
11,566
384,724
–
39,466
–
479,878
306,387
1,516,562
1,626,346
24,918
349,880
13,765
45,391
14,289
14,211
282,738
13,765
51,575
–
2,060,887
2,444,683
2,295,022
15,963
40,085
1,146,909
589,481
6,727
732
7,598
999
52,911
1,922
54,119
1,150,830
1,134,186
571,773
577,651
9,624
5,830
3,134
7,794
71,271
3,553
1,807,495
3,868,382
1,795,101
1,850,496
4,239,784
4,145,518
1,063,849
1,276,751
1,423,171
137,715
47,607
304,022
9,962
237,946
38,713
326,099
10,623
180,938
77,532
332,450
3,926
1,563,155
1,890,132
2,018,017
5,685
285,513
3,383
36,742
11,893
343,216
1,906,371
1,962,011
5,578
444,256
27,664
43,017
2,563
523,078
2,413,210
1,826,574
3,955
437,972
46,112
15,612
6,150
509,801
2,527,818
1,617,700
1,457,859
1,448,927
1,427,730
(2,427)
506,553
(17,461)
395,123
(51,752)
241,737
1,961,985
1,826,589
1,617,715
26
(15)
(15)
1,962,011
1,826,574
1,617,700
(i) Certain amounts shown here do not correspond to the consolidated Annual Financial Report as at 30 June 2013 and reflect adjustments
made as detailed in Note 39: Impact on Group’s historical financial statements on adoption of AASB 11 Joint Arrangements.
The consolidated statement of financial position should be read in conjunction with the accompanying notes on pages
48 to 112.
44 DOWNER EDI LIMITED
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 2014
2014
$’000
Issued
capital
Hedge
reserve
Foreign
currency
translation
reserve
Employee
benefits
reserve
Retained
earnings
Attributable
to owners of
the parent
Non-
controlling
interest
Total
Balance at 1 July 2013
1,448,927
1,746
(33,157)
13,950
395,123
1,826,589
(15) 1,826,574
Profit after income tax
Exchange differences arising on
translation of foreign operations
Net loss on foreign currency
forward contracts
Net loss on cross currency interest
rate swaps
Income tax relating to components
of other comprehensive income
Total comprehensive income for
the year
–
–
–
–
–
(4,476)
–
(571)
–
1,614
–
–
215,952
215,952
41
215,993
17,139
–
–
–
–
–
–
–
–
–
–
–
17,139
–
17,139
(4,476)
–
(4,476)
(571)
1,614
–
–
(571)
1,614
–
(3,433)
17,139
–
215,952
229,658
41
229,699
Contributions of equity(i)
8,932
Share-based transactions during
the year
Income tax relating to share-based
transactions during the year
Payment of dividends (ii)
–
–
–
–
–
–
–
–
–
–
–
–
1,171
157
–
–
–
8,932
1,171
157
–
(104,522)
(104,522)
–
–
–
–
8,932
1,171
157
(104,522)
Balance at 30 June 2014
1,457,859
(1,687)
(16,018)
15,278
506,553
1,961,985
26 1,962,011
(i) Contributions of equity relate to shares issued as a result of Dividend Re-investment Plan.
(ii) Payment of dividends relates to 2013 final dividend, 2014 interim dividend and ROADS dividends paid during the financial year.
The consolidated statement of changes in equity should be read in conjunction with the accompanying notes on pages
48 to 112.
ANNUAL REPORT 2014 45
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY – CONTINUED
FOR THE YEAR ENDED 30 JUNE 2014
2013
$’000
Issued
capital
Hedge
reserve
Foreign
currency
translation
reserve
Employee
benefits
reserve
Retained
earnings
Attributable
to owners of
the parent
Non-
controlling
interest
Total
Balance at 1 July 2012
1,427,730
(11,594)
(50,123)
9,965
241,737
1,617,715
(15) 1,617,700
–
–
–
203,979
203,979
7
203,986
Profit after income tax
Exchange differences arising on
translation of foreign operations
Net gain on foreign currency
forward contracts
Net gain on cross currency interest
rate swaps
Income tax relating to components
of other comprehensive income
Total comprehensive income for the
year
–
–
–
16,966
–
18,212
–
846
–
(5,718)
–
–
–
–
13,340
16,966
Contributions of equity(i)
20,899
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)
298
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(298)
3,532
751
–
–
–
–
16,966
–
16,966
18,212
–
18,212
846
–
846
(5,718)
–
(5,718)
203,979
234,285
–
–
–
–
20,899
–
3,532
751
–
(50,593)
(50,593)
7
–
–
–
–
(7)
234,292
20,899
–
3,532
751
(50,600)
Balance at 30 June 2013
1,448,927
1,746
(33,157)
13,950
395,123
1,826,589
(15) 1,826,574
(i) Contributions of equity relate to shares issued as a result of Dividend Re-investment Plan.
(ii) Payment of dividends relates to 2013 interim dividend, ROADS dividends paid and dividends paid to non-controlling interest in Downer
Infrastructure New Zealand during the financial year.
The consolidated statement of changes in equity should be read in conjunction with the accompanying notes on pages
48 to 112.
46 DOWNER EDI LIMITED
Note
15(a)
28(c)
17
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 30 JUNE 2014
Cash flows from operating activities
Receipts from customers
Distributions from equity-accounted investees
Dividends received from external entities
Payments to suppliers and employees
Manufacture Delay Account (MDA) interest received (ii)
Interest received
Interest and other costs of finance paid
Income tax paid
Net cash inflow from operating activities
Cash flows from investing activities
Proceeds from sale of property, plant and equipment
Payments for property, plant and equipment
Payments for intangible assets (software)
Payments for investments
(Advances to)/repayments from joint ventures
Repayments from/(advances to) other entities
Divestment cost paid on disposal of subsidiary
Proceeds from sale of businesses
Payments for businesses acquired
Net cash used in investing activities
Cash flows from financing activities
Proceeds from borrowings
Repayments of borrowings
Dividends paid
Dividends paid to non-controlling interest
Net cash (used in)/inflow from financing activities
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
28(a)
2014
$’000
2013
(restated)(i)
$’000
8,446,469
9,807,932
26,292
352
28,639
7
(7,890,744)
(9,313,563)
86,084
6,150
(49,467)
(41,709)
583,427
129,936
(379,474)
(12,989)
(389)
(15,120)
600
–
1,529
(2,847)
–
8,648
(69,242)
(14,327)
448,094
67,595
(350,343)
(5,344)
(1,335)
4,028
(600)
(2,357)
–
–
(278,754)
(288,356)
1,091,362
3,798,391
(1,352,343)
(3,759,584)
(95,590)
(29,694)
–
(356,571)
(51,898)
479,866
3,799
431,767
(7)
9,106
168,844
306,385
4,637
479,866
(i) Certain amounts shown here do not correspond to the consolidated Annual Financial Report as at 30 June 2013 and reflect adjustments
made as detailed in Note 39: Impact on Group’s historical financial statements on adoption of AASB 11 Joint Arrangements.
(ii) MDA interest in relation to the Waratah Train Project was substantially received upon the delivery of Train Set 78 to Reliance Rail. Refer to Note
1 for further details.
The consolidated statement of cash flows should be read in conjunction with the accompanying notes on pages 48 to 112.
ANNUAL REPORT 2014 47
– AASB 119 Employee Benefits (2011), AASB 2011-10
Amendments to Australian Accounting Standards arising
from AASB 119 (2011);
– AASB 2011-4 Amendments to Australian Accounting
Standards to Remove Individual Key Management
Personnel Disclosure Requirements;
– AASB 2012-2 Amendments to Australian Accounting
Standards – Disclosures – Offsetting Financial Assets and
Financial Liabilities;
– AASB 2012-5 Amendments to Australian Accounting
Standards arising from Annual Improvements 2009-
2011 Cycle;
– AASB 2012-10 Amendments to Australian Accounting
Standards – Transition Guidance and Other Amendments
which provides an exemption from the requirement to
disclose the impact of the change in accounting policy
on the current period;
– AASB 1048 Interpretation of Standards (December 2013);
– AASB 2012-9 Amendment to AASB 1048 arising from the
Withdrawal of Australian Interpretation 1039; and
– AASB CF 2013-1 Amendments to the Australian
Conceptual Framework, AASB 2013-9 Amendments
to Australian Accounting Standards – Conceptual
Framework, Materiality and Financial Instruments (Part A
Conceptual Framework).
CHANGES IN ACCOUNTING POLICIES
The Group has changed its accounting policies as a result of
new and amended accounting standards which became
effective for annual reporting periods beginning on or after
1 January 2013. AASB 10 Consolidated Financial Statements
(AASB 10) affected the Group’s principles of consolidation
and AASB 11 Joint Arrangements (AASB 11) resulted in the
Group changing its accounting for some joint arrangements
from the equity method to proportionate consolidation.
AASB 108 Accounting Policies, Changes in Accounting
Estimates and Errors requires that when there is a change
in accounting policy, the revised policy is applied
retrospectively as if the new accounting policy had always
been applied. Therefore certain amounts shown in the
consolidated Financial Report as at 30 June 2014 do not
correspond to the consolidated Financial Report as at
30 June 2013 or to the consolidated Financial Report as
at 30 June 2012 (which represents the 1 July 2012 earliest
opening comparative balance). Adjustments to these
previously disclosed amounts have been reflected as
detailed in Note 39: Impact on Group’s historical financial
statements on adoption of AASB 11 Joint Arrangements.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2014
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 (Cth),
Accounting Standards and Interpretations and complies
with other requirements of the law. Accounting Standards
include Australian equivalents to International Financial
Reporting Standards (A-IFRS). For the purposes of preparing
the consolidated financial statements, the Company is
a for-profit entity. 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 5 August 2014.
ROUNDING OF AMOUNTS
Downer is a company of the kind referred to in ASIC Class
Order 98/100, 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. All amounts are
presented in Australian dollars, unless otherwise noted.
The accounting policies and methods of computation in the
preparation of the Financial Report are consistent with those
adopted and disclosed in Downer’s Annual Report for the
financial year ended 30 June 2013, except in relation to the
relevant amendments and their effects on the current period
or prior periods as described below.
NEW AND AMENDED ACCOUNTING STANDARDS
ADOPTED BY THE GROUP
In the current year, the Group has applied a number of new
and revised accounting standards issued by the Australian
Accounting Standards Board (AASB) that are mandatorily
effective for an accounting period that begins on or after
1 January 2013.
The new and revised standards adopted by the Group for
its annual reporting period beginning on 1 July 2013 are
as follows:
– AASB 10 Consolidated Financial Statements, AASB 2011-7
Amendments to Australian Accounting Standards arising
from the Consolidation and Joint Arrangements Standards;
– AASB 11 Joint Arrangements, AASB 2011-7 Amendments
to Australian Accounting Standards arising from the
Consolidation and Joint Arrangements Standards;
– AASB 12 Disclosure of Interests in Other Entities, AASB 128
Investments in Associates and Joint Ventures, AASB 127
Separate Financial Statements, AASB 2011-7 Amendments
to Australian Accounting Standards arising from the
Consolidation and Joint Arrangements Standards;
– AASB 13 Fair Value Measurement, AASB 2011-8
Amendments to Australian Accounting Standards arising
from AASB 13;
48 DOWNER EDI LIMITED
NOTE 1. SUMMARY OF ACCOUNTING POLICIES – CONTINUED
BASIS OF CONSOLIDATION
AASB 10 establishes a revised control model that applies
to all entities. It replaces the consolidation requirements in
AASB 127 Consolidated and Separate Financial Statements
and AASB Interpretation 112 Consolidation – Special Purpose
Entities. The revised control model broadens the situations
when an entity is considered to be controlled by another
entity and includes additional application guidance.
Under AASB 10, the Group controls an entity when the
Group is exposed to, or has rights to, variable returns from
its involvement with the entity and has the ability to affect
those returns through its power over the entity. The Group has
reassessed its consolidation conclusions in light of the new
control principles in AASB 10 and concluded that no changes
are required. Accordingly, the adoption of AASB 10 has not
resulted in any adjustments to the carrying amounts in the
financial statements.
INVESTMENT IN JOINT ARRANGEMENTS
AASB 11 replaces AASB 131 Interests in Joint Ventures and
AASB Interpretation 113 Jointly Controlled Entities – Non-
monetary Contributions by Venturers. AASB 11 uses the
principle of control in AASB 10 to define joint control, and
therefore the determination of whether joint control exists
may change. In addition, AASB 11 removes the option to
account for jointly-controlled entities using proportionate
consolidation. Instead, accounting for a joint arrangement
is dependent on the nature of the rights and obligations
arising from the arrangement. Joint operations that give the
venturers a right to the underlying assets and obligations
for liabilities are accounted for by recognising the share
of those assets and liabilities. Joint ventures that give the
venturers a right to the net assets are accounted for using the
equity method.
The adoption of AASB 11 has resulted in the Group changing
its accounting policy to distinguish between accounting
for joint arrangements as either a joint operation or as a
joint venture. As a joint operation the Group accounts for its
right to the underlying assets and obligations for liabilities
by recognising the share of those assets and liabilities. As a
joint venture the Group accounts for its interests using the
equity method, where the interests are initially recognised
in the consolidated statement of financial position at cost
and adjusted thereafter to recognise the Group’s share
of the post-acquisition profits or losses and movements
in other comprehensive income in profit or loss and other
comprehensive income respectively.
The adoption of AASB 11 has resulted in the Group
determining that some joint arrangements that were
previously accounted for using the equity method are to be
accounted for as joint operations. As required by AASB 11, the
change in policy has been applied retrospectively and, as a
consequence, adjustments were recognised in the statement
of financial position as of 1 July 2012. The Group has
derecognised its related investments in joint ventures at the
beginning of the earliest period presented being 1 July 2012,
and has recognised the carrying amounts of the assets and
liabilities under proportionate consolidation. The change in
accounting policy had no impact on the Group’s net assets,
items of equity, profit for the year and earnings per share.
The effect of the change in accounting policy on individual
line items in the consolidated statement of profit or loss,
the consolidated statement of profit or loss and other
comprehensive income, the consolidated statement of
cash flows and the consolidated statement of financial
position is shown in more detail in Note 39: Impact on Group’s
historical financial statements on adoption of AASB 11
Joint Arrangements.
FAIR VALUE MEASUREMENT
AASB 13 Fair Value Measurement aims to improve consistency
and reduce complexity by providing a precise definition of
fair value and a single source of fair value measurement and
disclosure requirements for use across Australian Accounting
Standards. The standard does not extend the use of fair
value accounting but provides guidance on how it should
be applied where its use is already required or permitted by
other Australian Accounting Standards.
Previously the fair value of financial liabilities (including
derivatives) was measured on the basis that the financial
liability would be settled or extinguished with the
counterparty. The adoption of AASB 13 has clarified that fair
value is an exit price notion, and as such, the fair value of
financial liabilities should be determined based on a transfer
value to a third party market participant. As a result of this
change, the fair value of derivative liabilities has changed on
transition to AASB 13, largely due to incorporating credit risk
into the valuation.
As required under AASB 13, the change to the fair value
of the derivative liabilities is applied prospectively, in the
same way as a change in an accounting estimate. As a
consequence comparative amounts have not been restated.
ACCOUNTING ESTIMATES AND JUDGEMENTS
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.
ANNUAL REPORT 2014 49
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 1. SUMMARY OF ACCOUNTING POLICIES – CONTINUED
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:
subject to the availability of major spares. New contracts
often require the acquisition of new equipment and the
timing of purchases is dependent upon availability from
suppliers in an international 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.
WARATAH TRAIN PROJECT (WTP)
During the year ended 30 June 2014, the WTP Rolling Stock
Manufacturing (RSM) program achieved several significant
milestones. As at 29 May 2014, all Waratah trains had
achieved Practical Completion (PC) with Train Set 78 entering
passenger service on the Sydney Rail network. With all
payment milestones in relation to the RSM program satisfied
upon Train Set 78 achieving PC the majority of monies held in
the Manufacturing Delay Account (MDA) were released and
paid to Downer.
A total provision of $440.0 million had been provided against
losses expected to be incurred in the completion of the WTP
RSM program. The provision included estimates for program
design, manufacture, production and delivery schedules (the
program). The Total Forecast Costs at Completion (FCAC)
as at 31 December 2013 included $21.0 million of general
contingency to cover unexpected completion costs. As at
30 June 2014, $4.0 million of the general contingency was
incurred to close-out the RSM program, resulting in $17.0
million of the remaining contingency being written-back to
net profit in the period.
The financial position at project completion assumes that
inventory remaining at the completion of the build phase will
be utilised within the maintenance phase of the project and
that all outstanding supplier claims will be managed within
management expectations.
There are no specific allowances made for potential future
legal claims against Downer in relation to this project.
During the year, Final Completion (FC) was achieved for 33
trains following achievement of initial reliability requirements
and the correction of minor defects. FC payments of
$1.8 million were subsequently received per train Set for
achieving FC.
Major outstanding receivables against the WTP RSM program
at 30 June 2014 therefore comprised:
– $81.8 million in FC payments (referable to 45 train Sets
achieving FC expected in 2014/15); and
– MDA receivable of $17.5 million ($5.0 million projected in
2014/15 and $12.5 million projected in 2018/19).
REVENUE RECOGNITION
Revenue and expenses are recognised in net profit by
reference to the stage of completion of each identifiable
component for construction contracts.
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 is performed with the necessary skills. Project
control also includes a number of estimates and assessments
that depend on the experience and knowledge of project
management, industrial relations, risk management, training
and the prior management of similar projects.
In determining revenues and expenses for construction
contracts, Management makes key assumptions regarding
estimated revenues and expenses over the life of the
contracts. Where contract variations are recognised in
revenue, assumptions are made regarding the probability
that customers will approve those contract variations and the
amount of revenue arising from contract 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 costs 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 financial year.
Judgement is exercised by Management in determining
whether it is probable that the contract will be awarded.
An error in judgement may result in capitalised tender/bid
costs being recognised in the statement of profit or loss in the
following financial year.
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 such 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 may impact
Downer’s ability to complete projects and earn profits. In
addition, there are particular suppliers with whom Downer
has a long-term relationship that 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
50 DOWNER EDI LIMITED
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 1. SUMMARY OF ACCOUNTING POLICIES – CONTINUED
IMPAIRMENT OF ASSETS
SIGNIFICANT ACCOUNTING POLICIES
Accounting policies are selected and applied in a manner
that 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.
PRINCIPLES OF CONSOLIDATION
The Financial Report incorporates the financial statements
of the Company and entities controlled by the Group and its
subsidiaries. The Group controls an entity when it is exposed
to, or has rights to, variable returns from its involvement with
the entity and has the ability to affect those returns from its
involvement with the entity and has the ability to affect those
returns through its power over the entity.
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 profit and loss and other comprehensive
income, statement of changes in equity and the statement
of financial position respectively. The Group applies a
policy of treating transactions with minority interests as
transactions with parties external to the Group. Disposals of
minority interests resulting in gains and losses for the Group
are recorded in the statement of profit or loss and other
comprehensive income.
BUSINESS COMBINATIONS
Acquisitions of businesses are accounted for using the
acquisition method. The consideration transferred in a
business combination is measured at fair value which is
calculated as the sum of the acquisition-date fair values
of assets transferred by the Group, liabilities incurred by the
Group to the former owners of the acquiree and the equity
instruments issued by the Group in exchange for control of
the acquiree. Acquisition-related costs are recognised in
profit or loss as incurred.
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 of disposal,
and value in use to determine recoverable amount. 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 State
Government bonds at balance date that most closely match
the terms to 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’s 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 in 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.
ANNUAL REPORT 2014 51
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 1. SUMMARY OF ACCOUNTING POLICIES – CONTINUED
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 statement of profit or loss, but only after a
reassessment of the identification and measurement of the
net assets acquired.
Where the consideration transferred by the Group in a
business combination includes assets or liabilities resulting
from a contingent consideration arrangement, the
contingent consideration is measured at its acquisition-
date fair value. Changes in the fair value of the contingent
consideration that qualify as measurement period
adjustments are adjusted retrospectively, with corresponding
adjustments against goodwill. Measurement period
adjustments are adjustments that arise from additional
information obtained during the “measurement period”
(which cannot exceed one year from the acquisition
date) about facts and circumstances that existed at the
acquisition date.
The subsequent accounting for changes in the fair value of
contingent consideration that do not qualify as measurement
period adjustments depends on how the contingent
consideration is classified. Contingent consideration that
is classified as equity is not remeasured at subsequent
reporting dates and its subsequent settlement is accounted
for within equity. Contingent consideration that is classified
as an asset or liability is remeasured at subsequent reporting
dates in accordance with AASB 139 Financial Instruments:
Recognition and Measurement, or AASB 137 Provisions,
Contingent Liabilities and Contingent Assets, as appropriate,
with the corresponding gain or loss being recognised in profit
or loss.
If the initial accounting for a business combination is
incomplete by the end of the reporting period in which the
combination occurs, the Group reports provisional amounts
for the items for which the accounting is incomplete. Those
provisional amounts are adjusted during the measurement
period (see above), or additional assets or liabilities are
recognised, to reflect new information obtained about facts
and circumstances that existed as of the acquisition date
that, if known, would have affected the amounts recognised
as of that date.
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 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.
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.
52 DOWNER EDI LIMITED
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 1. SUMMARY OF ACCOUNTING POLICIES – CONTINUED
Contract price and cost estimates are reviewed periodically
as the work progresses and reflect adjustments proportionate
to the percentage of completion in the statement of profit
or loss 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 a 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 – WTP
Revenue and expenses from the Public Private Partnership
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
OTHER REVENUE
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, losses
on ineffective hedging instruments that are recognised in
profit or 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.
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.
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 that is recoverable from, or
payable to, the taxation authorities, is classified as operating
cash flow.
ANNUAL REPORT 2014 53
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 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 reflects
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 statement of profit or loss, except when
it relates to items credited or debited directly to other
comprehensive income, in which case the deferred tax is
also recognised 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.
54 DOWNER EDI LIMITED
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 1. SUMMARY OF ACCOUNTING POLICIES – CONTINUED
INVESTMENTS IN ASSOCIATES
PROPERTY, PLANT AND EQUIPMENT
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.
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 equals 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 OR LOSS INVESTMENTS
Fair value through profit or 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 statement of profit
or loss.
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 costs of disposal. 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 ARRANGEMENTS
JOINT OPERATIONS
Joint operations give the Group the right to the underlying
assets and obligations for liabilities and are accounted for by
recognising the share of those assets and liabilities.
JOINT VENTURES
Joint ventures give the Group the right to the net assets and
are accounted for using the equity method. The interests are
initially recognised in the consolidated statement of financial
position at cost and adjusted thereafter to recognise the
Group’s share of the post-acquisition profits or losses and
movements in other comprehensive income in profit or loss
and other comprehensive income respectively.
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 and installation 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, where material,
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 to recognise 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 methods 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.
ANNUAL REPORT 2014 55
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 1. SUMMARY OF ACCOUNTING POLICIES – CONTINUED
FINANCE LEASES
IMPAIRMENT OF ASSETS
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.
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 are not greater than 40 years. The estimated useful life
and amortisation methods 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 statement of profit or loss 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 an indefinite useful life.
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 that
are largely independent of the cash inflows from other assets
or groups of assets (cash-generating units or CGUs). 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.
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 statement of profit or loss. 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 statement of profit or loss.
56 DOWNER EDI LIMITED
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 1. SUMMARY OF ACCOUNTING POLICIES – CONTINUED
FAIR VALUE HEDGES
PROVISIONS
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.
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.
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 or loss.
EMPLOYEE BENEFITS
Liabilities are incurred for benefits accruing to employees in
respect of wages and salaries, annual leave, long service
leave, redundancy and sick leave vesting to employees and
are recognised in respect of employees’ services up to the
end of the reporting period. These liabilities are measured
at the amounts expected to be paid when they are settled
and include related on-costs, such as workers compensation
insurance, superannuation and payroll tax. The liability
for long-term benefits is measured at the present value of
estimated future payments to be made in respect of services
provided by employees up to the end of the reporting period.
In determining the liability for these employee entitlements,
consideration has been given to estimated future increases
in wage and salary rates including related on-costs and
expected settlement dates based on staff turnover history.
The provision is discounted using the Australian State
Government bond rates which most closely match the terms
to maturity of the provision.
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;
– The amounts to be paid are determined before the time 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.
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.
WARRANTY
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 as and when the liability arises.
ONEROUS CONTRACTS
Present obligations arising under onerous contracts are
recognised and measured as provisions. An onerous contract
is considered to exist where the Group has a contract under
which the unavoidable costs of meeting the obligations
under the contract exceed the economic benefits expected
to be received from the contract.
FOREIGN CURRENCY
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 statement of profit or loss, except when
deferred in equity as qualifying cash flow hedges.
ANNUAL REPORT 2014 57
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 1. SUMMARY OF ACCOUNTING POLICIES – CONTINUED
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 having regard to historical forfeitures.
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.
For cash-settled share-based payments, a liability is
recognised for the goods or services acquired, measured
initially at the fair value of the liability. At the end of each
reporting period until the liability is settled, and at the date
of settlement, the fair value of the liability is remeasured,
with any changes in fair value recognised in profit or loss for
the year.
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.
TREASURY SHARES
When treasury shares subsequently vest to employees under
the Downer employee share plans, the carrying value of
the vested shares is transferred from 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.
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
statement of profit or loss 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.
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 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
statement of profit or loss 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-
tradable 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.
58 DOWNER EDI LIMITED
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 1. SUMMARY OF ACCOUNTING POLICIES – CONTINUED
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.
GOVERNMENT GRANTS
Government grants are not recognised until there is
reasonable assurance that the Group will comply with
the conditions attaching to them and that the grants will
be received.
Government grants are recognised in profit or loss on
a systematic basis over the periods in which the Group
recognises as expenses the related costs for which the grants
are intended to compensate. Specifically, government grants
whose primary condition is that the Group should purchase,
construct or otherwise acquire non-current assets are
recognised as deferred revenue in the statement of financial
position and transferred to profit or loss on a systematic and
rational basis over the useful lives of the related assets.
Government grants that are receivable as compensation
for expenses or losses already incurred or for the purpose
of giving immediate financial support to the Group with
no future related costs are recognised in profit or loss in the
period in which they become receivable.
Government assistance which does not have conditions
attached specifically relating to the operating activities of
the entity is recognised in accordance with the accounting
policies above.
NEW ACCOUNTING STANDARDS AND INTERPRETATIONS
At the date of authorisation of the financial statements, the
Standards and Interpretations listed below were in issue but
not yet effective. 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 9 Financial Instruments (December 2009), AASB
2009-11 Amendments to Australian Accounting Standards
arising from AASB 9, AASB 2012-6 Amendments to
Australian Accounting Standards – Mandatory Effective
Date of AASB 8 and Transition Disclosure, AASB 2013-9
Amendments to Australian Accounting Standards
– Conceptual Framework, Materiality and Financial
Instruments effective on a modified retrospective basis to
annual periods beginning on or after 1 January 2017;
– AASB 9 Financial Instruments (December 2010), AASB 2010-
7 Amendments to Australian Accounting Standards arising
from AASB 9 (December 2010), AASB 2012-6 Amendments
to Australian Accounting Standards – Mandatory Effective
Date of AASB 8 and Transition Disclosure, AASB 2013-9
Amendments to Australian Accounting Standards
– Conceptual Framework, Materiality and Financial
Instruments effective on a modified retrospective basis to
annual periods beginning on or after 1 January 2017;
– AASB 1031 Materiality (2013) effective for annual periods
beginning on or after 1 January 2014;
– AASB 2012-3 Amendments to Australian Accounting
Standards Disclosure – offsetting Financial Assets and
Liabilities (Amendments to AASB 132) effective for annual
periods beginning on or after 1 January 2014;
– AASB 2013-3 Amendments to AASB 136 – Recoverable
Amount Disclosures for Non-Financial Assets effective for
annual periods beginning on or after 1 January 2014;
– AASB 2013-4 Amendments to Australian Accounting
Standards – Novation of Derivatives and Continuation of
Hedge Accounting effective for annual periods beginning
on or after 1 January 2014;
– AASB 2013-5 Amendments to Australian Accounting
Standards – Investment Entities effective for annual periods
beginning on or after 1 January 2014;
– AASB 2013-9 Amendments to Australian Accounting
Standards – Conceptual Framework, Materiality and
Financial Instruments effective for annual periods
beginning on or after 1 January 2014; and
– Interpretation 21 Levies effective for annual periods
beginning on or after 1 January 2014.
The following IASB Standards and IFRIC Interpretations
were also in issue but not yet effective, although Australian
equivalent Standards and Interpretations have not yet
been issued.
– Narrow-scope amendments to IAS 19 Employee Benefits
entitled Defined Benefit Plans: Employee Contributions
(Amendments to IAS 19) effective for annual periods
beginning on or after 1 July 2014;
– Annual Improvements to IFRSs 2010-2012 Cycle effective for
annual periods beginning on or after 1 July 2014;
– Annual Improvements to IFRSs 2011-2013 Cycle effective for
annual periods beginning on or after 1 July 2014;
– IFRS 14 Regulatory Deferral Accounts effective for annual
periods beginning on or after 1 July 2014; and
– IFRS 15 Revenue from Contracts with Customers effective
for annual periods beginning on or after 1 January 2017.
ANNUAL REPORT 2014 59
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 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 the Group 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 a combination of
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 are
outlined below:
Downer Infrastructure Australia: Downer Infrastructure
Australia is the combination of several cash generating
units, generally across geographical groupings. Downer
Infrastructure Australia provides a full suite of engineering,
construction and project management services in the
public and private infrastructure industries. The industries
in which Downer Infrastructure Australia is involved
include construction, road and rail infrastructure, power
systems including transmission lines and renewable
energy, asphalt, mining and materials handling, minerals
processing, communication networks and water treatment
and management.
Downer Infrastructure New Zealand: Provides essential
services for the construction, development, management
and maintenance of road and rail assets in the public
and private sectors. Providing utility services such as
groundworks for power, open space and facilities
management, infrastructure management including airport
runways and wharves, gas and telecommunications,
and construction and maintenance of water supply and
wastewater treatment.
Downer Mining: Provides contract mining services including
open-cut and underground operations, whole-of-lifecycle
mine planning, tyre management, explosives and
exploration, drilling, blasting and dust suppression services
and technology.
Downer Rail: Provides design, build, fit-out and maintenance
of passenger rolling stock and provides design, build and
maintenance of freight rolling stock including locomotives
and rail wagons as well as importing and commissioning of
completed locomotives units for use in the resources sector.
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) Interest income and finance costs;
b) Corporate charges comprising non-segmental expenses
such as head office expenses; and
c) Income tax expense.
INFORMATION ABOUT MAJOR CUSTOMERS
There is no single customer that contributed 10% or more to
the Group’s revenue for the years ended 30 June 2014 and
30 June 2013.
60 DOWNER EDI LIMITED
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 2. SEGMENT INFORMATION – CONTINUED
Total revenue(ii)
Share of sales revenue
from joint ventures
and associates
Total revenue including
joint ventures and
associates
2013
2013
2014
$’000
(restated)(i)
$’000
2014
$’000
(restated)(i)
$’000
2014
$’000
2013
$’000
By business segment
Downer Infrastructure Australia
3,556,349
4,143,889
Downer Infrastructure New Zealand
1,129,036
1,033,216
1,923,983
2,472,205
49,385
7,270
58,937
59,438
3,605,734
4,203,327
6,104
1,136,306
1,039,320
79,740
1,982,920
2,551,945
Downer Mining
Downer Rail
Inter-segment sales
Subtotal
Unallocated
Total
755,458
1,129,896
247,386
205,846
1,002,844
1,335,742
(6,500)
(8,547)
–
–
(6,500)
(8,547)
7,358,326
8,770,659
362,978
351,128
7,721,304
9,121,787
13,234
10,579
–
–
13,234
10,579
7,371,560
8,781,238
362,978
351,128
7,734,538
9,132,366
(i) Certain amounts shown here do not correspond to the consolidated Annual Financial Report as at 30 June 2013 and reflect adjustments
made as detailed in Note 39: Impact on Group’s historical financial statements on adoption of AASB 11 Joint Arrangements.
(ii) Total revenue for business segments includes other income and inter-segment sales, recorded at amounts equal to competitive market
prices charged to external customers for similar goods.
ANNUAL REPORT 2014 61
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 2. SEGMENT INFORMATION – CONTINUED
By business segment
Downer Infrastructure Australia
Downer Infrastructure New Zealand
Downer Mining
Downer Rail
Total reported segment results
Unallocated
Interest income
Interest expense
Net interest expense
Total profit before income tax
Income tax expense
Total net profit after tax
Reconciliation of segment net operating profit to net profit after tax:
Segment net operating profit
Unallocated:
Individually significant item
Impairment of goodwill
Settlement/(provision) of contractual claims
Government grant
Redundancy costs
Corporate costs
IT transformation costs
Total unallocated
Earnings before interest and tax
Interest income
Interest expense
Total profit before income tax
Income tax expense
Total net profit after tax
Segment results
2014
$’000
127,859
63,220
171,432
22,097
384,608
2013
(restated)(i)
$’000
184,684
45,589
174,225
59,021
463,519
(43,490)
(104,707)
6,627
(49,682)
(43,055)
298,063
(82,070)
215,993
4,779
(71,902)
(67,123)
291,689
(87,703)
203,986
384,608
463,519
–
–
6,423
11,711
(701)
(51,366)
(9,557)
(43,490)
341,118
6,627
(49,682)
298,063
(82,070)
215,993
(11,456)
(6,224)
(18,917)
10,302
(1,516)
(66,985)
(9,911)
(104,707)
358,812
4,779
(71,902)
291,689
(87,703)
203,986
Note
3(c)
3(c)
6(a)
4
17
3(a)
3(c)
3(c)
6(a)
(i) Certain amounts shown here do not correspond to the consolidated Annual Financial Report as at 30 June 2013 and reflect adjustments
made as detailed in Note 39: Impact on Group’s historical financial statements on adoption of AASB 11 Joint Arrangements.
62 DOWNER EDI LIMITED
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 2. SEGMENT INFORMATION – CONTINUED
Segment assets
Segment liabilities
Carrying value of equity-
accounted investees
2013
2013
2013
2014
$’000
(restated)(i)
$’000
2014
$’000
(restated)(i)
$’000
2014
$’000
(restated)(i)
$’000
By business segment
Downer Infrastructure Australia
1,354,927
1,312,551
635,796
651,479
Downer Infrastructure New Zealand
449,380
410,982
188,605
173,273
Downer Mining
Downer Rail
Subtotal
Unallocated
Total
By business segment
Downer Infrastructure Australia
Downer Infrastructure New Zealand
Downer Mining
Downer Rail
Subtotal
Unallocated
Total
1,069,496
1,243,559
403,056
567,646
694,573
958,263
229,432
409,103
3,568,376
3,925,355
1,456,889
1,801,501
300,006
314,429
449,482
611,709
8,914
4,128
9,002
18,041
40,085
–
9,308
2,327
17,297
23,979
52,911
–
3,868,382
4,239,784
1,906,371
2,413,210
40,085
52,911
Share of net profit of joint
ventures and associates
Depreciation
and amortisation
Acquisition of
segment assets
2013
2013
2014
$’000
(restated)(i)
$’000
2014
$’000
2013
$’000
2014
$’000
(restated)(i)
$’000
938
435
3,616
8,362
13,351
–
2,042
356
13,225
11,340
26,963
38,643
23,073
41,846
21,994
51,870
25,535
83,673
20,813
188,167
215,295
294,025
246,280
7,988
7,889
17,084
9,382
257,871
287,024
388,514
360,148
–
8,550
7,777
4,547
7,097
13,351
26,963
266,421
294,801
393,061
367,245
The consolidated entity operated in six geographical areas – Australia, Pacific (New Zealand, Papua New Guinea, Vanuatu
and Fiji), Asia (Hong Kong, China, Singapore, Malaysia, Thailand, Vietnam, Indonesia and the Philippines), Africa (South Africa,
Botswana and Namibia), South America (Brazil and Chile) and Other (United Kingdom, Canada and India).
By geographic location
Australia
Pacific
Asia
Africa
South America
Other
Total
Total revenue (ii)
Segment assets
Acquisition of
segment assets
2013
2013
2013
2014
$’000
(restated)(i)
$’000
2014
$’000
(restated)(i)
$’000
2014
$’000
(restated)(i)
$’000
6,156,876
7,654,832
3,374,005
3,775,017
363,234
344,567
1,148,630
1,063,336
448,920
419,829
25,839
20,971
12,406
26,953
20,011
6,684
11,822
22,207
20,706
8,335
10,311
11,969
17,513
5,664
10,426
9,567
16,996
7,949
62
1,193
2,668
65
7
304
1,319
77
7,371,560
8,781,238
3,868,382
4,239,784
393,061
367,245
(i) Certain amounts shown here do not correspond to the consolidated Annual Financial Report as at 30 June 2013 and reflect adjustments
made as detailed in Note 39: Impact on Group’s historical financial statements on adoption of AASB 11 Joint Arrangements.
(ii) 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 2014 63
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 3. PROFIT FROM ORDINARY ACTIVITIES
a) Revenue
Sales revenue
Rendering of services
Mining services
Construction contracts
Sale of goods
Other revenue
Other revenue
Rental income
Government grant(ii)
Dividends
Other entities
Total revenue from ordinary activities
Other income
Net gain on disposal of property, plant and equipment
Net foreign exchange gains
Total other income
Consolidated
Note
2014
$’000
2013
(restated)(i)
$’000
2
4,150,337
1,887,680
1,038,519
261,522
6,354
8,848
11,711
4,667,621
2,423,830
1,408,458
248,949
8,085
9,123
10,302
352
7
7,365,323
8,776,375
4,820
1,417
6,237
4,863
–
4,863
Total revenue and other income
Share of sales revenue from joint ventures and associates
7,371,560
8,781,238
2
362,978
351,128
Total revenue including joint ventures and associates and other income
7,734,538
9,132,366
(i) Certain amounts shown here do not correspond to the consolidated Annual Financial Report as at 30 June 2013 and reflect adjustments
made as detailed in Note 39: Impact on Group’s historical financial statements on adoption of AASB 11 Joint Arrangements.
(ii) The amount relates to the research and development tax incentive received by the Group. The Group elected to present the net amount in
‘Other revenue’ as allowed under AASB 120 Accounting for Government grants and disclosure of Government assistance.
64 DOWNER EDI LIMITED
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014
NOTE 3. PROFIT FROM ORDINARY ACTIVITIES – CONTINUED
b) Operating expenses
Cost of goods sold
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 relating to land and buildings
Operating lease expenses relating to plant and equipment(ii)
Total operating lease expenses
Employee benefits expense:
– Defined contribution plans
– Share-based transactions
– Employee benefits
– Redundancy costs
Total employee benefits expense
c) Finance income and costs
Finance income
Interest income
Finance costs
Finance costs on liabilities carried at amortised cost:
– Interest expense
– Finance lease expense
Total interest and finance lease expense
Consolidated
Note
2014
$’000
2013
(restated)(i)
$’000
201,586
189,407
–
–
3,122
2,111
232,011
2,075
19,547
253,633
12,788
266,421
251,739
2,769
28,892
283,400
11,401
294,801
2,276
2,877
73,562
167,730
241,292
135,735
1,171
72,894
241,588
314,482
170,893
3,532
2,463,287
2,821,088
29,075
13,856
2,629,268
3,009,369
6,627
4,779
40,797
8,885
49,682
60,577
11,325
71,902
16
16
16
17
2
2
(i) Certain amounts shown here do not correspond to the consolidated Annual Financial Report as at 30 June 2013 and reflect adjustments
made as detailed in Note 39: Impact on Group’s historical financial statements on adoption of AASB 11 Joint Arrangements.
(ii) Operating lease expenses do not include expenses relating to maintenance, insurance and taxes of $17.9 million (2013: $14.2 million).
ANNUAL REPORT 2014 65
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 4. INDIVIDUALLY SIGNIFICANT ITEM
The following material item is relevant to an understanding of the Group’s financial
performance:
– Provision referable to Singapore Tunnel dispute
Consolidated
2014
$’000
2013
$’000
–
–
11,456
11,456
The provision related to a dispute with SP PowerAssets Ltd in relation to the construction of an electrical services tunnel. A
settlement was reached between the parties in December 2012. A provision of $11.5 million was taken up in the prior year to
cover the settlement outcome.
NOTE 5. 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
Sustainability assurance
Due diligence and other non-audit services
The auditor of the Group is Deloitte Touche Tohmatsu.
Consolidated
2014
$
2013
$
2,966,420
584,580
3,551,000
448,305
52,500
103,000
410,880
1,014,685
2,832,457
485,131
3,317,588
268,439
119,002
100,000
1,452,254
1,939,695
66 DOWNER EDI LIMITED
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 6. INCOME TAX
a) Income tax recognised in the statement of profit or loss
Tax expense comprises:
– Current tax expense
– Deferred tax expense relating to the origination and reversal of temporary differences
Total tax expense
The prima facie income tax expense on pre-tax accounting profit reconciles
to the income tax expense in the financial statements as follows:
Consolidated
2014
$’000
2013
$’000
68,385
13,685
82,070
64,280
23,423
87,703
Profit before income tax
Group income tax expense calculated at 30% of operating profit
298,063
89,419
291,689
87,507
– Amortisation of intangible assets
– Non-taxable gains
– Profits and franked distributions from joint arrangements and associate entities
– Non-deductible expenses
– Effect of different rates of tax on overseas income
– Effect of unrecognised temporary differences
– Impairment of goodwill
– Other items
Under/(over) provision of income tax in previous year
Income tax expense attributable to profit
–
–
(5,831)
559
(1,912)
–
–
(2,629)
79,606
2,464
82,070
57
633
(7,741)
3,996
(1,989)
2,689
1,867
2,246
89,265
(1,562)
87,703
The tax rate used in the above reconciliation is the corporate tax rate of 30% payable by Australian corporate entities on taxable
profits under Australian tax law. There has been no change in the Australian corporate tax rate between 2013 and 2014.
b) Income tax recognised directly in other comprehensive income
The following deferred tax amounts were charged directly to equity during the year:
Deferred tax
– Share-based costs
– Revaluations of financial instruments treated as cash flow hedges
Total deferred tax charged to equity
Consolidated
2014
$’000
2013
$’000
157
1,614
1,771
751
(5,718)
(4,967)
ANNUAL REPORT 2014 67
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 7. EARNINGS PER SHARE
Earnings per share (EPS)
– Basic earnings per share (cents per share)
– Diluted earnings per share (cents per share)
Basic earnings per share
Profit attributable to members of the parent entity ($’000)
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
Weighted average number of ordinary shares (WANOS) on issue (000’s)(i)
Basic earnings per share (cents per share)
Diluted earnings per share
2014
2013
48.3
46.0
45.7
43.1
215,952
(9,026)
206,926
203,979
(7,683)
196,296
428,569
48.3
429,998
45.7
Profit attributable to members of the parent entity used in calculating EPS ($’000)
215,952
203,979
Weighted average number of ordinary shares – diluted
Weighted average number of ordinary shares (WANOS) on issue (000’s)(i)(ii)
WANOS adjustment to reflect potential dilution for ROADS (000’s)(iii)
WANOS used in the calculation of diluted EPS (000’s)
Diluted earnings per share (cents per share)
428,572
40,482
469,054
46.0
429,998
43,503
473,501
43.1
(i) The WANOS on issue has been adjusted by the weighted average effect of shares issue from Dividend Reinvestment Plan election and the
unvested Executive Incentive shares.
(ii) For diluted earning per share, the WANOS has been further adjusted by the potential vesting of Executive Incentive shares.
(iii) The WANOS adjustment is the value of ROADS that could potentially be converted into ordinary shares at the reporting date. It is calculated
based on the issued value of ROADS in New Zealand dollars converted to Australian dollars at the spot rate prevailing at the reporting date,
which was $185.9 million (2013: $168.6 million), divided by the average market price of the Company’s ordinary shares for the period 1 July
2013 to 30 June 2014 discounted by 2.5% according to the ROADS contract terms, which was $4.59 (2013: $3.87).
68 DOWNER EDI LIMITED
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 8. DIVIDENDS
a) Ordinary shares
Dividend per share (in Australian cents)
Franking percentage
Cost (in $’000)
Payment date
Dividend record date
Final
2014
12.0
100%
52,248
Interim
2014
11.0
70%
47,821
Final
2013
11.0
70%
Interim
2013
10.0
70%
47,675
42,910
17/09/2014
20/03/2014
24/09/2013
15/04/2013
19/08/2014
18/02/2014
20/08/2013
15/03/2013
The final 2014 dividend has not been declared at the reporting date and therefore is not reflected in the financial statements.
b) Redeemable Optionally Adjustable Distributing Securities (ROADS)
Dividend per ROADS (in Australian cents)
New Zealand imputation credit percentage
Cost (in A$’000)
Payment date
Dividend per ROADS (in Australian cents)
New Zealand imputation credit percentage
Cost (in A$’000)
Payment date
c) Franking credits
Franking account balance
Quarter 1
2014
Quarter 2
2014
Quarter 3
2014
Quarter 4
2014
1.09
100%
2,181
1.13
100%
2,262
1.15
100%
2,301
1.14
100%
2,282
16/09/2013
16/12/2013
17/03/2014
16/06/2014
Quarter 1
2013
Quarter 2
2013
Quarter 3
2013
Quarter 4
2013
0.95
100%
1,895
0.94
100%
1,882
0.95
100%
1,904
1.00
100%
2,002
17/09/2012
17/12/2012
15/03/2013
17/06/2013
Total
2014
4.51
100%
9,026
Total
2013
3.84
100%
7,683
Parent Entity
2014
$’000
3,853
2013
$’000
5,114
ANNUAL REPORT 2014 69
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 9. CASH AND CASH EQUIVALENTS
Cash at bank and in hand
Short-term deposits
NOTE 10. TRADE AND OTHER RECEIVABLES
Current
Trade receivables
Allowance for doubtful debts
Note
37(a)
10(a)
10(b)
Amounts due from customers under contracts and rendering of services (ii)
31
Other receivables
Non-current
Other receivables
Total trade and other receivables
Consolidated
2014
$’000
327,678
104,089
431,767
574,947
(4,672)
570,275
557,410
65,679
2013
(restated)(i)
$’000
459,531
20,347
479,878
580,669
(8,102)
572,567
910,075
33,920
1,193,364
1,516,562
15,963
999
1,209,327
1,517,561
(i) Certain amounts shown here do not correspond to the consolidated Annual Financial Report as at 30 June 2013 and reflect adjustments
made as detailed in Note 39: Impact on Group’s historical financial statements on adoption of AASB 11 Joint Arrangements.
(ii) Prior year included $60.4 million ($440.0 million less $379.6 million utilised) provision for the Waratah Train Project. The Waratah Train Project is
substantially completed. Refer Note 1 for further details.
a) Of the total $574.9 million (2013: $580.7 million) of trade receivables, $454.6 million (2013: $440.4 million) is current
(i.e. within 30 days). The Group considers that there are no indications as at the reporting date that debtors will not meet their
payment obligations.
Of the total receivables of $574.9 million (2013: $580.7 million):
– $2.2 million (2013: $2.6 million) are renegotiated receivables and the Group has assessed that these are all recoverable and
no impairment has been taken;
– $113.4 million (2013: $129.6 million) are past due but not impaired with an average of more than 64 days. These relate to a
number of customers for whom there is no recent history of default, nor other indicators of impairment. The Group considers
that no provision is required on these balances. The consolidated entity does not hold any collateral over these balances; and
– $4.7 million (2013: $8.1 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.
70 DOWNER EDI LIMITED
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 10. TRADE AND OTHER RECEIVABLES – CONTINUED
(b) Movement in the allowance for doubtful debts
Consolidated
Balance at the beginning of financial year
Additional provisions
Amounts used
Amounts reversed
Foreign currency exchange differences
Balance at the end of the financial year
Note
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 11. OTHER FINANCIAL ASSETS
Current
Foreign currency forward contracts – designated as cash flow hedge
Foreign currency forward contracts – fair value through profit or loss
Deferred consideration receivable – amortised cost
Other financial assets – amortised cost
Non-current
Advances to joint ventures – amortised cost
Foreign currency forward contracts – designated as cash flow hedge
Fair value through profit or loss investments
Deferred consideration receivable – amortised cost
Other financial assets – amortised cost
27
27
Total other financial assets
NOTE 12. INVENTORIES
Current
Raw materials
Work in progress
Finished goods
Components and spare parts
2014
$’000
(8,102)
(3,131)
5,795
855
(89)
(4,672)
642
311
572
10,041
11,566
–
178
5,151
1,398
–
6,727
18,293
2013
$’000
(7,160)
(4,749)
2,027
1,872
(92)
(8,102)
13,925
350
–
10,643
24,918
972
183
6,458
1,771
240
9,624
34,542
253,768
226,439
2,534
95,281
33,141
1,435
92,727
29,279
384,724
349,880
ANNUAL REPORT 2014 71
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 13. TAX ASSETS
Current
Current tax assets
Non-current
a) Deferred tax assets
Consolidated
2014
$’000
2013
$’000
Note
–
13,765
732
5,830
b) Movement in deferred tax assets for the financial year
Balance at the beginning of the financial year
Charged to statement of profit or loss as deferred income tax expense
13(d)
Charged to equity
Net foreign currency exchange differences
Tax losses utilised or transferred
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)
23(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:
Inventories
Trade and other receivables
Property, plant and equipment
Trade and other payables
Borrowings
Provisions
Income tax losses
Hedges and foreign exchange movements
Share issue expenses
Other
Total deferred tax assets (gross)
d) Amounts charged to the statement of profit or loss as deferred income tax
(expense)/benefit:
Inventories
Trade and other receivables
Property, plant and equipment
Trade and other payables
Borrowings
Provisions
Hedges and foreign exchange movements
Share issue expenses
Other
Deferred tax assets in relation to prior years
Charged to statement of profit or loss as deferred income tax expense
72 DOWNER EDI LIMITED
160,674
(24,070)
129
1,859
(4,255)
(243)
5,668
139,762
(139,030)
732
5,755
2,467
11,009
28,433
65
89,385
–
1,649
956
43
221,116
(26,213)
(4,766)
1,362
(33,161)
(552)
2,888
160,674
(154,844)
5,830
3,833
20,670
6,006
11,719
157
108,289
7,153
1,324
1,481
42
139,762
160,674
(4,030)
(19,507)
(5,097)
15,074
–
(17,885)
(1,475)
(798)
3,803
5,845
(24,070)
(4,230)
10,883
(2,809)
(8,454)
(185)
1,802
(635)
(524)
(5,391)
(16,670)
(26,213)
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 14. OTHER ASSETS
Current
Prepayments
Other deposits
Other current assets
Non-current
Prepayments
Other non-current assets
Total other assets
NOTE 15. JOINT ARRANGEMENTS AND ASSOCIATE ENTITIES
Interest in joint ventures and associates
Consolidated
2014
$’000
34,296
2,294
2,876
39,466
6,109
1,489
7,598
47,064
2013
(restated)(i)
$’000
39,935
2,162
3,294
45,391
1,208
1,926
3,134
48,525
Consolidated
2014
$’000
40,085
2013
(restated)(i)
$’000
52,911
Note
15(a)
a) The consolidated entity and its controlled entities have interests in the following joint ventures and associates which are
equity accounted:
Name of joint venture
Principal activity
Country of
operation
Ownership interest
2014
%
2013
%
Allied Asphalt Limited
Asphalt plant
New Zealand
Bitumen Importers Australia Joint Venture
Construction of bitumen storage facility
Australia
Bitumen Importers Australia Pty Ltd
Bitumen importer
Dust-A-Side Australia Pty Ltd (ii)
Dust suppression to mine industry
EDI Rail-Bombardier Transportation
(Maintenance) Pty Ltd
EDI Rail-Bombardier Transportation Pty Ltd
Maintenance of railway rolling stock
Sale and maintenance of railway
rolling stock
Emulco Limited
Emulsion plant
Green Vision Recycling Limited
Recycling
Australia
Australia
Australia
Australia
New Zealand
New Zealand
Isaac Asphalt Limited
Manufacture and supply of asphalt
New Zealand
RTL Mining and Earthworks Pty Ltd
Contract mining; civil works and plant hire
Australia
Stockton Alliance Limited
Mine operations
New Zealand
50
50
50
–
50
50
50
33
50
44
50
50
50
50
50
50
50
50
33
–
44
50
(i) Certain amounts shown here do not correspond to the consolidated Annual Financial Report as at 30 June 2013 and reflect adjustments
made as detailed in Note 39: Impact on Group’s historical financial statements on adoption of AASB 11 Joint Arrangements.
(ii) Joint venture interest in Dust-A-Side Australia Pty Ltd was disposed of during the financial year.
ANNUAL REPORT 2014 73
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 15. JOINT ARRANGEMENTS AND ASSOCIATE ENTITIES – CONTINUED
Name of associate
Principal activity
Country of
operation
Ownership interest
2014
%
2013
%
Clyde Babcock Hitachi (Australia) Pty Ltd
KDR Gold Coast Pty Ltd (i)
KDR Victoria Pty Ltd
Refurbishment, construction and
maintenance of boilers
Australia
Operation and maintenance of Gold Coast
Rapid Transit Project
Australia
Operation of Yarra Trams and Melbourne
tram network
KDR Victoria Services Pty Ltd
Operation of maintenance activities
Keolis Downer Pty Ltd
Reliance Rail Pty Ltd
Holding company of KDR
Rail manufacturing and maintenance
Australia
Australia
Australia
Australia
27
49
49
49
49
49
27
49
49
–
–
49
All joint ventures and associates have a statutory reporting date of 30 June unless stated below.
Material associates
The Group is a 49% partner in Keolis Downer Pty Ltd, the ultimate parent entity of KDR Victoria Pty Ltd, KDR Victoria Services Pty
Ltd and KDR Gold Coast Pty Ltd. These associates are considered material to the Group as the partnership with Keolis (one of
Europe’s leading public transport operators) is considered a strategic long-term partnership.
KDR Victoria Pty Ltd is the operator of the Yarra Trams, the Melbourne tram system; KDR Victoria Services Pty Ltd operates the
maintenance activities for Yarra Trams and KDR Gold Coast Pty Ltd operates and maintains a light rail public transportation
system on the Gold Coast.
Consolidated
Interest in joint ventures and associates
Equity-accounted investees at the beginning of the financial year
– Share of net profit
– Share of distributions
– Earn-in contribution
– Additional interest in joint ventures and associates
– Disposal of interest in joint ventures and associates (iii)
– Foreign currency exchange differences
Equity-accounted investees at the end of the financial year
Share of results of joint ventures and associates
Revenue
Expenses
Current assets
Non-current assets
Total assets
Current liabilities
Non-current liabilities
Total liabilities
Net assets
Note
2
2
2014
$’000
52,911
13,351
(26,292)
–
1,695
(2,000)
420
40,085
362,978
(342,847)
20,131
139,484
41,820
181,304
128,523
12,737
141,260
40,044
2013
(restated)(ii)
$’000
54,119
26,963
(28,639)
218
65
–
185
52,911
351,128
(318,865)
32,263
143,179
38,668
181,847
113,864
18,374
132,238
49,609
(i) KDR Gold Coast Pty Ltd has a 31 December statutory reporting date. The statutory reporting date differs to the Group as it is aligned with the
joint venture partners’ reporting date.
(ii) Certain amounts shown here do not correspond to the consolidated Annual Financial Report as at 30 June 2013 and reflect adjustments
made as detailed in Note 39: Impact on Group’s historical financial statements on adoption of AASB 11 Joint Arrangements.
(iii) Joint venture interest in Dust-A-Side Australia Pty Ltd was disposed of during the financial year.
74 DOWNER EDI LIMITED
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 15. JOINT ARRANGEMENTS AND ASSOCIATE ENTITIES – CONTINUED
b) Contingent liabilities
The consolidated entity’s share of the contingent liabilities of joint ventures and associates is included in Note 30.
c) The consolidated entity has interests in the following joint operations which are proportionately consolidated:
Name of joint operation
Principal activity
BPL Downer Joint Venture
Building construction
CDJV Construction Pty Ltd (i)
Employment of labour force deployed in
Clough Downer
Country of
operation
Singapore
Australia
Clough Downer Joint Venture (i)
Gas compression facilities and pipelines
Australia
CMC and Downer Joint Venture
Road construction
Dampier Highway Joint Venture
Highway construction and design
Downer Clough Joint Venture
Ammonium nitrate production
Downer Contech Joint Venture (ii)
Construction
Downer CSS Joint Venture (iii)
Telecommunications
Downer Daracon Joint Venture
Construction
Downer EDI Works Pty Ltd & Leighton
Contractors Pty Ltd
Design and construction of rail works
Downer Electrical GHD JV(iii)
Traffic control infrastructure
Downer HEB Joint Venture
Design and build of the New Zealand
National War Memorial Park
DownerMouchel (i)(iv)
Road maintenance
DownerMouchel Services Pty Ltd
Employment of labour force deployed in
DownerMouchel in New South Wales
John Holland EDI Joint Venture (i)
Research reactor
LD&C Joint Venture
Design and construction of pipes
and structures
Leighton Works Joint Venture
Road construction
Macdow Downer Joint Venture
Road construction
Australia
Australia
Australia
Fiji
Thailand
Australia
Australia
Australia
New Zealand
Australia
Australia
Australia
Australia
New Zealand
New Zealand
Roche Thiess Linfox Joint Venture
Contract mining; civil works and plant hire
Australia
Synergy Joint Venture (i)
Thiess Downer EDI Works
Road and pavement construction
Construction of coast to coast railway
Australia
Australia
Total Spaces Joint Venture
Roading, landscaping and earthworks
New Zealand
Wiri Train Depot Joint Venture
Construction of the Wiri train depot
New Zealand
Yokogawa Downer Joint Venture (ii)
Refurbishment of power station
York Civil Pty Ltd and Downer EDI
Engineering Pty Ltd Joint Venture
Construction of water pump station
Australia
Australia
Ownership interest
2014
%
2013
%
50
50
50
50
50
50
–
60
50
50
90
50
60
50
40
37.5
50
50
44
33
25
50
50
–
50
50
50
50
50
50
50
50
60
50
50
90
50
60
–
40
–
50
50
44
33
25
50
50
50
50
(i) Following the adoption of AASB 11 Joint Arrangements, these Joint Arrangements previously classified as Joint Controlled Entities are now
classified as Joint Operations.
(ii) Joint Operation was de-registered during the financial year.
(iii) Contractual arrangement prevents control despite ownership of more than 50% of these joint ventures.
(iv) The joint arrangement specifies 50% interest, except where an Integrated Service Arrangement (ISA) obligation is in place, whereby Downer
EDI Limited has a 60% interest.
ANNUAL REPORT 2014 75
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 15. JOINT ARRANGEMENTS AND ASSOCIATE ENTITIES – CONTINUED
MATERIAL JOINT OPERATIONS
Clough Downer Joint Venture
The Group is a 50% partner in Clough Downer Joint Venture. The joint arrangement was set up to utilise each party’s experience,
knowledge and relevant skills to deliver the Santos Gladstone LNG project in Queensland. The project involves the construction
of over 400 kilometres of gas and water transmission pipelines, compression facilities, camps and associated infrastructure.
DownerMouchel
The Group is a 50% partner in DownerMouchel except for three Integrated Service Arrangements (ISA) in Western Australia
where Downer has a 60% interest. The joint arrangement is a strategic partnership with Mouchel, a UK-based international
infrastructure and business services group, to tender and deliver integrated asset management services and maintenance
services. The major projects on hand include: the Stewardship Maintenance contract for the Sydney West Zone road network for
Roads and Maritime Services (RMS); the maintenance and improvement of the intelligent transport system assets in the Sydney
West Zone and regional New South Wales for RMS; and the road asset maintenance contract in the northern region of South East
Queensland for The Department of Transport and Main Roads (TMR) Queensland. DownerMouchel also operates the three ISAs
for Main Roads Western Australia involving the delivery of fence-to-fence road network asset management on more than 6,600
lane-kilometres of road.
NOTE 16. PROPERTY, PLANT AND EQUIPMENT
2014
$’000
At 1 July 2013
Cost
Accumulated depreciation
Net book value
Year ended 30 June 2014
Additions
Disposals at net book value
Acquisition of business
Disposals of business at net book value
Depreciation expense (Note 3(b))
Reclassifications at net book value
Reclassified as intangible assets (Note 17)(i)
Net foreign currency exchange
differences at net book value
Consolidated
Freehold
Land
Buildings
Plant and
Equipment
Equipment
under
Finance
Lease
Total
20,860
51,465
1,961,943
183,589
2,217,857
–
(16,958)
(1,005,593)
(44,476)
(1,067,027)
20,860
34,507
956,350
139,113
1,150,830
–
–
–
–
–
–
–
58
144
(275)
–
–
366,877
(80,319)
893
(1,006)
8,935
(44,525)
–
–
375,956
(125,119)
893
(1,006)
(2,075)
(232,011)
(19,547)
(253,633)
(748)
–
567
748
(10,386)
–
–
–
(10,386)
9,278
(529)
9,374
Closing net book value
20,918
32,120
1,010,424
83,447
1,146,909
At 30 June 2014
Cost
Accumulated depreciation
Closing net book value
20,918
–
20,918
49,735
2,120,712
131,475
2,322,840
(17,615)
(1,110,288)
(48,028)
(1,175,931)
32,120
1,010,424
83,447
1,146,909
(i) Refers to the reclassification of software from Capital Work in Progress to Intangible Assets.
76 DOWNER EDI LIMITED
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 16. PROPERTY, PLANT AND EQUIPMENT – CONTINUED
2013
$’000
At 1 July 2012
Cost
Accumulated depreciation
Net book value
Year ended 30 June 2013
Additions
Disposals at net book value
Disposals of business at net book value
Depreciation expense (Note 3(b))
Reclassified as asset held for sale (ii)
Reclassifications at net book value
Reclassified as intangible assets (Note 17)(iii)
Net foreign currency exchange differences
at net book value
Freehold
Land
Buildings
Consolidated
Plant and
Equipment
(restated)(i)
Equipment
under
Finance
Lease
Total
(restated)(i)
2,060,732
(926,546)
1,134,186
361,901
(49,954)
(1,716)
51,047
(15,344)
35,703
797
(260)
–
1,839,108
(875,948)
963,160
288,250
(18,128)
(1,648)
151,577
(35,254)
116,323
70,835
(31,366)
(68)
(2,769)
(251,739)
(28,892)
(283,400)
–
624
–
412
(14,289)
(12,536)
(3,897)
–
11,912
–
(14,289)
–
(3,897)
7,177
369
7,999
19,000
–
19,000
2,019
(200)
–
–
–
–
–
41
Closing net book value
20,860
34,507
956,350
139,113
1,150,830
At 30 June 2013
Cost
20,860
51,465
1,961,943
183,589
2,217,857
Accumulated depreciation
–
(16,958)
(1,005,593)
(44,476)
(1,067,027)
Closing net book value
20,860
34,507
956,350
139,113
1,150,830
(i) Certain amounts shown here do not correspond to the consolidated Annual Financial Report as at 30 June 2013 and reflect adjustments
made as detailed in Note 39: Impact on Group’s historical financial statements on adoption of AASB 11 Joint Arrangements.
(ii) Asset held for sale related to the sale of mining equipment at Cracow underground mine. Proceeds of $14.4 million were received prior to
30 June 2013 and the transfer of the assets was completed in July 2013.
(iii) Refers to the reclassification of software from Capital Work in Progress to Intangible Assets.
ANNUAL REPORT 2014 77
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 17. INTANGIBLE ASSETS
2014
$’000
At 1 July 2013
Cost
Accumulated amortisation and impairment
Net book value
Year ended 30 June 2014
Purchases
Acquisition of business (Note 26)
Disposals of business at net book value
Reclassifications at net book value (Note 16)(i)
Amortisation expense (Note 3(b))
Net foreign currency exchange differences at net book value
Closing net book value
At 30 June 2014
Cost
Accumulated amortisation and impairment
Closing net book value
2013
$’000
At 1 July 2012
Cost
Accumulated amortisation and impairment
Net book value
Year ended 30 June 2013
Purchases
Reclassifications at net book value (Note 16)(i)
Amortisation expense (Note 3(b))
Impairment (Note 2)
Net foreign currency exchange differences at net book value
Consolidated
Intellectual
Property/
Software
Goodwill
590,799
(75,994)
514,805
–
3,223
–
–
–
3,567
521,595
597,589
(75,994)
521,595
Goodwill
588,358
(69,770)
518,588
–
–
–
(6,224)
2,441
138,680
(81,712)
56,968
12,989
–
(150)
10,386
(12,788)
481
67,886
158,514
(90,628)
67,886
Consolidated
Intellectual
Property/
Software
128,879
(69,816)
59,063
5,344
3,897
(11,401)
–
65
Closing net book value
514,805
56,968
At 30 June 2013
Cost
Accumulated amortisation and impairment
Closing net book value
590,799
(75,994)
514,805
138,680
(81,712)
56,968
(i) Refers to the reclassification of software from Capital Work in Progress to Intangible Assets.
78 DOWNER EDI LIMITED
Total
729,479
(157,706)
571,773
12,989
3,223
(150)
10,386
(12,788)
4,048
589,481
756,103
(166,622)
589,481
Total
717,237
(139,586)
577,651
5,344
3,897
(11,401)
(6,224)
2,506
571,773
729,479
(157,706)
571,773
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 17. INTANGIBLE ASSETS – CONTINUED
ALLOCATION OF GOODWILL TO CASH-GENERATING UNITS (CGUs)
Goodwill has been allocated for impairment testing purposes to CGUs that are significant individually or in aggregate,
taking into consideration geographical spread, resource allocation, how operations are monitored and where independent
cash inflows are identifiable. Eight independent CGUs (by operation) have been identified across the Group against which
impairment testing has been undertaken. Goodwill has been allocated to these CGUs as follows:
Downer Infrastructure East
Downer Infrastructure West
Downer Infrastructure Specialist Services
Downer Infrastructure New Zealand
Downer Mining
Downer Rail
Carrying value
of Consolidated Goodwill
2014
$’000
188,162
58,850
83,780
55,799
65,545
69,459
521,595
2013
$’000
184,939
58,850
83,780
52,232
65,545
69,459
514,805
Goodwill relating to Downer Infrastructure Asia and Works United Kingdom has previously been fully impaired.
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.
The recoverable amount is the higher of fair value less costs of disposal and value in use. In its impairment assessment, the Group
determines the recoverable amount based on a value in use calculation, using three years cash flow projections based on the
2014/15 (FY15) budget for the year ending 30 June 2015 and the business plan for the subsequent financial years ending 30 June
2016 (FY16) and 30 June 2017 (FY17) as discussed with the Board. For FY18 onwards, the Group assumes a long-term growth rate
to allow for organic growth on the existing asset base.
Cash flow projections are determined utilising the budgeted Earnings Before Interest, Tax, Depreciation and Amortisation
(EBITDA) less tax, capital maintenance spending and working capital changes, adjusted to exclude any uncommitted
restructuring costs and future benefits to provide a “free cash flow” estimate. This calculated “free cash flow” is then discounted
to its present value using a post-tax discount rate that reflects current market assessments of the time value of money and the
risks specific to the asset for which the estimates of future cash flows have not been adjusted.
KEY ASSUMPTIONS
The table below shows the key assumptions utilised in the “value in use” calculations.
Downer Infrastructure East
Downer Infrastructure West
Downer Infrastructure Specialist Services
Downer Infrastructure New Zealand
Downer Mining
Downer Rail
Budgeted
EBITDA(i)
%
Long-term
Growth rate
%
Discount
rate
%
6.9%
3.6%
7.6%
2.4%
3.8%
11.6%
2.5%
2.5%
2.5%
2.5%
2.5%
2.5%
10.8%
10.8%
10.8%
11.2%
11.8%
10.8%
(i) Budgeted EBITDA used for impairment testing is expressed as the compound annual growth rates from FY15 to FY17 based on the
business plans.
ANNUAL REPORT 2014 79
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 17. INTANGIBLE ASSETS – CONTINUED
KEY ASSUMPTIONS – CONTINUED
Budgeted EBITDA
Budgeted EBITDA has been based on past experience and the Group’s assessment of economic and regulatory factors
affecting the industry within which the Downer businesses operate:
– Downer Infrastructure revenue is expected to benefit from the development of strategic partnerships and an expected
increase in activity in the oil and gas, transport infrastructure and telecommunications sectors. It will also benefit from recent
restructuring and business improvement initiatives.
– Downer Mining revenue and EBITDA have been adjusted to reflect the recent early termination of the Goonyella contract
and include assumptions that take into account the cyclical nature of the resources industry.
– Downer Rail is expected to benefit from its recently completed business restructure through growth in its maintenance,
component and overhauls and after-market parts sales activities. The projected cash flows assume that the restructure results
in a return to historic profitability levels for these activities from FY15. In addition, strategic partnerships and investments are
expected to continue to contribute to revenue and EBITDA growth.
Long-term growth rate
The future annual growth rates for FY17 onwards to perpetuity are based on the historical nominal GDP rates for the country
of operation.
Discount rates
Post-tax discount rates of between 10.8% and 11.8% reflect the Group’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 risks specific to that CGU, including
benchmarking against relevant peer group companies. The post-tax discount rate is applied to post-tax cash flows that include
an allowance for tax based on the respective jurisdiction’s tax rate. This method is used to approximate the requirement of the
accounting standards to apply a pre-tax discount rate to pre-tax cash flows.
Budgeted capital expenditure
The cash flows for capital expenditure are based on past experience and the amounts included in the terminal year calculation
are 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.
Budgeted working capital
Working capital has been maintained to support the underlying business plus allowances for growth. It has been assumed to be
in line with historic trends given the level of utilisation and operating activity.
SENSITIVITIES
Other than as disclosed below, the Group believes that for all other CGUs, any reasonably possible change in the key
assumptions would not cause the carrying value of the CGUs to exceed their recoverable amount.
For the Mining CGU, the Group has considered the current macro-economic challenges facing the resources sector (which has
resulted in the recent early termination of its Goonyella mining contract). A number of scenarios, including further contract losses
and pricing and volume reductions have been analysed. Based on the modelling and analysis performed, the recoverable
amount is expected to be greater than the carrying value.
For the Rail CGU, the recoverable amount currently exceeds its carrying value. A reasonably possible change in the projected
cash flows could result in the carrying value of the CGU exceeding its recoverable amount. The following sensitivity analysis was
performed to determine what changes in the key assumptions used, if any, would lead to an impairment loss being recognised.
The valuation of the Rail CGU assumes increased efficiencies in its operations and improvement in financial performance of
its maintenance business and a return to historical levels in FY15 following a substantial restructure undertaken during FY14.
The timing of the cash flows arising from these improvements may be affected by macro-economic risks including volatile
commodity prices which result in reduced capital expenditure in the Australian resources sector and insourcing by key
customers for rolling stock maintenance. In the event that these risks cannot be mitigated and EBITDA for the Rail CGU for FY15
is 24% lower than planned, with subsequent years EBITDA increasing by 2.5% from the revised base, then the Rail CGU carrying
value may exceed its recoverable amount.
80 DOWNER EDI LIMITED
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 18. TRADE AND OTHER PAYABLES
Current
Trade payables
Amounts due to customers under contracts and rendering of services
31
Note
Accruals
Goods and services tax payable
Other
Non-current
Other
Total trade and other payables
NOTE 19. BORROWINGS
Current
Secured – at amortised cost:
– Finance lease liabilities
– Hire purchase liabilities
– Supplier finance
Unsecured – at amortised cost:
– Bank loans
– Bank overdrafts
– AUD medium term notes (2009-1)
– AUD medium term notes (2009-2)
– 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
– AUD medium term notes (2009-1)
– AUD medium term notes (2010-1)
– AUD medium term notes (2013-1)
– Deferred finance charges
Total non-current borrowings
Total borrowings
29(c)
29(d)
28(a)
37(a)
29(c)
29(d)
37(a)
Consolidated
2014
$’000
348,111
156,003
481,096
42,651
35,988
2013
(restated)(i)
$’000
450,150
241,267
478,114
57,000
50,220
1,063,849
1,276,751
5,685
5,578
1,069,534
1,282,329
14,017
1,667
7,545
23,229
16,562
–
13,283
–
12,600
74,357
(2,316)
114,486
137,715
40,455
2,008
42,463
44,825
7,436
39,894
6,300
150,000
(5,405)
243,050
285,513
423,228
38,037
2,286
5,733
46,056
17,843
12
13,283
150,310
12,600
–
(2,158)
191,890
237,946
80,850
3,214
84,064
61,387
83,270
53,177
18,900
150,000
(6,542)
360,192
444,256
682,202
(i) Certain amounts shown here do not correspond to the consolidated Annual Financial Report as at 30 June 2013 and reflect adjustments
made as detailed in Note 39: Impact on Group’s historical financial statements on adoption of AASB 11 Joint Arrangements.
ANNUAL REPORT 2014 81
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 20. FINANCING FACILITIES
Financing facilities
At 30 June 2014, the consolidated entity had the following facilities that were not utilised at balance date:
Syndicated bank loan facility
Bilateral bank loan facilities
Total unutilised bank loan facilities
Bilateral bank and insurance company bonding facilities
Total unutilised bonding facilities
BANK LOANS
2014
$’000
400,000
217,000
617,000
384,187
384,187
2013
$’000
400,000
221,246
621,246
458,539
458,539
Syndicated loan facility
The syndicated loan facility, totalling A$400.0 million, is unsecured and has a maturity date of April 2018 following completion of
the process whereby the Group exercised an option to extend the term by one year. The facility has a further one year extension
option, exercisable in April 2015, subject to the agreement of the lenders and the borrower. The facility is subject to certain
Group guarantees.
Bilateral bank loans and overdrafts
These facilities are unsecured, are subject to certain Group guarantees and excluding those supported by guarantees from
Export Credit Agencies, are due for annual renewal in multiple tranches in calendar year 2015 and 2016. Included in bank
loans are amounts of $61.4 million in aggregate, which are supported by Export Credit Agency guarantees and which amortise
through even semi-annual instalments and with final maturity dates of May 2017, April 2018 and July 2019.
USD NOTES
USD unsecured private placement notes are on issue for a total amount of US$77.0 million and are subject to certain Group
guarantees. The notes mature in various tranches in September 2014 (US$30.0 million), October 2014 (US$40.0 million) and
September 2019 (US$7.0 million). The USD principal and interest have been fully hedged against the Australian dollar.
AUD MEDIUM TERM NOTES (MTNs)
The Group has the following MTNs on issue: Series 2009-1 amortises through even semi-annual instalments, until the final maturity
date of April 2018 and has a balance of $53.2 million; Series 2010-1 amortises through even semi-annual instalments until the final
maturity date of September 2015 and has a balance of $18.9 million; and Series 2013-1 for an amount of $150.0 million and which
has a bullet maturity date of November 2018. The MTNs are subject to certain Group guarantees.
FINANCE LEASE FACILITIES
The Group funds certain of its equipment under finance leases which amortise over periods of up to five years. The Group’s
obligations under finance leases are secured by the lessors’ title to the leased assets. Interest rates which are implicit in the
rentals are fixed at lease commencement dates and have a weighted average of 6.0% per annum (June 2013: 6.6% per annum).
HIRE PURCHASE AND LEASE FACILITIES
Hire purchase facilities are secured by the specific assets financed.
SUPPLIER FINANCE
Supplier finance in respect of the financing of the Group’s insurance premiums has been entered into in the normal course of
business. The financing has a term of less than one year and amortises on a monthly basis. Security is limited to the insurance
premiums that have been paid.
82 DOWNER EDI LIMITED
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 20. FINANCING FACILITIES – CONTINUED
COVENANTS ON FINANCING FACILITIES
The Group’s financing facilities contain undertakings including an obligation to comply at all times with financial covenants
which require the Group to operate within certain financial ratio levels as well as ensuring that subsidiaries that contribute
certain minimum threshold amounts of Group EBIT and Group Total Tangible Assets are guarantors under various facilities.
The main financial covenants which the Group is subject to are Net Worth, Interest Service Coverage (calculated as rolling 12
month EBIT to Net Interest Expense) and Leverage (calculated as Net Debt to Total Capitalisation).
Financial covenants testing is undertaken and reported to the Board on a monthly basis. Reporting of financial covenants to
financiers occurs semi-annually for the rolling 12 month periods to 30 June and 31 December. The Group was in compliance with
all its financial covenants as at 30 June 2014.
BONDING
The Group has $1,282.0 million of bank guarantee and insurance bond facilities to support its contracting activities.
$498.5 million of these facilities are provided to the Group on a committed basis and $783.5 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 nature of the contract of work and potential concentration limits the financial institution may have on the project or
industry where the work is being undertaken. 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 facilities are provided by a number of different banks and insurance companies on an unsecured basis and
are subject to certain Group guarantees. $897.8 million of these facilities were utilised as at 30 June 2014 with $384.2 million
unutilised. $84.6 million of the current committed facilities relates to a syndicated bonding facility referable to the Waratah Train
Project and which matures in December 2014. Excluding this syndicated facility, the Group’s other facilities have varying maturity
dates which range from December 2014 to February 2016.
The risk being assumed by the financier under these bonds is Downer corporate credit risk rather than project specific risk.
The Group has the flexibility in respect of certain committed facility amounts (shown as part of the unutilised bilateral bank loan
facilities) which can, at the request of the Group, be utilised for bonding purposes.
REFINANCING REQUIREMENTS
Where existing facilities approach maturity, the Group will seek to negotiate with existing and new financiers to extend the
maturity date of those facilities. The Group’s earnings profile, financial metrics, 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. Furthermore,
banks and other lending institutions may demand more stringent terms (including increased pricing and lower facility limits) on
debt and bonding facilities to reflect the higher credit risk profile.
ANNUAL REPORT 2014 83
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 21. OTHER FINANCIAL LIABILITIES
Current
Foreign currency forward contracts – designated as cash flow hedge
Foreign currency forward contracts – fair value through profit or loss
Cross currency and interest rate swaps – designated as cash flow hedge
Fair value commodity hedges
Advances from joint ventures and associates – amortised cost
Non-current
Foreign currency forward contracts – designated as cash flow hedge
Cross currency and interest rate swaps – designated as cash flow hedge
Total other financial liabilities
NOTE 22. PROVISIONS
$’000
At 1 July 2013
Current
Non-current
Total
Movement
Additional provisions recognised
Unused provision reversed
Utilisation of provision
Acquisition of business
Disposal of business
Net foreign currency exchange differences
Employee
benefits(i)
Decom-
missioning (ii)
Consolidated
Contract
claims/
warranties(iii)
265,458
19,439
284,897
316,388
(12,561)
(326,589)
77
(522)
2,287
5,829
6,701
12,530
1,357
(595)
(1,468)
–
–
26
25,502
1,849
27,351
12,837
(4,574)
(8,754)
–
–
495
Consolidated
2014
$’000
888
74
30,173
–
16,472
47,607
15
3,368
3,383
50,990
2013
$’000
1,588
197
4,373
63
32,492
38,713
11
27,653
27,664
66,377
Other(iv)
Total
29,310
15,028
44,338
41,235
(13,109)
(34,717)
–
(349)
184
326,099
43,017
369,116
371,817
(30,839)
(371,528)
77
(871)
2,992
At 30 June 2014
263,977
11,850
27,355
37,582
340,764
Current
Non-current
Total at 30 June 2014
244,258
19,719
263,977
4,654
7,196
11,850
23,857
3,498
27,355
31,253
6,329
37,582
304,022
36,742
340,764
(i) Employee benefits comprise provision for annual leave, long service leave and other employee entitlements.
(ii) 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.
(iii) Provisions for contract claims and warranties are 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.
84 DOWNER EDI LIMITED
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 23. TAX LIABILITIES
Current
Current tax liabilities
Non-current
a) Deferred tax liabilities
Consolidated
2014
$’000
2013
$’000
Note
9,962
10,623
11,893
2,563
b) Movement in deferred tax liabilities for the financial year
Balance at the beginning of the financial year
Charged to statement of profit or loss as deferred income tax (benefit)
23(d)
Charged to equity
Net foreign currency exchange differences
Disposal of entities and operations
Other
Balance at the end of the financial year (gross)
Set-off of deferred tax assets within the same tax jurisdiction
23(c)
13(b)
Net deferred tax liabilities
c) Deferred tax liabilities at the end of the financial year (prior to offsetting
balances within the same tax jurisdiction) are attributable to:
Inventories
Trade and other receivables
Other current assets
Joint arrangements and associate entities
Property, plant and equipment
Intangible assets
Trade and other payables
Borrowings
Hedges and foreign exchange movements
Other
Total deferred tax liabilities (gross)
d) Amounts charged to statement of profit or loss as deferred income tax (benefit)/expense:
Inventories
Trade and other receivables
Other assets
Joint arrangements and associate entities
Property, plant and equipment
Intangible assets
Trade and other payables
Borrowings
Provisions
Hedges and foreign exchange movements
Other
Deferred tax liabilities in relation to prior years
Charged to statement of profit or loss as deferred income tax (benefit)
157,407
(10,385)
(1,642)
2,164
(396)
3,775
150,923
(139,030)
11,893
7,693
96,973
373
5,870
16,865
7,578
12,844
515
620
1,592
150,923
(17)
(31,622)
8
1,845
(1,654)
317
5,667
12
–
(25)
628
14,456
(10,385)
155,995
(2,790)
201
1,546
(395)
2,850
157,407
(154,844)
2,563
1,515
106,851
34
10,777
21,679
7,920
5,046
493
1,140
1,952
157,407
(724)
(9,238)
(1,118)
(902)
(601)
(46)
(3,396)
20
(84)
127
–
13,172
(2,790)
ANNUAL REPORT 2014 85
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 24. ISSUED CAPITAL
Ordinary shares
435,399,975 ordinary shares (2013: 433,409,429)
Unvested executive incentive shares
6,038,698 ordinary shares (2013: 6,038,698)
200,000,000 Redeemable Optionally Adjustable
Distributing Securities (ROADS) (2013: 200,000,000)
Consolidated
2014
$’000
2013
$’000
1,308,395
1,299,463
(29,139)
(29,139)
178,603
178,603
1,457,859
1,448,927
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
2014
2013
000’s
$’000
000’s
$’000
Fully paid ordinary share capital
Balance at the beginning of the financial year
433,409
1,299,463
429,100
1,278,564
Issue of shares through Dividend
Reinvestment Plan election
1,991
8,932
4,309
20,899
Balance at the end of the financial year
435,400
1,308,395
433,409
1,299,463
Unvested executive incentive shares
Balance at the beginning of the financial year
Vested executive incentive shares transactions
Balance at the end of the financial year
Consolidated
2014
2013
000’s
$’000
000’s
$’000
6,039
–
6,039
(29,139)
–
(29,139)
6,116
(77)
6,039
(29,437)
298
(29,139)
Unvested executive incentive shares are stock market purchases and are held by the Executive Employee Share Plan Trust under
the Long Term Incentive (LTI) plan. From the 2011 LTI plan onwards, no dividends will be distributed on shares held in trust during
the performance measurement and service periods. Accumulated dividends will be paid out to executives after all vesting
conditions have been met. Otherwise, excess net dividends are retained in the trust to be used by the Company to acquire
additional shares on the market for Employee Equity plans.
86 DOWNER EDI LIMITED
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 24. ISSUED CAPITAL – CONTINUED
Redeemable Optionally Adjustable Distributing
Securities (ROADS)
Balance at the beginning and at the end of the
financial year
Consolidated
2014
2013
000’s
$’000
000’s
$’000
200,000
178,603
200,000
178,603
ROADS are perpetual, redeemable, exchangeable preference shares. In accordance with the terms of the ROADS preference
shares, the dividend rate for the one year commencing 15 June 2014 is 7.95% per annum (2013: 6.82% per annum) which is
equivalent to the one year swap rate on 16 June 2014 plus the Step-up margin of 4.05% per annum.
SHARE OPTIONS AND PERFORMANCE RIGHTS
During the financial year, no performance rights (2013: nil) or performance options (2013: nil), in relation to unissued shares,
were granted to senior executives of the Group under the LTI plan. Further details of the key management personnel LTI plan are
contained in the Remuneration Report.
NOTE 25. RESERVES
Hedge reserve
Foreign currency translation reserve
Employee benefits reserve
Total reserves
NOTE 26. ACQUISITION OF BUSINESS
2014
Name of business acquired
Scarriff
Consolidated
2014
$’000
(1,687)
(16,018)
15,278
(2,427)
2013
$’000
1,746
(33,157)
13,950
(17,461)
Principal activity
Pipeline maintenance
Date of
acquisition
01/07/2013
Cost of
acquisition
$’000
4,037
The Group acquired the business of Scarriff Pipelines and business assets of Scarriff Construction (collectively known as “Scarriff”)
to provide a broader market offering of the Group’s water maintenance services.
Total consideration for this acquisition was $4.0 million, which includes a deferred consideration of $1.2 million. At the date of
the acquisition the net asset value of Scarriff was $0.8 million, resulting in a $3.2 million goodwill being recognised. The goodwill
represents the benefit of expected synergies; the expected revenue growth; the future market development and the assembled
workforce of Scarriff. These benefits are not recognised separately from goodwill because they do not meet the recognition
criteria for identifiable intangible assets.
None of the goodwill arising on this acquisition is expected to be deductible for tax purposes.
2013
The Group did not acquire any businesses during the financial year ended 30 June 2013.
NOTE 27. DISPOSAL OF SUBSIDIARY
2014
On 4 February 2014, the Group sold the Spiire NZ business to Brown Consulting (the civil and urban infrastructure services business
of Calibre Group Limited) for its net tangible asset value of NZ$2.2 million comprising cash and deferred consideration.
2013
The Group disposed the Spiire Australia business by way of a management buy-out (MBO) to three of its senior executives for
$1.8 million. The sale transaction was completed on 30 June 2013.
ANNUAL REPORT 2014 87
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 28. 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
b) Non-cash financing and investing activities
During the current financial year $8.9 million (2013: $20.9 million) equity
was issued in respect of Dividend Reinvestment Plan elections.
c) Reconciliation of profit after tax to net cash flows from operating activities
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
Amortisation of deferred costs
Net gain on sale of property, plant and equipment
Loss on disposal of business
Government grant
Foreign exchange (gain)/loss
Decrease in income tax payable
Movement in deferred tax balances
Equity-settled share-based transactions
Impairment of goodwill
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
Non-current trade and other receivables
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
Consolidated
Note
2014
$’000
2013
(restated)(i)
$’000
37(a)
19
3(b)
3(a)
3(a)
3
3(b)
327,678
104,089
431,767
–
459,531
20,347
479,878
(12)
431,767
479,866
215,993
203,986
12,941
266,421
2,375
(4,820)
–
(11,711)
(1,417)
24,288
16,068
1,171
–
1,532
1,676
294,801
3,795
(4,863)
2,111
(10,302)
3,122
17,379
55,997
3,532
6,224
1,319
306,848
374,791
341,786
(32,541)
6,206
(14,876)
(4,487)
(203,813)
(23,936)
(1,137)
(6,616)
60,586
583,427
83,164
(65,733)
6,460
1,035
413
(179,258)
(5,537)
1,343
27,430
(130,683)
448,094
(i) Certain amounts shown here do not correspond to the consolidated Annual Financial Report as at 30 June 2013 and reflect adjustments
made as detailed in Note 39: Impact on Group’s historical financial statements on adoption of AASB 11 Joint Arrangements.
88 DOWNER EDI LIMITED
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014
NOTE 29. COMMITMENTS
a) Capital expenditure commitments
Plant and equipment
Within one year
b) Operating lease commitments
Non-cancellable operating leases relate to premises and plant and
equipment with lease terms of between one to 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 to 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) 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
e) Other service contracts
Within one year
Between one and five year(s)
Consolidated
2014
$’000
2013
$’000
Note
17,612
17,612
45,737
45,737
110,829
212,473
120,761
444,063
16,801
43,224
60,025
(5,553)
54,472
14,017
40,455
54,472
1,853
2,187
–
4,040
(365)
3,675
1,667
2,008
3,675
148,170
221,877
117,405
487,452
44,630
90,746
135,376
(16,489)
118,887
38,037
80,850
118,887
2,547
3,358
184
6,089
(589)
5,500
2,286
3,214
5,500
25,642
55,063
80,705
27,983
89,904
117,887
19
19
19
19
Other service contracts relates to a six-year contract (from December 2011 to November 2017) with Hewlett-Packard Australia Pty
Ltd for the provision of information technology services.
ANNUAL REPORT 2014 89
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 30. CONTINGENT LIABILITIES
Consolidated
2014
$’000
2013
$’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
897,794
918,942
In the ordinary course of business:
i)
The Group is called upon to give guarantees and indemnities to counterparties, relating to the performance of contractual
and financial obligations (including for controlled entities and related parties). Other than as noted above, these
guarantees and indemnities are indeterminable in amount.
ii) The Group is subject to 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) The Group is subject to product liability litigation/claims in relation to performance obligations for specific contracts; such
liability includes the potential costs to carry out rectification works by the Group. Provision is made for the potential costs
of carrying out rectification works based on known claims and previous claims history. However, as the ultimate outcome
of these claims cannot be reliably determined at the date of this report, contingent liability may exist for any amounts that
ultimately become payable in excess of current provisioning levels.
iv) The Group has 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.
v) The Group carries the normal contractor’s and consultant’s liability in relation to services, supply and construction contracts
(for example, liability relating to professional advice, design, completion, workmanship, and damage), as well as liability
for personal injury/property damage. This liability may include claims, disputes and/or litigation/arbitration 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 arbitration/litigation matters in relation to services, supply and construction contracts as well as in relation to
personal injury and property damage claims. Some New Zealand entities in the Group have been named as co-defendants
in several proceedings with projects associated with the “weather tight” homes issue in New Zealand.
vi) Ground subsidence at the Waratah Train Maintenance Facility (“AMF”), located on Manchester Road, Auburn has been
identified. The design and construction of the AMF formed part of the Waratah Train Project, with Reliance Rail contracting
Downer to design and build the AMF. In turn, Downer subcontracted this work to John Holland Pty Ltd. The design and
construction of the areas in which subsidence has been observed formed part of the subcontractor’s design and construct
obligations. Investigations into the causes of the subsidence, the cost of remediation and operational impacts are ongoing.
While it is too early to reliably estimate the total cost of the remediation, in the opinion of the Directors, there is no material
exposure to either Downer EDI Rail Pty Limited or Downer EDI PPP Maintenance Pty Limited arising from the subsidence,
based on the fact that there are a range of recovery options being pursued.
vii) On 27 February 2014, the Group announced that the IMF (Australia) Ltd (IMF) funded shareholder class action had been
settled (“First Class Action”).
Slater & Gordon has also advised that it reserves its position in relation to a second claim arising out of the second
impairment to the Waratah Train Project announced on 27 January 2011, although no basis for this position has been
provided.
viii) On 27 March 2014, Downer was served with a second class action claim alleging breaches of Downer’s continuous
disclosure obligations in connection with the Group’s $190 million impairment to the Waratah Train Project announced on
1 June 2010, i.e. similar facts as the First Class Action (“Second Class Action”).
The Second Class Action has been commenced in the Victorian Supreme Court and the Directors are of the opinion that
disclosure of any further information relating to this matter would be prejudicial to the interests of the Group.
ix) A subsidiary of Downer, Snowden Mining Industry Consultants Inc (an entity incorporated in Canada) (“Snowden”) has been
served with two class action claims issued out of the Ontario Superior Court, Canada. Both claims name Pretium Resources
Inc as the first-named defendant as well as executives of Pretium Resources Inc as defendants. The quantum of the first
claim is CAD $60 million plus unspecified damages (against all defendants) and the quantum of the second claim is CAD
$250 million (against all defendants), with no specific amount sought against Snowden alone.
The claims arise out of Pretium’s Brucejack Project, being a gold reserve located in British Columbia. Snowden was one of
Pretium’s advisers for the project. Based on currently available information, the Directors are of the view that there is no
material exposure to Snowden. The Directors are of the opinion that disclosure of any further information relating to this
matter would be prejudicial to the interests of the Group.
90 DOWNER EDI LIMITED
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014
NOTE 30. CONTINGENT LIABILITIES – CONTINUED
x) Locomotive Demand Power Pty Ltd (LDP), a wholly owned subsidiary of the Group, is party to a Master Rental Agreement
(MRA) with Aurizon Ltd. Under the terms of the MRA, Aurizon leases nine locomotives from LDP and pays rental and
maintenance fees. Separately, LDP has obligations to National Australia Bank which extend to 2019 under a financing/lease
back facility for the locomotives. A dispute has arisen between LDP and Aurizon as to whether or not Aurizon is obligated to
extend the duration of the MRA for a further three years. The Group has instigated a dispute resolution process under the
MRA to enforce the additional three-year term and is in the process of finalising a claim which will be filed in the New South
Wales Supreme Court. LDP is claiming a declaration regarding the term of the lease, or in the alternative, damages in the
order of $20 million plus interest and costs. The Directors are of the opinion that disclosure of any further information relating
to this matter would be prejudicial to the interests of the Group.
xi) Under the terms of the agreement reached between the NSW Government and Reliance Rail, the Group has a contingent
commitment to pay Reliance Rail $12.5 million in 2018 should it be required to refinance Reliance Rail’s senior debt.
NOTE 31. 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 (ii)
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
Note
2014
$’000
2013
(restated)(i)
$’000
13,355,354
13,340,192
(12,953,947)
(12,671,384)
401,407
668,808
10
18
557,410
(156,003)
401,407
910,075
(241,267)
668,808
(i) Certain amounts shown here do not correspond to the consolidated Annual Financial Report as at 30 June 2013 and reflect adjustments
made as detailed in Note 39: Impact on Group’s historical financial statements on adoption of AASB 11 Joint Arrangements.
(ii) Prior year included $60.4 million ($440.0 million less $379.6 million utilised) provision for the Waratah Train Project. The Waratah Train Project is
substantially completed. Refer Note 1 for further details.
NOTE 32. SUBSEQUENT EVENTS
At the date of this report there is no matter or circumstance 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:
(a) The Group’s operations in future financial years;
(b) The results of those operations in future financial years; or
(c) The Group’s state of affairs in future financial years.
NOTE 33. CONTROLLED ENTITIES
Name of controlled entity
A F Downer Memorial Scholarship Trust
ACN 066 652 177 Pty Ltd (iii)
Advanced Separation Engineering Australia Pty Ltd (ii)
Chan Lian Construction Pte Ltd
Chang Chun Ao Da Technical Consulting Co Ltd
Coomes AC Consulting Pty Ltd (iii)
Coomes Consulting Group Unit Trust(iii)
Corke Instrument Engineering (Australia) Pty Ltd (iii)
DBS Chile SpA(v)
Dean Adams Consulting Pty Ltd
DGL Investments Limited
Country of
incorporation
New Zealand
Australia
Australia
Singapore
China
Australia
Australia
Australia
Chile
Australia
New Zealand
Ownership interest
2014
%
100
–
100
100
100
–
–
–
100
100
100
2013
%
100
100
100
100
100
100
100
100
–
100
100
ANNUAL REPORT 2014 91
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 33. CONTROLLED ENTITIES – CONTINUED
Name of controlled entity
Downer Australia Pty Ltd
Downer Construction (Fiji) Limited
Downer Construction (New Zealand) Limited
Downer Construction PNG Limited
Downer EDI Associated Investments Pty Ltd
Downer EDI Consulting Pty Ltd (ii)
Country of
incorporation
Australia
Fiji
New Zealand
PNG
Australia
Australia
Downer EDI Engineering Communications Limited (iv)
New Zealand
Downer EDI Engineering Company Pty Limited
Downer EDI Engineering Construction (Australia) Pty Limited (ii)
Downer EDI Engineering CWH Pty Limited
Downer EDI Engineering Electrical Pty Ltd
Australia
Australia
Australia
Australia
Downer EDI Engineering Group Limited (iv)
New Zealand
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 Ltd
Downer EDI Engineering (M) Sdn Bhd
Downer EDI Engineering (S) Pte Ltd
Downer EDI Engineering Transmission Pty Ltd
Downer EDI Group Insurance Pte Ltd
Downer EDI Limited Tax Deferred Employee Share Plan
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 Rail (Hong Kong) Limited
Downer EDI Rail Pty Ltd
Downer EDI Resources Holdings Pty Limited (ii)
Downer EDI Services Pty Ltd
Downer EDI Works (Hong Kong) Limited
Downer EDI Works Pty Ltd
Downer EDI Works Vanuatu Limited
Downer Energy Systems Pty Limited
Downer Group Finance International Pty Ltd (ii)
Downer Group Finance Pty Limited
Downer Holdings Pty Limited
Downer MBL Pty Limited (iii)
Downer Mining Regional NSW Pty Ltd (v)
92 DOWNER EDI LIMITED
Australia
Thailand
Australia
New Zealand
New Zealand
Australia
Australia
Thailand
Malaysia
Singapore
Australia
Singapore
Australia
New Zealand
Australia
Australia
Australia
Hong Kong
Australia
Australia
Australia
Hong Kong
Australia
Vanuatu
Australia
Australia
Australia
Australia
Australia
Australia
Ownership interest
2014
%
2013
%
100
100
100
100
100
100
–
100
100
100
100
–
100
100
100
100
100
100
100
100
100
100
100
100
100
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 STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 33. CONTROLLED ENTITIES – CONTINUED
Name of controlled entity
Downer New Zealand Limited
Downer PPP Investments Pty Ltd
Downer Professional Services Limited (v)
Downer Pte Ltd
Downer Singapore Pte Ltd
Duffill Watts Pte Ltd
Duffill Watts Vietnam Ltd (ii)
EDI Rail PPP Maintenance Pty Ltd
EDICO Pty Ltd
Emoleum Partnership
Emoleum Road Services Pty Ltd
Emoleum Roads Group Pty Ltd
Emoleum Services Pty Limited
Evans Deakin Industries Pty Ltd
Faxgroove Pty. Limited
Locomotive Demand Power Pty Ltd
Lowan (Management) Pty. Ltd.
MD Mineral Technologies Private Limited
MD Mineral Technologies SA (Pty) Ltd.
MD Mining and Mineral Services (Pty) Ltd.
Mineral Technologies Comercio de Equipamentos para
Processamento de Minerais LTD
Mineral Technologies (Holdings) Pty Ltd
Mineral Technologies, Inc.
Mineral Technologies Pty Ltd
Otraco Botswana (Proprietary) Limited
Otraco Brasil Gerenciamento de Pneus Ltda
Otraco Canada Inc.(iii)
Otraco Chile SA
Otraco International Pty Ltd
Otracom Pty Ltd
Otraco Southern Africa (Pty) Ltd
Otraco Tyre Management Namibia (Proprietary) Limited (vi)
Primary Producers Improvers Pty. Ltd.
PT Duffill Watts Indonesia
PT Otraco Indonesia
QCC Resources Pty Ltd
Quality Coal Consulting Pty Ltd
Rail Services Victoria Pty Ltd
REJV Services Pty Ltd
Reussi Pty Ltd
Richter Drilling (PNG) Limited
Country of
incorporation
New Zealand
Australia
New Zealand
Singapore
Singapore
Singapore
Vietnam
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
India
South Africa
South Africa
Brazil
Australia
USA
Australia
Botswana
Brazil
Canada
Chile
Australia
Australia
South Africa
Namibia
Australia
Indonesia
Indonesia
Australia
Australia
Australia
Australia
Australia
PNG
Ownership interest
2014
%
2013
%
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
70
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
70
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
ANNUAL REPORT 2014 93
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 33. CONTROLLED ENTITIES – CONTINUED
Name of controlled entity
Rimtec Pty Ltd
Rimtec USA Inc.
Roche Bros. (Hong Kong) Limited (ii)
Roche Bros. Superannuation Pty. Ltd.
Roche Contractors Pty Ltd (iii)
Roche Highwall Mining Pty Ltd (ii)
Roche Mining (PNG) Limited (ii)
Roche Services Pty Ltd
RPC Roads Pty Ltd
SACH Infrastructure Pty Ltd
Sillars (B. & C.E.) Limited
Sillars (TMWD) Limited
Sillars Holdings Limited
Sillars Road Construction Limited
Singleton Bahen Stansfield Pty Ltd (iii)
Snowden Consultoria do Brasil Limitada
Snowden Holdings Pty Ltd
Snowden Mining Industry Consultants (Proprietary) Ltd
Snowden Mining Industry Consultants Inc.
Snowden Mining Industry Consultants Limited
Snowden Mining Industry Consultants Pty Ltd
Snowden Technologies Pty Ltd
Snowden Training (Pty) Ltd
Southern Asphalters Pty Ltd
Spiire New Zealand Limited (i)
Techtel Training & Development Limited
TSE Wall Arlidge Limited
Underground Locators Limited
Waste Solutions Limited
Works Finance (NZ) Limited
Works Infrastructure Cortex Resources Joint Venture Limited
Works Infrastructure (Holdings) Limited
Works Infrastructure Harker Underground Construction Joint
Venture Limited
Works Infrastructure Limited
(i) Entity disposed during the financial year ended 30 June 2014.
Country of
incorporation
Australia
USA
Hong Kong
Australia
Australia
Australia
PNG
Australia
Australia
Australia
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Australia
Brazil
Australia
South Africa
Canada
United Kingdom
Australia
Australia
South Africa
Australia
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
United Kingdom
New Zealand
United Kingdom
Ownership interest
2014
%
2013
%
100
100
100
100
–
100
100
100
100
100
100
100
100
100
–
100
100
100
100
100
100
100
100
100
–
90
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
90
100
100
100
100
100
100
100
100
(ii) Indicates entities currently undergoing liquidation as part of a Group rationalisation process.
(iii) Indicates entities liquidated during the financial year ended 30 June 2014.
(iv) Indicates entities amalgamated into Downer New Zealand Limited on 24 June 2014.
(v) Indicates entities incorporated during the financial year ended 30 June 2014.
(vi) Formerly Otraco Tyre Management Namibia (Pty) Ltd.
94 DOWNER EDI LIMITED
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 34. RELATED PARTY INFORMATION
a) Transactions within the wholly-owned Group
Aggregate amounts receivable from and payable to wholly-owned subsidiaries are included within total assets and liabilities
balances as disclosed in Note 38. 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.
b) Equity interests in related parties
Equity interests in subsidiaries
Details of the percentage of ordinary shares held in controlled entities are disclosed in Note 33.
Equity interests in joint arrangements and associate entities
Details of interests in joint arrangements and associate entities are disclosed in Note 15.
c) Controlling entity
The parent entity of the Group is Downer EDI Limited.
NOTE 35. KEY MANAGEMENT PERSONNEL COMPENSATION
Short-term employee benefits
Post-employment benefits
Share-based payments
Consolidated
2014
$
2013
$
14,097,355
12,898,151
1,302,590
602,885
1,100,681
960,549
16,002,830
14,959,381
NOTE 36. EMPLOYEE DISCOUNT 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.
No shares were issued under the Employee Discount Share Plan during the years ended 30 June 2014 and 30 June 2013.
ANNUAL REPORT 2014 95
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 37. 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, provide adequate returns to shareholders and maintain an appropriate
capital structure to optimise its cost of capital.
The consolidated entity monitors its gearing ratio determined as the ratio of Net Debt to Total Capitalisation. The gearing ratios
at 30 June 2014 and 30 June 2013 were as follows:
Current borrowings
Non-current borrowings
Gross debt(ii)
Adjustment for the mark to market of derivatives and deferred finance charges
Adjusted gross debt
Less: cash and cash equivalents
Net debt
Equity(iii)
Total capitalisation (Net debt + Equity)
Gearing ratio (iv)
Off balance sheet debt
Operating leases (v)
Gearing ratio (including off balance sheet debt)
Note
19
19
9
Consolidated
2014
$’000
137,715
285,513
423,228
41,262
464,490
(431,767)
32,723
1,962,011
1,994,734
1.6%
2013
(restated)(i)
$’000
237,946
444,256
682,202
40,416
722,618
(479,878)
242,740
1,826,574
2,069,314
11.7%
166,830
9.2%
231,820
20.6%
(i) Certain amounts shown here do not correspond to the consolidated Annual Financial Report as at 30 June 2013 and reflect adjustments
made as detailed in Note 39: Impact on Group’s historical financial statements on adoption of AASB 11 Joint Arrangements.
(ii) Gross debt is defined as all borrowings.
(iii) Equity consists of all issued capital and reserves.
(iv) Net debt/Total capitalisation.
(v) The Group enters into operating leases with respect to plant and equipment utilised in its businesses. The present value of these leases
at 30 June 2014 discounted at 10% per annum (discount rate prescribed by the relevant loan covenant) was $166.8 million (June 2013:
$231.8 million).
(b) Financial risk management objectives
The consolidated entity’s Treasury function manages the Group’s funding, liquidity and financial risks. These risks include foreign
exchange, interest rate, commodity and counterparty credit risk.
The consolidated entity may enter into a variety of derivative financial instruments to manage its exposures 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 currency risk associated with foreign currency denominated borrowings;
iii) Interest rate swaps to mitigate the risk of rising interest rates; and
iv) Fuel Index derivatives in relation to its input costs.
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 Policy.
96 DOWNER EDI LIMITED
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 37. FINANCIAL INSTRUMENTS – CONTINUED
(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. As a result, exposures to exchange
rate fluctuations arise. Exchange rate exposures are managed within approved policy parameters, utilising forward foreign
exchange contracts, options and cross currency swaps.
The carrying amounts of the consolidated entity’s material 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)
Financial assets(i)
Financial liabilities(i)
2014
$’000
30,061
846
36
711
31,654
2013
$’000
38,699
775
1,601
6,138
47,213
2014
$’000
22,905
267
59
906
24,137
2013
$’000
25,660
263
1,083
–
27,006
(i) The above table shows foreign currency financial assets and liabilities in Australian dollar equivalent.
The table excludes foreign currency financial assets and liabilities which have been hedged back into Australian dollars.
ANNUAL REPORT 2014 97
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 37. FINANCIAL INSTRUMENTS – CONTINUED
FOREIGN CURRENCY FORWARD CONTRACTS
The following table summarises by currency the Australian dollar (AUD) value (unless otherwise stated) of material forward
exchange contracts outstanding as at reporting date:
Weighted average
exchange rate
2014
2013
0.9140
0.9320
0.9019
0.8343
0.8722
0.9156
0.9883
0.9834
0.9736
1.0041
0.9828
0.9992
0.6594
0.6785
0.6726
0.7387
0.7207
0.6983
–
–
–
6.2913
6.3021
6.3153
10.0354
10.0748
–
9.2982
–
–
1.2292
1.2339
1.2491
1.2433
1.2469
1.2444
–
–
–
1.2159
1.1865
1.1878
5.9036
5.8422
5.7806
6.2467
6.1750
5.9570
Outstanding contracts
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 AUD / Sell ZAR
Less than 3 months
3 to 6 months
Later than 6 months
Buy NZD / Sell AUD
Less than 3 months
3 to 6 months
Later than 6 months
Buy AUD / Sell NZD
Less than 3 months
3 to 6 months
Later than 6 months
Buy CNY / Sell AUD
Less than 3 months
3 to 6 months
Later than 6 months
98 DOWNER EDI LIMITED
Foreign currency
Contract value
Fair value
2014
FC’000
2013
FC’000
2014
$’000
2013
$’000
2014
$’000
2013
$’000
7,954
8,033
7,626
43,273
33,842
60,277
8,744
8,793
8,458
43,317
34,076
63,057
23,613
137,392
25,995
140,450
2,427
875
2,135
5,437
998
237
534
1,769
–
–
–
–
936
999
–
1,908
1,238
4,601
7,747
7,803
2,822
21,156
31,781
139,000
132,000
116,000
387,000
1,085
–
–
1,935
1,085
700
434
3,023
4,157
–
–
–
–
458
229
129
816
734
734
5,593
7,061
850
18,802
41,718
61,370
358
329
1,633
2,320
2,899
999
2,332
6,230
1,513
349
794
2,656
–
–
–
–
93
99
–
192
570
352
2,420
3,342
–
–
–
–
78
39
22
139
1,871
1,169
4,581
7,621
9,950
3,837
30,586
44,373
22,094
20,944
18,369
61,407
117
–
–
117
595
590
4,508
5,693
712
15,846
35,125
51,683
57
53
275
385
(262)
(191)
(206)
(659)
313
64
28
405
(59)
(1)
(4)
(64)
–
–
–
–
1
–
–
1
79
49
342
470
–
–
–
–
1
–
–
1
4,119
3,223
3,806
11,148
(220)
(195)
(520)
(935)
1,165
214
119
1,498
387
284
209
880
(3)
–
–
(3)
26
31
189
246
(3)
(61)
(133)
(197)
6
5
16
27
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 37. FINANCIAL INSTRUMENTS – CONTINUED
FOREIGN CURRENCY SENSITIVITY ANALYSIS
The Group is mainly exposed to the following foreign currencies: 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 movements in the Australian dollar against relevant foreign currencies.
The percentages disclosed below represent the Group’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 exchange 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
– 15% rate change
+ 15% rate change
EUR impact
– 15% rate change
+ 15% rate change
CNY impact (iii)
– 15% rate change
+ 15% rate change
NZD impact
– 10% rate change
+ 10% rate change
– 15% rate change
+ 15% rate change
GBP impact
– 15% rate change
+ 15% rate change
Profit/(loss)(i)
Equity(ii)
2014
$’000
2013
$’000
2014
$’000
2013
$’000
1,263
(933)
2,918
(2,157)
3,427
(2,509)
24,598
(18,181)
(34)
25
1,083
(801)
–
–
–
–
102
(76)
(4)
3
–
–
(5,702)
4,665
–
–
91
(68)
385
(383)
25
(18)
–
–
680
(502)
–
–
6,770
(6,770)
11,874
(8,812)
658
(539)
–
–
–
–
(i) This is mainly as 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 as a result of the changes in the value of forward foreign exchange contracts designated as cash flow hedges.
(iii) A portion of the Group’s forward foreign exchange contracts in the prior year relates to the USD/CNY pair. Therefore, the above prior year
sensitivity analysis includes assumed USD rate changes.
In the Group’s opinion, the above sensitivity analysis is not fully representative of the underlying foreign exchange risk as the year
end exposure used in this analysis, does not necessarily reflect the exposure during the course of the year.
CROSS CURRENCY INTEREST RATE SWAPS
Under cross currency interest rate swaps, the consolidated entity has agreed to exchange certain foreign currency loan
principal and interest amounts at agreed future dates at fixed exchange and interest rates. Such contracts enable the
consolidated entity to eliminate the risk of adverse movements in foreign exchange rates and interest rates related to foreign
currency denominated borrowings.
ANNUAL REPORT 2014 99
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 37. FINANCIAL INSTRUMENTS – CONTINUED
The following table details the Australian dollar equivalent of cross currency interest rate swaps outstanding as at reporting date:
Outstanding contracts
Buy USD / Sell AUD
Less than 1 year
1 to 2 year(s)
5 years or more
Weighted average
interest rate
(including credit margin)
2014
%
2013
%
Weighted average
exchange rate
2014
2013
Contract value
Fair value
2014
$’000
2013
$’000
2014
$’000
2013
$’000
8.0
–
6.8
–
8.0
6.8
0.6787
–
103,141
–
(28,877)
–
–
0.6787
–
103,141
–
(26,713)
0.7220
0.7220
9,695
9,695
(1,893)
(1,407)
112,836
112,836
(30,770)
(28,120)
The above cross currency interest rate swap contracts are designated and effective as cash flow hedges.
(e) Interest rate risk management
The consolidated entity is exposed to interest rate risk as entities borrow funds at 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 debt securities.
The consolidated entity’s exposure to interest rates on financial assets and financial liabilities is detailed in the table below:
Floating interest rates – cash flow exposure
Bank overdrafts (ii)
Bank loans
AUD
SGD
AUD medium term notes
Series 2010-1
Cash and cash equivalents
Cash flow exposure – total
Fixed interest rates – fair value exposure
Bank loans
AUD
USD notes
AUD medium term notes
Series 2009-1
Series 2009-2(iii)
Series 2013-1(iii)
Finance lease and hire purchase liabilities
Fair value exposure – total
Weighted average
effective interest rate
(including credit margin)
Consolidated
2014
%
2013
%
2014
$’000
2013
(restated)(i)
$’000
–
4.1
–
5.4
2.7
4.9
8.0
7.2
–
5.8
6.0
4.4
4.4
2.4
5.8
2.7
4.3
7.8
7.2
9.8
5.8
6.6
–
12
47,701
–
59,701
1,281
18,900
31,500
(431,767)
(479,878)
(365,166)
(387,384)
21,678
112,563
24,692
111,391
55,501
69,654
–
150,000
150,000
150,000
58,147
124,387
397,889
630,124
All interest rates in the above table reflect rates in the currency of the relevant loan other than USD notes where the AUD rate
under the cross currency swap is used.
(i) Certain amounts shown here do not correspond to the consolidated Annual Financial Report as at 30 June 2013 and reflect adjustments
made as detailed in Note 39: Impact on Group’s historical financial statements on adoption of AASB 11 Joint Arrangements.
(ii) Bank overdrafts located in Australia (AUD denominated).
(iii) Coupon rate.
100 DOWNER EDI LIMITED
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 37. 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 swap contracts
Weighted average
interest rate
Notional principal amount
Fair value
AUD interest rate swaps
2 to 5 years
2014
%
2013
%
2014
$’000
2013
$’000
2014
$’000
2013
$’000
5.1
5.1
66,863
66,863
84,707
84,707
(2,771)
(2,771)
(3,906)
(3,906)
The above interest rate swap contracts are designated as effective cash flow hedges.
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 period.
The selected basis points increase or decrease represents the Group’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.
Sensitivities have been based on an increase in interest rates by 75 basis points (2013: 100 basis points) and a decrease by
75 basis points (2013: 100 basis points) across the yield curve.
Increase in rate + 75 bp (2013: + 100 bp)
Profit/(loss)(i)
Equity(ii)
Decrease in rate – 75 bp (2013: – 100 bp)
Profit/(loss)(i)
Equity(ii)
Consolidated
2014
$’000
2,770
887
(2,770)
(907)
2013
$’000
3,815
2,143
(3,815)
(2,214)
(i) This is mainly attributable to the floating rate valuation component of its interest rate swaps and to interest rate changes on cash and
cash equivalents.
(ii) This is mainly on account of the change in the valuation of cross currency interest rate swaps held by the consolidated entity and
designated as cash flow hedges arising from shifts in the interest rate curves of the relevant currency pairs.
ANNUAL REPORT 2014 101
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 37. FINANCIAL INSTRUMENTS – CONTINUED
(f) Commodity price risks
The consolidated entity is exposed to commodity price risks arising from variability in bitumen prices. The consolidated entity
uses Fuel Oil Index derivatives to manage this exposure. No such hedging was in place at 30 June 2014.
(g) Credit risk management
Credit risk refers to the risk that a financial counterparty will default on its contractual obligations, resulting in a 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. Refer to Note 10 for details on
credit risk arising from trade and other receivables.
The preferred credit risk on derivative financial instruments is to counterparties that have minimum long-term credit ratings from
Standard & Poor’s of no less than AA– (or equivalent from other rating agencies). Due to the general downward migration of
the credit ratings of bank counterparties over recent years, the consolidated entity has exposure to banks below this rating
threshold. Three bank counterparties are rated A+ and one is rated BBB+. Furthermore as a result of a global restructure, one
counterparty is no longer rated by Standard & Poor’s. The transactions with the BBB+ and unrated counterparties were entered
into more than five years ago when these entities had ratings of at least AA–. From a commercial perspective, Downer has no
current credit exposure to either BBB+ or unrated counterparties as the underlying derivatives are out-the-money.
Credit risk arising from cash balances held with banks is managed by Group Treasury. Investments of surplus funds are generally
only made with counterparties that have a minimum AA– credit rating. On a specific approval basis, investments for limited
amounts and short tenors are made on occasions with A rated counterparties.
Counterparty credit limits and the related credit acceptability of counterparties, 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 continually monitoring forecast and actual cash flows and where possible by matching the maturity profiles of financial assets
and liabilities. Included in Note 20 is a listing of committed undrawn debt facilities.
102 DOWNER EDI LIMITED
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 37. 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.
$’000
2014
Financial liabilities
Trade payables
Supplier finance
Bank loans
USD notes
AUD medium term notes (Series 2009-1)
AUD medium term notes (Series 2010-1)
AUD medium term notes (Series 2013-1)
Total borrowings including interest
Finance lease and hire purchase liabilities
Derivative instruments(ii)
Cross currency interest rate swaps (iii)
– Receive leg
– Pay leg
Interest rate swaps
Foreign currency forward contracts
Total
2013
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)
AUD medium term notes (Series 2013-1)
Less than
1 year
(restated)(i)
1 to 2
years
2 to 3
years
3 to 4
years
4 to 5
years
More than
5 years
348,111
7,672
18,784
77,420
15,617
13,461
8,625
141,579
18,654
(77,527)
107,226
1,518
13
–
–
–
–
18,177
483
14,568
483
–
–
7,139
483
15,057
14,500
13,881
6,472
8,625
48,814
25,121
(483)
659
1,035
(168)
–
8,625
38,176
10,084
(483)
659
518
–
–
8,625
30,128
10,025
(483)
659
167
–
–
–
5,835
483
–
–
154,313
160,631
181
(483)
659
–
–
–
–
2,816
7,667
–
–
–
10,483
–
(7,677)
10,031
–
–
539,574
74,978
48,954
40,496
160,988
12,837
450,150
12
5,845
20,816
6,027
16,305
157,313
14,194
8,625
–
–
–
18,864
79,798
15,708
–
13,481
8,625
–
–
–
18,417
497
15,272
–
6,487
8,625
49,298
29,772
(492)
659
774
(57)
–
–
–
15,850
497
14,710
–
–
8,625
39,682
14,804
(492)
659
278
–
–
–
–
6,192
497
13,975
–
–
8,625
29,289
26,379
(492)
659
74
–
–
–
–
8,723
8,400
–
–
–
154,313
171,436
184
(8,308)
10,690
–
–
Total borrowings including interest
229,137
136,476
Finance lease and hire purchase liabilities
47,176
23,150
Derivative instruments (ii)
Cross currency interest rate swaps (iii)
– Receive leg
– Pay leg
Interest rate swaps
Foreign currency forward contracts
(5,961)
8,974
1,905
(12,558)
(78,927)
107,226
1,401
(147)
Total
718,823
189,179
79,954
54,931
55,909
174,002
(i) Certain amounts shown here do not correspond to the consolidated Annual Financial Report as at 30 June 2013 and reflect adjustments
made as detailed in Note 39: Impact on Group’s historical financial statements on adoption of AASB 11 Joint Arrangements.
(ii) Includes assets and liabilities.
(iii) Bond basis.
ANNUAL REPORT 2014 103
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 37. FINANCIAL INSTRUMENTS – CONTINUED
(i) Fair value of financial instruments
The financial liability disclosed below is recorded in the financial statements at its carrying amount. The fair value is shown in the
table below:
Total borrowings (ii)
Carrying amount
Fair value
2014
$’000
2013
(restated)(i)
$’000
2014
$’000
365,081
557,815
384,163
2013
$’000
562,149
(i) Certain amounts shown here do not correspond to the consolidated Annual Financial Report as at 30 June 2013 and reflect adjustments
made as detailed in Note 39: Impact on Group’s historical financial statements on adoption of AASB 11 Joint Arrangements.
(ii) Total borrowings exclude finance leases and hire purchase liabilities.
Fair value measurements
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 (refer to valuation techniques below); 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.
The Group measures and recognises the following assets and liabilities at fair value on a recurring basis:
– Financial assets/liabilities at Fair Value Through Profit or Loss (FVTPL); and
– Derivative financial instruments.
Fair value measurements recognised in the statement of financial position
The Group provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, split
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 in active and liquid 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); and
– 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.
104 DOWNER EDI LIMITED
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 37. FINANCIAL INSTRUMENTS – CONTINUED
The following table presents the Group’s assets and liabilities measured and recognised at fair value at 30 June 2014.
Comparative information for non-financial assets has not been provided as permitted by the transitional provisions of the
new rules.
2014
$’000
Financial assets in designated cash flow hedge
accounting relationships
Foreign currency forward contracts
Financial assets at fair value through profit or loss
Unquoted equity investments
Foreign currency forward contracts
Financial liabilities in designated cash flow hedge
accounting relationships
Foreign currency forward contracts
Cross currency and interest rate swaps
Financial liabilities at fair value through profit or loss
Foreign currency forward contracts
2013
$’000
Financial assets in designated cash flow hedge
accounting relationships
Foreign currency forward contracts
Financial assets at fair value through profit or loss
Unquoted equity investments
Foreign currency forward contracts
Financial liabilities in designated cash flow hedge
accounting relationships
Foreign currency forward contracts
Cross currency and interest rate swaps
Financial liabilities in designated fair value hedge
accounting relationships
Fair value commodity hedges
Financial liabilities at fair value through profit or loss
Foreign currency forward contracts
Level 1
Level 2
Level 3
Total
–
–
–
–
–
–
–
–
820
–
311
1,131
903
33,541
74
34,518
–
820
5,151
–
5,151
–
–
–
–
5,151
311
6,282
903
33,541
74
34,518
Level 1
Level 2
Level 3
Total
–
–
–
–
–
–
–
–
–
14,108
–
14,108
–
350
14,458
1,599
32,026
63
197
33,885
6,458
–
6,458
–
–
–
–
–
6,458
350
20,916
1,599
32,026
63
197
33,885
ANNUAL REPORT 2014 105
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 37. FINANCIAL INSTRUMENTS – CONTINUED
Valuation techniques used to derive fair values (Level 2)
The fair value of financial instruments that are not traded in an active and liquid market (for example, over-the-counter
derivatives) is determined using valuation techniques. These valuation techniques maximise the use of observable market
data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to fair value
an instrument are observable, the instrument is included in Level 2. If one or more of the significant inputs is not based on
observable market data, the instrument is included in Level 3. This is the case for unlisted equity securities.
Specific valuation techniques used to value financial instruments include:
– The use of quoted market prices or dealer quotes for similar instruments;
– The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows based on observable
yield curves;
– The fair value of forward foreign exchange contracts is determined using forward exchange rates prevailing at the balance
sheet date; and
– Other techniques, such as discounted cash flow analysis, are used to determine fair value for the remaining
financial instruments.
Fair value measurements using significant unobservable inputs (Level 3)
The fair values of unquoted equity investments were determined based on the consolidated entity’s interest in the net assets of
the unquoted entities. Where practical the valuations incorporate observable market data. Assumptions are generally required
to be made with regard to future expected revenues and discount rates.
Reconciliation of Level 3 fair value measurements of financial assets
During the year there were no transfers between Level 1, Level 2 and Level 3 fair value hierarchies. The table below analyses the
changes in Level 3 instruments as follows:
Unquoted equity investments
Opening balance
Purchases
Return on investment
Other
Closing balance
Fair value through profit or loss
2014
$’000
6,458
–
(1,280)
(27)
5,151
2013
$’000
5,188
1,400
(130)
–
6,458
The table above only includes financial assets. There are no financial liabilities measured at fair value that are classified as
Level 3.
Fair value of financial assets and liabilities
Unquoted equity investments
Changing inputs to the Level 3 valuations to reasonably possible alternative assumptions would not change significantly
amounts recognised in profit or loss, total assets or total liabilities, or total equity.
106 DOWNER EDI LIMITED
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 38. 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 benefits reserve
Total equity
(b) Financial performance
Profit for the year
Total comprehensive income
Company
2014
$’000
2013
$’000
484,338
933,855
459,898
948,905
1,418,193
1,408,803
49,300
1,756
51,056
49,808
2,416
52,224
1,367,137
1,356,579
1,279,256
1,270,324
72,603
72,305
15,278
13,950
1,367,137
1,356,579
95,794
95,794
26,837
26,837
(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 2014 other than those disclosed in Note 30 to the financial statements.
(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 2014.
ANNUAL REPORT 2014 107
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 39. IMPACT ON GROUP’S HISTORICAL FINANCIAL STATEMENTS ON ADOPTION OF AASB 11
JOINT ARRANGEMENTS
As a result of the adoption of AASB 11 Joint Arrangements, certain amounts previously disclosed in the Group historical
financial statements have been adjusted to reflect the retrospective impact of the change in accounting policy adopted from
1 July 2013.
The following tables summarise the adjustment made to the Group’s consolidated statement of profit or loss and consolidated
statement of cash flows for the year ended 30 June 2013, and to the Group’s consolidated statement of financial position as at
1 July 2012 and 30 June 2013.
IMPACT ON CONSOLIDATED STATEMENT OF PROFIT OR LOSS
Revenue from ordinary activities
Other income
Total revenue
Employee benefits expense
Raw materials and consumables used
Subcontractor costs
Plant and equipment costs
Communication expenses
Occupancy costs
Professional fees (i)
Travel and accommodation expenses
Other expenses from ordinary activities (i)
Depreciation and amortisation
Share of net profit of joint ventures and associates
Individually significant item
Earnings before interest and tax
Finance income
Finance costs
Profit before income tax
Income tax expense
Profit after income tax
Profit for the year that is attributable to:
– Non-controlling interest
– Members of the parent entity
Total profit for the year
Earnings per share (cents)
– Basic earnings per share
– Diluted earnings per share
June 2013
As previously
reported
$’000
Consolidated
Change in
accounting
policy
$’000
June 2013
restated
$’000
8,370,151
406,224
8,776,375
4,863
–
4,863
8,375,014
406,224
8,781,238
(2,910,974)
(1,735,777)
(1,706,120)
(976,538)
(89,021)
(128,505)
(46,874)
(122,301)
(59,975)
(294,801)
66,205
(11,456)
(98,395)
(25,622)
(180,912)
(43,366)
(1,449)
(3,757)
(393)
(12,339)
(814)
–
(39,242)
–
(3,009,369)
(1,761,399)
(1,887,032)
(1,019,904)
(90,470)
(132,262)
(47,267)
(134,640)
(60,789)
(294,801)
26,963
(11,456)
(8,016,137)
(406,289)
(8,422,426)
358,877
4,712
(71,900)
(67,188)
291,689
(87,703)
203,986
7
203,979
203,986
45.7
43.1
(65)
67
(2)
65
–
–
–
–
–
–
–
–
358,812
4,779
(71,902)
(67,123)
291,689
(87,703)
203,986
7
203,979
203,986
45.7
43.1
(i) The 2013 balances have 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.
108 DOWNER EDI LIMITED
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 39. IMPACT ON GROUP’S HISTORICAL FINANCIAL STATEMENTS ON ADOPTION OF AASB 11
JOINT ARRANGEMENTS – CONTINUED
IMPACT ON CONSOLIDATED STATEMENT OF FINANCIAL POSITION
ASSETS
Current assets
Cash and cash equivalents
Trade and other receivables
Other financial assets
Inventories
Current tax assets
Other assets
Assets classified as held for sale
Total current assets
Non-current assets
Trade and other receivables
Interest in joint ventures and associates
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
June 2013
As previously
reported
$’000
Consolidated
Change in
accounting
policy
$’000
473,733
1,441,242
24,918
349,880
13,765
43,763
14,289
6,145
75,320
–
–
–
1,628
–
June 2013
restated
$’000
479,878
1,516,562
24,918
349,880
13,765
45,391
14,289
2,361,590
83,093
2,444,683
999
68,245
1,150,827
571,773
9,624
5,830
3,134
1,810,432
4,172,022
–
(15,334)
3
–
–
–
–
999
52,911
1,150,830
571,773
9,624
5,830
3,134
(15,331)
67,762
1,795,101
4,239,784
1,209,001
67,750
1,276,751
237,934
38,713
326,099
10,623
12
–
–
–
237,946
38,713
326,099
10,623
1,822,370
67,762
1,890,132
5,578
444,256
27,664
43,017
2,563
523,078
2,345,448
1,826,574
–
–
–
–
–
–
67,762
–
5,578
444,256
27,664
43,017
2,563
523,078
2,413,210
1,826,574
ANNUAL REPORT 2014 109
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 39. IMPACT ON GROUP’S HISTORICAL FINANCIAL STATEMENTS ON ADOPTION OF AASB 11
JOINT ARRANGEMENTS – CONTINUED
IMPACT ON CONSOLIDATED STATEMENT OF FINANCIAL POSITION – CONTINUED
EQUITY
Issued capital
Reserves
Retained earnings
Parent interests
Non-controlling interest
Total equity
ASSETS
Current assets
Cash and cash equivalents
Trade and other receivables
Other financial assets
Inventories
Current tax assets
Other assets
Total current assets
Non-current assets
Trade and other receivables
Interest in joint ventures and associates
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
110 DOWNER EDI LIMITED
June 2013
As previously
reported
$’000
Consolidated
Change in
accounting
policy
$’000
1,448,927
(17,461)
395,123
1,826,589
(15)
1,826,574
–
–
–
–
–
–
June 2013
restated
$’000
1,448,927
(17,461)
395,123
1,826,589
(15)
1,826,574
1 July 2012
As previously
reported
$’000
Consolidated
Change in
accounting
policy
$’000
1 July 2012
restated
$’000
296,691
1,598,414
14,211
282,738
13,765
48,969
2,254,788
1,922
60,893
1,133,470
577,651
7,794
71,271
3,553
1,856,554
4,111,342
9,696
27,932
–
–
–
2,606
40,234
–
(6,774)
716
–
–
–
–
(6,058)
34,176
306,387
1,626,346
14,211
282,738
13,765
51,575
2,295,022
1,922
54,119
1,134,186
577,651
7,794
71,271
3,553
1,850,496
4,145,518
1,388,995
34,176
1,423,171
180,938
77,532
332,450
3,926
–
–
–
–
180,938
77,532
332,450
3,926
1,983,841
34,176
2,018,017
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 39. IMPACT ON GROUP’S HISTORICAL FINANCIAL STATEMENTS ON ADOPTION OF AASB 11
JOINT ARRANGEMENTS – CONTINUED
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
1 July 2012
As previously
reported
$’000
Consolidated
Change in
accounting
policy
$’000
1 July 2012
restated
$’000
3,955
437,972
46,112
15,612
6,150
509,801
2,493,642
1,617,700
1,427,730
(51,752)
241,737
1,617,715
(15)
1,617,700
–
–
–
–
–
–
34,176
–
–
–
–
–
–
–
3,955
437,972
46,112
15,612
6,150
509,801
2,527,818
1,617,700
1,427,730
(51,752)
241,737
1,617,715
(15)
1,617,700
ANNUAL REPORT 2014 111
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014 NOTE 39. IMPACT ON GROUP’S HISTORICAL FINANCIAL STATEMENTS ON ADOPTION OF AASB 11
JOINT ARRANGEMENTS – CONTINUED
IMPACT ON CONSOLIDATED STATEMENT OF CASH FLOWS
June 2013
As previously
reported
$’000
Consolidated
Change in
accounting
policy
$’000
June 2013
restated
$’000
9,449,096
58,731
7
358,836
(30,092)
–
9,807,932
28,639
7
(8,980,478)
(333,085)
(9,313,563)
8,581
(69,240)
(14,327)
452,370
66,879
(350,340)
(5,344)
(1,335)
4,028
(600)
(2,357)
67
(2)
–
(4,276)
8,648
(69,242)
(14,327)
448,094
716
(3)
67,595
(350,343)
–
–
–
–
–
(5,344)
(1,335)
4,028
(600)
(2,357)
(289,069)
713
(288,356)
3,798,391
(3,759,584)
(29,694)
(7)
9,106
172,407
296,689
4,637
473,733
–
–
–
–
–
(3,563)
9,696
–
6,133
3,798,391
(3,759,584)
(29,694)
(7)
9,106
168,844
306,385
4,637
479,866
Cash flows from operating activities
Receipts from customers
Distributions from equity-accounted investees
Dividends received from external entities
Payments to suppliers and employees
Interest received
Interest and other costs of finance paid
Income tax paid
Net cash inflow from operating activities
Cash flows from investing activities
Proceeds from sale of property, plant and equipment
Payments for property, plant and equipment
Payments for intangible assets (software)
Payments for investments
Repayments from joint ventures
Advances to other entities
Divestment cost paid on disposal of subsidiary
Net cash used in investing activities
Cash flows from financing activities
Proceeds from borrowings
Repayments of borrowings
Dividends paid
Dividends paid to non-controlling interest
Net cash inflow from financing activities
Net 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
112 DOWNER EDI LIMITED
NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2014
DIRECTORS’ DECLARATION
FOR THE YEAR ENDED 30 JUNE 2014
In the opinion of the Directors of Downer EDI Limited:
(a) The financial statements and notes set out on pages 42 to 112 are in accordance with the Australian Corporations Act 2001
(Cth), 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 Limited 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 Section 295A of the Corporations Act 2001 (Cth); 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 Section 295(5) of the Corporations Act 2001 (Cth).
On behalf of the Directors
R M Harding
Chairman
Sydney, 5 August 2014
ANNUAL REPORT 2014 113
INDEPENDENT AUDITOR’S REPORT
FOR THE YEAR ENDED 30 JUNE 2014
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 2014, 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 42 to 113.
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 gives a true and fair view and 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 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
114 DOWNER EDI LIMITED
INDEPENDENT AUDITOR’S REPORT
FOR THE YEAR ENDED 30 JUNE 2014
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 2014
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 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 17 to 40 of the directors’ report for the
year ended 30 June 2014. The directors of the company are responsible for the preparation and
presentation of the Remuneration Report in accordance with section 300A of the Corporations Act
2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit
conducted in accordance with Australian Auditing Standards.
Opinion
In our opinion, the Remuneration Report of Downer EDI Limited for the year ended 30 June 2014,
complies with section 300A of the Corporations Act 2001 .
DELOITTE TOUCHE TOHMATSU
A V Griffiths
Partner
Chartered Accountants
Sydney, 5 August 2014
ANNUAL REPORT 2014 115
SUSTAINABILITY PERFORMANCE SUMMARY 2014
Downer’s ability to understand and manage the sustainability
and environmental impacts of its activities is fundamental
to its long-term success as a business, improving its
environmental performance and delivering value to Downer’s
stakeholders. Downer balances the need for short-term
results against the long-term sustainability of the Company
by optimising costs, improving efficiencies and maintaining
systems. Downer’s sustainability strategy is designed to
focus on the health and safety of its people, environmental
sustainability and the advancement of the communities in
which Downer operates.
Downer focuses on the issues, risks and opportunities that are
relevant to its business activities and that are important for
the Company and its stakeholders. Reviewing performance
in the context of emerging global risks and opportunities
enables Downer to adapt the way the Company delivers
products and services and interacts with its supply chain.
Sustainability performance is tracked and disclosed through
the annual Sustainability Report, which is a supplement to
the 2014 Annual Report. The Sustainability Report provides
a summary of Downer’s non-financial, sustainability-related
performance for the year ended 30 June 2014 and will be
available on the Downer website at www. downergroup.com
later in 2014.
HEALTH AND SAFETY
Tragically, a Downer employee died in April 2014 while
performing stringing work for the construction of a new
transmission line in Western Australia. This death occurred
despite a very high level of safety management across
the company and a mature safety culture. It reinforces the
need across all Downer’s businesses to focus intensely on
understanding and managing the critical risks that have the
potential to cause our people serious injury.
Downer’s goal of Zero Harm requires continuous
improvement to achieve zero work related injuries and
environmental incidents.
Downer’s managers are expected to lead by example and
are held accountable for safety performance, compliance
with Zero Harm policy and the creation of a workplace
culture that recognises that the safety of Downer’s people
is paramount. Employees are expected to take personal
responsibility and be involved in setting and complying with
Company standards and improvement initiatives. Downer’s
Zero Harm culture involves leading and inspiring, re-thinking
processes, learning lessons from what has worked well and
tracking the progress of programs and initiatives.
In 2013 the Group embarked on an analysis, assessment
and response at every level of the organisation on the
management of critical risks. An example of this work is the
introduction of a Group-wide Critical Risk Register which
informs key improvement targets in areas that pose the most
significant risk to employees.
Downer’s health and safety performance, as monitored
through the measure of Lost Time Injury Frequency Rate
(LTIFR)1, increased slightly and Total Recordable Injury
Frequency Rate (TRIFR)2, improved again compared to the
previous year. LTIFR was 1.08 per million hours worked at 30
June 2014. TRIFR reduced from 5.42 per million hours worked3
at 30 June 2013 to 4.83 as at 30 June 2014. This represents a
21% improvement in the number of recordable injuries.
This TRIFR performance is due to a number of factors
including an increased focus on critical risks through the
implementation of Group-wide risk management processes,
providing appropriate workplace health, safety and
environmental training to employees and contractors, and
greater utilisation of feedback from audit and incident
investigations to enhance learning for the Company.
ENVIRONMENTAL SUSTAINABILITY
Driving energy efficiency and reducing greenhouse gas
(GHG) emissions has been central to the environmental
sustainability goals during 2013-14 and this involved the
implementation of a range of energy saving and carbon
abatement initiatives. Significant environmental benefits,
as well as bottom line savings, have been delivered through
Downer’s energy efficiency and GHG emissions reduction
program. This includes annualised energy savings of
more than 400 terajoules per year, equivalent to potential
abatement of 42 kilotonnes of carbon covering Scope 1, 2
and 3 GHG emissions.
During the year the Group exceeded its stretch target of
7.5% energy efficiency improvements compared to 2012-13
consumption levels as well as continued development of
energy management strategies. Each of the Downer divisions
has developed five-year energy efficiency/GHG emissions
reduction plans that are incorporated into operational
planning and provide the framework for ongoing energy
management across the Group.
Downer operates across a diverse range of industry sectors
and manages its environmental and sustainability impacts
through a risk-based approach which is supported by
robust environmental management systems. During 2013-
14, Downer met its Group-wide target of zero level 54 or
level 65 environmental incidents and additionally no level 4
(significant) environmental events were recorded.
Further information about Downer’s approach to sustainability
is available in its Annual Review and Sustainability
Reports, which are available on the Downer website at
www. downergroup.com.
1
2
3
4
5
Lost time injuries (LTIs) are defined as injuries that cause the injured person to be unfit to perform any work duties for one whole day or shift,
or more, after the shift on which the injury occurred, and injury that results, directly or indirectly, in the death of the person. The LTIFR is the
number of LTIs per million hours worked.
TRIFR is the number of fatal injuries + lost-time injuries + medically treated injuries per million hours worked.
Published safety statistics may be subject to change due to updates in incident classifications and amendments to hours worked.
These data will be subject to third party verification and will be published in the 2014 Sustainability Report.
A Level 5 environmental incident is defined as a highly significant incident reversible only in the long term (over 10 years).
A Level 6 environmental incident is defined as an incident which results in catastrophic widespread impacts resulting in irreversible
damage to habitat and species.
116 DOWNER EDI LIMITED
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 to Downer’s business are identified and managed;
and
– Downer effectively communicates with its shareholders
and the investment community.
Downer continues to enhance its policies and processes to
promote leading corporate governance practices.
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 www. downergroup.com.
The Board Charter states that the role of the Board is to
provide strategic guidance 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, led by the Group CEO.
The primary goal set for management by the Board is to
focus on enhancing shareholder value, which 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 www. downergroup.com.
The Company has formal induction procedures for both
Directors and senior executives. These induction procedures
have been developed to enable new Directors and senior
executives to gain an understanding of:
– 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.
Downer has written employment agreements with each
of its senior executives and the performance of those
senior executives is regularly reviewed against appropriate
measures, including performance targets linked to the
business plan and overall corporate objectives. In FY2014,
Downer’s senior executives participated in periodic
performance evaluations where they received feedback on
progress against these targets.
PRINCIPLE 2 – STRUCTURE THE BOARD TO
ADD VALUE
Throughout the 2014 financial year, the Board was comprised
of a majority of independent Directors.
The Board is currently comprised of the Chairman (Mike
Harding, an independent, Non-executive Director), six
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
their term of office are set out in the Directors’ Report on
pages 2 to 3 and are also available on the Downer website at
www. 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. The Board
regularly assesses the independence of each Director to
ensure that each director has the capacity to bring an
independent judgement to bear on issues before the Board
and to act in the best interests of Downer as a whole.
Downer’s governance framework requires each Director to
promptly disclose actual and possible conflicts of interest,
any interests in contracts, other directorships or offices held,
related party transactions and any dealing in the Company’s
securities.
At least one Director must retire from office 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 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.
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.
ANNUAL REPORT 2014 117
CORPORATE GOVERNANCEFOR THE YEAR ENDED 30 JUNE 2014 PRINCIPLE 2 – STRUCTURE THE BOARD TO ADD VALUE – CONTINUED
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 committees to assist the Board to effectively and efficiently execute its responsibilities. A
list of the main Board Committees and their membership is set out in the table below.
Board Committee
Audit and Risk Committee
Chairman
S A Chaplain
Zero Harm Committee
E A Howell
Nominations and Corporate
Governance Committee
R M Harding
Remuneration Committee
P S Garling
Disclosure Committee
J S Humphrey
Tender Risk Evaluation Committee
C G Thorne
Members
P S Garling
J S Humphrey
K G Sanderson
C G Thorne
S A Chaplain
G A Fenn
C G Thorne
S A Chaplain
J S Humphrey
K G Sanderson
R M Harding
J S Humphrey
K G Sanderson
G A Fenn
R M Harding
G A Fenn
P S Garling
R M Harding
E A Howell
The names of members of each committee, the number of meetings and the attendances by each of the members of the
various committees to which they are appointed is set out in the Directors’ Report on page 15.
The Tender Risk Evaluation Committee’s primary purpose is to oversee tenders and contracts that exceed the delegation of
the Group CEO. The Tender Risk Evaluation Committee is chaired by an independent Director and comprises five members,
including the Group CEO. Meetings of the Tender Risk Evaluation Committee are convened as required to review tender
opportunities.
The Board has established the Nominations and Corporate Governance Committee to oversee the practices for selection and
appointment of Directors 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 Nominations and Corporate Governance 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 www. downergroup.com.
The Nominations and Corporate Governance Committee, all members of which are independent Directors, is chaired by an
independent Director and has a minimum of three members.
118 DOWNER EDI LIMITED
CORPORATE GOVERNANCEFOR THE YEAR ENDED 30 JUNE 2014 PRINCIPLE 2 – STRUCTURE THE BOARD TO ADD VALUE – CONTINUED
The 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 (including undertaking a formal due
diligence screening process); 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. This may result in a Non-executive Director with a longer
tenure remaining in office so as to bring that experience and depth of understanding to matters brought before the Board.
The chart below illustrates the balance achieved with the current Board composition. The Company recognises the value of
diversity and diversity has been a component of the appointment process over the past few years.
Professional qualifications
Industry experience
Gender diversity
Tenure
Business and economics
Technical*
Humanities
Legal
* Comprises construction, engineering,
metallurgy and science.
Professional services
Transport and infrastructure
Resources
0-3
3-6
6-9
9+
3
3
0
1
Male
Female
From time to time, Downer engages external specialists to assist with the selection process as necessary, and the Chairman,
Board 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.
As part of its commitment to leading corporate governance practice, the Board undertakes improvement programs, including
externally facilitated periodic reviews of its performance and that of its Committees and Directors. The last review was
completed during FY13 with a number of improvements identified and implemented.
Downer’s Director induction program is designed to enable new Directors to gain an understanding of, among other things,
Downer’s culture and values and the Company’s financial, strategic, operational and risk management position.
Directors are given an induction briefing by the Company Secretary and an induction pack containing information about
Downer and its business, Board and 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.
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.
Directors are also encouraged to attend appropriate training and professional development courses to update and enhance
their skills and knowledge and the Company Secretary 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, through the Chair, on all
governance matters.
ANNUAL REPORT 2014 119
CORPORATE GOVERNANCEFOR THE YEAR ENDED 30 JUNE 2014 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. The
Downer 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;
– Workplace behaviour;
– Prohibition against bribery and corruption;
– Protection of confidential information;
– Engaging with stakeholders;
– Workplace safety;
– Diversity and inclusiveness;
– Sustainability; and
– Conflicts of interest.
Downer has a formal whistleblower policy and procedures for reporting and investigating breaches of the Standards of Business
Conduct. This includes the Our Voice service, an external and independent reporting service which enables employees
to anonymously report potential breaches of the Standards of Business Conduct, including misconduct or other unethical
behaviour. Reports received through Our Voice are investigated where appropriate, with the Company Secretary overseeing
the completion of any remedial action.
The Standards of Business Conduct apply to all officers and employees and is available on the Downer website at
www. downergroup.com.
Downer endorses leading governance practices and has in place policies setting out the Company’s approach to various
matters, including:
– Securities trading (stipulating “closed periods” for designated employees and a formal process which 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.
Downer has an Anti-Bribery and Corruption Policy which expands upon the prohibition against bribery and corruption currently
contained in the Standards of Business Conduct, and which addresses key issues such as working with government, political
donations, human rights, conducting business internationally and gifts and benefits. As Downer has operations in foreign
jurisdictions, Downer employees are confronted by the challenges of doing business in environments where bribery and
corruption are real risks. However, regardless of the country or culture within which our people work, Downer is committed to
compliance with the law, as well as maintaining its reputation for ethical practice.
These policies are available on the Downer website at www. downergroup.com.
DIVERSITY AT DOWNER
Downer is committed to ensuring that it has a diverse and inclusive workforce, which fulfils the expectations of its employees,
customers and shareholders while building a sustainable future for its business. Downer has formalised its practices in a Diversity
and Inclusiveness Policy, which sets out Downer’s diversity initiatives and has a particular focus on gender, age and cultural
diversity. Downer has established a Diversity and Inclusiveness Committee made up of senior executives across the Group which
meets to implement and monitor these initiatives.
The Diversity and Inclusiveness Policy and Downer’s Sustainability Reports are available on the Downer website at
www. downergroup.com.
ASX DIVERSITY RECOMMENDATIONS – DIVERSITY STATEMENT
This diversity statement outlines Downer’s performance throughout 2014 with respect to its broader diversity program, but with a
particular focus on gender, and specifically includes:
– Details of Downer’s key gender representation metrics;
– An overview of the gender diversity initiatives undertaken by Downer throughout 2014; and
– An outline of Downer’s measurable gender diversity objectives for 2015.
120 DOWNER EDI LIMITED
CORPORATE GOVERNANCEFOR THE YEAR ENDED 30 JUNE 2014 GENDER REPRESENTATION METRICS
As at 30 June 2014, the gender representation metrics were as follows:
– Three of the eight Non-executive Directors on the Downer Board are women (unchanged since FY12);
– Women currently make up 7 per cent of Senior Executive1 roles;
– 6.0 per cent of Manager2 roles are held by women; and
– Women constitute approximately 12 per cent of Downer’s workforce.
LOOKING BACK: FY2014 MEASURABLE OBJECTIVES
Objective
Outcome
Increase the number of female employees in the organisation
by providing development opportunities, targeted recruitment
and introduction of flexible work opportunities where
appropriate
Increase the number of Indigenous and Torres Strait Islander
employees in Australia and increase the number of Maori
and Pacific Island employees in management and senior
management roles in New Zealand, through targeted
recruitment and development initiatives
Undertake a pilot program to support the Jawun program and
it is expected this will lead to full support and membership with
Jawun
The number of female employees in the organisation
remained unchanged from FY13 at 12 per cent.
The Diversity and Inclusiveness Policy was updated to
recognise and promote flexible work practices within Downer.
The Diversity Committee has introduced the concept of
Employee Resource Groups which are designed to increase
awareness and assist with the implementation of diversity and
inclusiveness initiatives throughout the organisation.
The Downer Diversity and Inclusiveness intranet site was
established in March 2014 and now provides employees with
access to a range of information and resources relating to
diversity and inclusiveness.
Downer New Zealand established the Downer Women’s
Network, the purpose of which is to explore key barriers
to and opportunities for career progression within Downer,
and to encourage networking amongst female employees
in this business.
Downer continues to offer a Group-wide Downer Corporate
Family Program to its employees. This program, established
in FY13, is designed to support employees with caring
responsibilities and to assist them in managing these
responsibilities with their work obligations.
The program for the recruitment of Indigenous and Torres
Strait Islander employees continues to deliver strong results,
particularly in Downer Mining.
Downer New Zealand established the Maori Leadership
Network which is designed to promote leadership
development opportunities for Maori employees in Downer.
In late 2013, three Downer employees participated in a
successful six week pilot program to support the Jawun
program, an indigenous corporate partnership program which
creates opportunities for selected employees to use their
professional skills to make a contribution to our Indigenous
communities.
Following the successful pilot program, Downer has entered
into a formal partnership with Jawun, with further secondments
now underway.
1
2
For present purposes, “Senior Executive” refers to CEO, KMP and Other Executives/General Managers as defined in the Workplace Gender
Equality Agency Reference guide to the workplace profile and reporting questionnaire (WGEA Reference Guide).
For present purposes, “Manager” refers to CEO, KMP, Other Executives/General Managers, Senior Managers and Other Managers as
defined in the WGEA Reference Guide.
ANNUAL REPORT 2014 121
CORPORATE GOVERNANCEFOR THE YEAR ENDED 30 JUNE 2014 PRINCIPLE 3: PROMOTE ETHICAL AND RESPONSIBLE DECISION-MAKING – CONTINUED
Objective
Outcome
Maintain a continuous pipeline of talent into the
organisation through cadetship, graduate and
apprenticeship opportunities
Optimise the ageing workforce by providing flexible
work arrangements and retirement planning options
to employees
An analysis of the adequacy of the training support that
Downer provides through its cadetship, graduate and
apprenticeship opportunities was conducted across the
Group. The findings of this analysis were presented to and
considered by the Executive Committee and Downer Board
and will form the basis for the initiatives of the Corporate
Champions Program to be established during FY2015.
Downer Mining successfully applied to Queensland Civil and
Administrative Tribunal in November 2013 for an exemption
under the anti-discrimination laws to specifically recruit
females for specific roles at designated mining sites in
Queensland for the next five (5) year period. Additionally,
the exemptions granted by the Anti-Discrimination Tribunal
of New South Wales in March 2013 led to two targeted
recruitment campaigns being run throughout FY2014 which
employed 15 female operators (trainee and experienced)
at the Boggabri mine site.
Downer has received Commonwealth Government funding to
establish a Corporate Champions Program, which will focus on
improving the retention and management of mature workers.
Additionally, Downer employees now have access to a senior
living program which is designed to assist those employees
who are transitioning into retirement by offering services such
as superannuation planning and aged care assistance.
LOOKING AHEAD: FY2015 MEASURABLE OBJECTIVES
As part of Downer’s ongoing commitment to the regular review and updating of its measurable objectives, Downer has re-
affirmed its objectives for FY2015, which are comprised by a continuation of the FY2014 objectives and those set out below:
– To have at least one woman candidate on the shortlist for 25% of Manager roles (currently 17%) to aim to increase the number
of female Managers in Downer from 6.0% (FY2014) to 6.5% in the future;
– To complete the implementation of a job grading structure across Downer to enable a comprehensive gender pay
review in the future;
– Conduct a diversity and inclusiveness survey which will expand upon the survey conducted in 2012 by targeting a broader
audience and incorporating cultural and age diversity, not just gender diversity;
– Introduce a Group-wide formalised mentoring program with the initial focus being women in leadership;
– Promote awareness, utilisation and continuous improvement of flexible work opportunities to female employees;
– Consolidate and strengthen Downer’s involvement in the Jawun program; and
– Continue to focus on the ageing workforce and the flexible work and retirement planning options available to employees
transitioning to retirement, with a particular focus on developing and implementing the objectives and initiatives of the
Corporate Champions Program, and undertaking a Group-wide employee age profiling exercise.
122 DOWNER EDI LIMITED
CORPORATE GOVERNANCEFOR THE YEAR ENDED 30 JUNE 2014 PRINCIPLE 4: SAFEGUARD INTEGRITY IN
FINANCIAL REPORTING
PRINCIPLE 5: MAKE TIMELY AND BALANCED
DISCLOSURE
The Company has in place a structure of review and
authorisation which independently verifies and safeguards
the integrity of its financial reporting.
The Audit and Risk Committee assists the Board to fulfil its
responsibilities relating to:
– The quality and integrity of the accounting, auditing and
reporting practices of the Company with a particular
focus on the qualitative aspects of financial reporting to
shareholders;
– The Company’s risk profile and risk policies; and
– The effectiveness of the Company’s system of internal
control and framework for risk management.
The Audit and Risk 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); and
– Has at least three members.
The Audit and Risk Committee currently comprises only
independent Directors, includes members who are financially
literate and has at least one member who has relevant
qualifications and experience.
The Audit and Risk Committee Charter sets out the Audit
and Risk Committee’s role and responsibilities, composition,
structure and membership requirements and the procedures
for inviting non-committee members to attend meetings.
The Board receives assurances from the Group CEO and the
Group CFO that the declarations provided in relation to the
annual and half-year financial statements, in accordance
with sections 295A and 303(4) of the Corporations Act 2001
(Cth) are 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.
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.
The Audit and Risk Committee Charter is available on the
Downer website at www. downergroup.com.
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
www. downergroup.com.
The Disclosure Policy also sets out the procedures for
identifying and disclosing material and market-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 of
the Board) 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 www. downergroup.com.
The Company publishes corporate information on its website
(www. downergroup.com), including Annual and Half
Year Reports, ASX announcements, investor updates and
media releases.
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.
The Directors and key members of management attend the
Company’s AGMs and are available to answer questions.
ANNUAL REPORT 2014 123
CORPORATE GOVERNANCEFOR THE YEAR ENDED 30 JUNE 2014 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).
The maximum aggregate fee approved by shareholders
that can be paid to Non-executive Directors is $2.0 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 17.
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, information about any payments has been fully
provided in the financial statements where such retirement
benefits have been paid. 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 17 and details of Downer shares beneficially owned
by Directors are provided in the Directors’ Report at page 4.
PRINCIPLE 7: RECOGNISE AND MANAGE RISK
To mitigate the risks that arise through its activities, Downer has
various risk management policies and procedures in place
that cover (among other matters) interest rate management,
foreign exchange risk management, credit risk management,
tendering and contracting risk and project 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.
Downer has a Risk Management Framework in place
to enable business risks to be identified, evaluated and
managed. The Downer Board ratifies Downer’s approach
to managing risk and oversees Downer’s Risk Management
Framework, including the Group risk profile and the
effectiveness of the systems being implemented to
manage risk.
Downer’s annual Sustainability Report provides a
detailed overview of Downer’s approach to managing its
environmental sustainability and social sustainability risks. The
2013 Sustainability Report is available on the Downer website
at www. downergroup.com.
The Company’s internal audit function objectively evaluates
and reports on the existence, design and operating
effectiveness of internal controls. Downer’s internal audit team
is independent of the external auditor and reports to the Audit
and Risk Committee.
Downer’s Audit and Risk Committee assists the Board in
its oversight of Downer’s risk profile and risk policies, the
effectiveness of the systems of internal control and Risk
Management Framework and Downer’s compliance with
applicable legal and regulatory obligations. The Audit and
Risk Committee Charter is available on the Downer website at
www. downergroup.com.
Management reports regularly to the Audit and Risk
Committee on the effectiveness of Downer’s management
of its material business risks and on the progress of mitigation
treatments.
PRINCIPLE 8: REMUNERATE FAIRLY AND
RESPONSIBLY
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;
– Executive and equity-based incentive plans; and
– Superannuation arrangements and retirement payments.
124 DOWNER EDI LIMITED
CORPORATE GOVERNANCEFOR THE YEAR ENDED 30 JUNE 2014 DOWNER SHAREHOLDERS
UPDATING YOUR SHAREHOLDER DETAILS
Downer had 20,659 ordinary shareholders as at 30 June 2014.
The largest shareholder, J P Morgan Nominees Australia
Limited, holds 23.43 per cent of the 435,399,975 fully paid
ordinary shares issued at that date. Downer has 18,561
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 www. downergroup.com offers
comprehensive information about Downer and its services.
The site also contains news releases and announcements to
the ASX and NZX, financial presentations, Annual Reports,
Half Year Reports and company newsletters. Downer printed
communications for shareholders include the Annual Report
which is 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 paid to the Australian Taxation Office by Downer and
its incorporated joint ventures.
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.
Shareholders can update their details (including bank
accounts, DRP elections, tax file numbers 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 immediately,
in writing, if your issuer sponsored statement has been lost
or stolen.
ANNUAL REPORT MAILING LIST
Shareholders must elect to receive a Downer Annual Report
by writing to Computershare Investor Services Pty Ltd at the
address provided. Alternatively shareholders may choose to
receive this publication 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 9, 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
AUSTRALIAN SECURITIES EXCHANGE
INFORMATION AS AT 30 JUNE 2014
Number of holders of equity securities:
ORDINARY SHARE CAPITAL
435,399,975 fully paid listed ordinary shares were held by
20,659 shareholders. All issued ordinary shares carry one vote
per share.
ANNUAL REPORT 2014 125
INFORMATION FOR INVESTORSFOR THE YEAR ENDED 30 JUNE 2014 SUBSTANTIAL SHAREHOLDERS
The following shareholders have notified that they are substantial shareholders of Downer as at 30 June 2014.
Shareholders
Schroder Investment Management Australia Limited
National Australia Bank Limited
UBS AG and its related bodies corporate
Commonwealth Bank of Australia
LSV Asset Management
DISTRIBUTION OF HOLDERS OF QUOTED EQUITY SECURITIES
Shareholder distribution of quoted equity securities as at 30 June 2014.
Ordinary shares
held
% of issued
shares
28,061,984
27,965,895
22,442,355
22,042,680
21,874,362
6.45
6.42
5.15
5.06
5.02
Number of
shareholders
Shareholders
%
Ordinary
shares held
Shares
%
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
TWENTY LARGEST SHAREHOLDERS
11,410
55.24
5,056,634
7,287
1,205
703
54
20,659
1,058
35.27
16,568,374
5.83
3.40
0.26
8,557,779
15,364,477
389,852,711
435,399,975
Downer’s 20 largest shareholders of ordinary fully paid shares as at 30 June 2014.
Shareholders
J P Morgan Nominees Australia Limited
HSBC Custody Nominees (Australia) Limited
National Nominees Limited
Citicorp Nominees Pty Ltd
BNP Paribas Noms Pty Ltd
Citicorp Nominees Pty Limited – Colonial First State Inv A/C
HSBC Custody Nominees (Australia) Limited – NT-Comnwlth Super Corp A/C
AMP Life Ltd
CPU Share Plans Pty Ltd
Argo Investments Ltd
RBC Investor Services Australia Nominees Pty Limited – PI Pooled A/C
BNP Paribas Nominees Pty Ltd – Agency Lending DRP A/C
UBS Nominees Pty Ltd
National Nominees Limited – N A/C
HSBC Custody Nominees (Australia) Limited – GSCO ECA
UBS Nominees Pty Ltd
Masfen Securities Limited
CS Fourth Nominees Pty Ltd
QIC Limited
Sandhurst Trustees Ltd – Harper Bernays Ltd A/C
Total for top 20 shareholders
126 DOWNER EDI LIMITED
1.16
3.81
1.97
3.53
89.53
100.00
% of issued
shares
23.43
22.36
16.85
9.21
5.24
1.83
1.51
1.30
1.46
0.55
0.52
0.52
0.51
0.32
0.29
0.28
0.27
0.27
0.25
0.24
Shares held
102,000,693
97,334,884
73,355,455
40,086,426
22,818,621
7,948,332
6,560,633
5,677,305
6,375,320
2,392,527
2,279,847
2,249,265
2,232,500
1,400,000
1,248,683
1,231,500
1,171,647
1,168,178
1,079,314
1,061,120
379,672,250
87.21
INFORMATION FOR INVESTORSFOR THE YEAR ENDED 30 JUNE 2014 INFORMATION FOR INVESTORS
FOR THE YEAR ENDED 30 JUNE 2014
ON-MARKET BUY-BACK
On 5 August 2014, the Board resolved to undertake an ongoing share buy-back program that will operate from 20 August 2014.
The total number of shares to be purchased under the buy-back will depend on share price levels and capital requirements.
The program is part of Downer’s ongoing capital management strategy and will be managed in conjunction with capital
requirements for growth. Downer has a strong balance sheet and is in a good position to take advantage of growth
opportunities, including mergers and acquisitions, but any prospect will be subject to robust risk assessment. Downer will focus
on opportunities that are strategic, the right price and grow the Company’s capability.
ANNUAL REPORT 2014 127
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128 DOWNER EDI LIMITED
DOWNER GROUP OFFICE
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 INFRASTRUCTURE
AUSTRALIA
Level 11
468 St Kilda Road
Melbourne VIC 3004
Australia
T +61 3 9864 0800
F +61 3 9864 0801
NEW ZEALAND
130 Kerrs Road
Wiri, Auckland, 2022
New Zealand
T +64 9 251 0340
F +64 9 523 6822
DOWNER MINING
Level 7, 104 Melbourne Street
South Brisbane QLD 4101
Australia
T +61 7 3026 6666
F +61 7 3026 6060
DOWNER RAIL
Level 2, Triniti I
Triniti Business Campus
39 Delhi Road
North Ryde NSW 2113
Australia
T +61 2 9468 9700
F +61 2 9813 8915
www.downergroup.com