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Annual
Report 2016
This Annual Report includes the Downer EDI Limited
Directors’ Report, the Annual Financial Report and
Independent Audit Report for the financial year ended
30 June 2016. The Annual Report is available on
the Downer website www.downergroup.com.
Contents
Directors’ Report
Page 2
Auditor’s signed reports
Page 43
Page 44
Auditor’s Independence Declaration
Independent Auditor’s Report
Financial Statements
Page 49
Page 50
Page 51
Page 52
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 consolidated financial statements
A
B
C
D
E
F
About this
report
Business
performance
Operating assets
and liabilities
Employee
benefits
Capital structure
and financing
Group
structure
G
Other
Page 53-54
Page 55-62
Page 63-71
Page 72
Page 73-79
Page 80-86
Page 87-96
D1
Employee benefits
E1
Borrowings
F1
Joint arrangements
and associate
entities
G1
New accounting
standards
D2
Key management
personnel
compensation
E2
Financing facilities
F2
Acquisition of
businesses
G2
Capital and financial
risk management
D3
Employee discount
share plan
E3
Commitments
F3
Disposal of
subsidiary
G3
Other financial
assets and liabilities
E4
Issued capital
F4
Controlled entities
E5
Dividends
F5
Related party
information
F6
Parent entity
disclosures
B1
Segment
information
C1
Reconciliation of
cash flow from
operating activities
B2
Profit from
ordinary activities
C2
Trade and other
receivables
B3
Earnings per share
B4
Taxation
B5
Remuneration
of auditors
B6
Subsequent events
C3
Rendering of
services and
construction
contracts
C4
Inventories
C5
Trade and other
payables
C6
Property, plant
and equipment
C7
Intangible assets
C8
Provisions
C9
Contingent
liabilities
Page 97
Directors’ Declaration
Other information
Sustainability Performance Summary 2016
Page 98
Page 100 Corporate Governance
Page 109
Information for Investors
Annual Report 2016 1
S A CHAPLAIN (58)
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 Chairman of Queensland Airports Limited and
a Director of Seven Group Holdings Limited and the Export
Finance and Insurance Corporation. Ms Chaplain is also
Chairman of Canstar Pty Ltd, a financial services research and
ratings company. Ms Chaplain is a former Director of PanAust
Limited, Coal & Allied Industries Limited and Keolis Downer Pty
Ltd, a joint venture between Downer and Keolis SA, and a former
member of the Board of Taxation.
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 (62)
Independent Non-executive Director since November 2011
Mr Garling has over 35 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 Tellus Holdings Limited
and Energy Queensland and a Director of Charter Hall Limited
and the New South Wales electricity distributors. Mr Garling is
also the President of Water Polo Australia Limited.
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.
Directors’ Report
for the year ended 30 June 2016
The Directors of Downer EDI Limited submit the Annual Financial
Report of the Company for the financial year ended 30 June
2016. In compliance with the provisions of the Corporations Act
2001 (Cth), the Directors’ Report is set out below.
Board of Directors
R M HARDING (67)
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 Lynas Limited and a
Director of Cleanaway Waste Management Limited, a former
Chairman of Roc Oil Company Limited and Clough Limited and 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 (51)
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 10 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.
Mr Fenn is currently a Director of Sydney Airport Limited and he
was 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.
2 Downer EDI Limited
C G THORNE (66)
Independent Non-executive Director since July 2010
Dr Thorne has over 36 years’ 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 former Director of JK Tech and Queensland
Energy Resources Limited. 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.
E A HOWELL (70)
Independent Non-executive Director since January 2012
Ms Howell has over 40 years’ 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 Limited 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 MMA Offshore Limited and
Buru Energy Limited. She is a Senior Advisor of Miro Advisors
Ltd and African Geopolitics.
She has previously served on a number of boards, including
EMR Resources Pty Ltd where she held the position of
Chairman, 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 Graduate of the Australian
Institute of Company Directors.
Ms Howell lives in Perth.
J S HUMPHREY (61)
Independent Non-executive Director since April 2001
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 the Chairman of Horizon Oil Limited
and Auswide Bank 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.
Mr Humphrey will retire as a Non-executive Director at the
conclusion of the 2016 Annual General Meeting.
Annual Report 2016 3
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
C G Thorne
Number of Fully Paid
Ordinary Shares
Number of Fully Paid
Performance Rights
Number of Fully Paid
Performance Options
10,150
626,492
74,142
12,100
10,000
68,367
59,230
–
1,426,257
–
–
–
–
–
–
–
–
–
–
–
–
*
Performance rights granted to Mr Fenn are subject to performance and/or service period conditions over the period 2013 to 2018. Further details regarding the conditions
relating to these performance rights are outlined in sections 6.4 and 9.2 of the Remuneration Report.
Company Secretary
Review of operations
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 at
Downer for over 15 years.
Principal activities
Downer EDI Limited (Downer) is a leading provider of services to
customers in markets including: Transport Services; Technology
and Communications Services; Utilities Services; Rail;
Engineering, Construction and Maintenance (EC&M); and Mining.
Downer employs about 19,000 people, mostly in Australia and
New Zealand but also in the Asia-Pacific region, South America
and Southern Africa.
Divisional activities
Downer reports its financial results under six service lines:
Transport Services; Technology and Communications Services;
Utilities Services; Rail; EC&M and Mining. An outline of each
service line is set out below.
4 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2016 Transport Services
Transport Services comprises Downer’s road, rail infrastructure,
bridge, airport and port businesses. It features a broad range
of transport infrastructure services including earthworks, civil
construction, asset management, maintenance, surfacing and
stabilisation, supply of bituminous products and logistics, open
space and facilities management and rail track signalling and
electrification works.
Total revenue1 (FY16)
EBIT (FY16)
24.9%
28.2%
Transport Services
Road Services
Downer offers one of the largest non-government owned road
infrastructure services businesses in Australia and New Zealand,
maintaining more than 40,000 kilometres of road in Australia
and more than 32,000 kilometres in New Zealand.
Downer delivers a wide range of tailored pavement treatments
and traffic control services and also provides high-level
capabilities in strategic and tactical asset management, network
planning and intelligent transport systems. The Company
continues to invest in state-of-the-art technology to drive
innovation and performance, including asphalt plants that use
more recycled products and substantially less energy.
Downer is also a leading manufacturer and supplier of bitumen
based products and a provider of soil and pavement stabilisation,
pressure injection stabilisation, pavement recycling, pavement
profiling and asset management.
Customers include all of Australia’s State road authorities,
the New Zealand Transport Agency and the majority of local
government councils and authorities in both countries.
Other transport infrastructure
Downer provides a range of rail infrastructure services to its
customers including earthworks, civil and rail track construction
and signalling and electrification works.
Downer also provides integrated services to its airport and
port customers including pavement construction, facilities
maintenance, communications technologies, open space and
asset management and turnkey electrical and communication
systems. It also provides whole-of-life asset solutions for
associated infrastructure such as roads, rail lines and car parks.
Technology and Communications Services
Downer provides an end-to-end infrastructure service
offering comprising feasibility, design, civil construction,
network construction, commissioning, testing, operations and
maintenance across fibre, copper and radio networks in Australia
and New Zealand.
Total revenue1 (FY16)
EBIT (FY16)
6.5%
8.1%
Technology and Communications Services
Downer’s expertise in the feasibility and design phases of the
life cycle provides customers with a high level of assurance and
reduces uncertainty at the beginning of the investment process.
Downer has a track record of delivering both fixed and mobile
networks across Australia and New Zealand.
Downer also delivered Australia’s first fully integrated, multi-
modal electronic fare payment system for public transport and
is a leader in intelligent transport technology systems (ITS) in
both countries.
Comprehensive project and program management capabilities
are supported by our world class engineering and technical
capabilities. This allows Downer to deliver projects safely, cost
effectively and on time.
Customers include nbn™, Telstra, Chorus, Spark and Vodafone.
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 2016 5
Utilities Services
The Utilities Services division provides complete lifecycle
solutions to customers in the power, gas, water and renewable
energy sectors.
Total revenue1 (FY16)
EBIT (FY16)
10.6%
11.3%
Renewable energy
Downer is one of Australia’s largest and most experienced
providers in the renewable energy market, offering design, build
and maintenance services for: wind farms and wind turbine sites;
solar farms; landfill methane generation plants; sugar cane waste
(Bagasse) fired cogeneration plants; and other biomass fired
cogeneration plants.
Utilities Services
Power and Gas
Downer offers customers a wide range of services including
planning, designing, constructing, operating, maintaining,
managing and decommissioning power and gas network assets.
Over the past four years, Downer has erected over 1,000 steel
lattice transmission towers. It has designed and built over 100
substations and every year it connects 35,000 new power
and gas customers. It also maintains over 62,000 kilometres
of electricity and gas networks across more than 115,000
square kilometres.
Customers include United Energy, AusNet Services, Ergon
Energy, Powerco, Wellington Electricity and Powerlink.
Water
Downer provides complete water lifecycle solutions for municipal
and industrial water users, with expertise including waste and
waste water treatment, pumping and water transfer, desalination
and water re-use, and abstraction and dewatering.
Supporting its customers across the full asset lifecycle from
the conceptual development of a project through design,
construction, commissioning and optimisation, Downer also
operates and maintains treatment, storage, pump station and
network assets.
Customers include Logan City Council, Mackay Regional
Council, Melbourne Water, Queensland Urban Utilities,
Tauranga City Council, Yarra Valley Water, Wagga Wagga City
Council and Watercare.
Downer offers the services required for the entire asset
life-cycle including procurement, assembly, construction
and commissioning.
Downer is currently working on the Ararat Wind Farm Project
(Victoria) and the Sunshine Coast Solar Farm while its previous
experience in wind farms includes Collgar (WA), Boco Rock and
Taralga (NSW), Lake Bonney (SA) and Mt Mercer (Victoria).
Rail
Downer provides total rail asset solutions including freight and
passenger build, operations and maintenance, component
overhauls and after-market parts.
Total revenue1 (FY16)
EBIT (FY16)
11.1%
3.9%
Rail
Downer provides services to a range of public and private
sector rail customers with capabilities spanning the provision,
maintenance and overhaul of passenger and freight rolling stock,
as well as importing and commissioning completed locomotive
units for use in the resources sector.
Downer’s Rail division has a strong national presence with
approximately 1,200 workers employed across 20 facilities.
Downer operates two fleet control centres, focused on
monitoring and management of passenger and freight fleets on
behalf of its customers, and four manufacturing plants.
Downer has formed strategic joint ventures with leading
technology and knowledge providers to support its growth
objectives in the passenger and freight market. These include
partnerships with Keolis and Electro-Motive Diesel (owned
by Caterpillar).
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%.
6 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2016 The Keolis Downer joint venture is Australia’s largest private
provider of multi-modal public transport solutions, with contracts
to operate and maintain Yarra Trams in Melbourne and the
Gold Coast light rail system in Queensland. In April 2015, Keolis
Downer acquired Australian Transit Enterprises (ATE), one of
Australia’s largest route, school and charter bus businesses. ATE
operates a fleet of over 900 buses in South Australia, Western
Australia and Queensland.
Customers include Sydney Trains, Queensland Rail, Public
Transport Authority (WA), Metro Trains Melbourne, Pacific
National, Aurizon, BHP Billiton, Genesee & Wyoming
and SCT Logistics.
Engineering, Construction and Maintenance (EC&M)
Downer works with customers in the public and private sectors
delivering services including design, engineering, construction,
maintenance and ongoing management of critical assets.
Customers include Alcoa, Bechtel, BHP Billiton, Chevron,
Landcorp, Orica, Origin Energy, POSCO, Powerlink Queensland,
Rio Tinto, Santos, Transgrid, Wesfarmers and Woodside Energy.
Mining
Downer is Australia’s leading diversified mining contractor
with around 3,500 employees working across more than
50 sites in Australia, Papua New Guinea, South America and
Southern Africa.
Total revenue1 (FY16)
EBIT (FY16)
21.5%
35.4%
Total revenue1 (FY16)
EBIT (FY16)
Mining
Downer’s Mining division generates its revenues primarily
from open cut mining and blasting services, with contributions
also from tyre management and underground mining.
Downer supports its customers at all stages of the mining
lifecycle including:
– asset management;
– blasting services, explosives manufacture and supply;
– civil projects (mine site infrastructure);
– crushing;
– exploration drilling;
– mine closure and mine site rehabilitation;
– mobile plant maintenance;
– open cut mining;
– training and development for ATSI employees;
– tyre management (through the subsidiary Otraco
International); and
– underground mining.
Customers include BHP Mitsubishi Alliance, Glencore,
Idemitsu Australia Resources, Karara Mining, Milmerran Power
Partners, Newmarket Gold, Rio Tinto, Roy Hill Iron Ore, Stanwell
Corporation and Yancoal Australia.
25.4%
13.1%
EC&M
Multi-disciplined teams project manage and self-execute a
wide range of services for greenfield and brownfield projects
across a range of industry sectors including: oil and gas; power
generation; commercial / non-residential; iron ore; coal; and
industrial materials. These services are delivered on complex
mining and industrial sites as well as commercial operations with
critical infrastructure requirements such as data centres, airport
facilities and hospitals.
Downer supports customers across all stages of the project
lifecycles with services including:
– feasibility studies;
– engineering design;
– civil works;
– structural, mechanical and piping;
– electrical and instrumentation;
– mineral process equipment design and manufacture;
– commissioning;
– operations maintenance;
– shutdowns, turnarounds and outages;
– strategic asset management; and
– decommissioning.
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 2016 7
Group financial performance
For the 12 months ended 30 June 2016, Downer reported
declines in total revenue, earnings before interest and tax (EBIT)
and net profit after tax (NPAT).
Expenses
Downer continues to take proactive steps to ‘right-size’ its
business in line with market conditions. Downer’s total expenses
declined by 2.0%, as total revenue declined by 0.5%.
Revenue
Total revenue for the Group decreased by $36.2 million, or 0.5%,
to $7.4 billion.
Transport Services revenue fell 3.9% to $1.8 billion. This was due
to reduced government expenditure in Western Australia and
inclement weather in the first half of the year, particularly in New
South Wales, as well as lower revenue from rail infrastructure
projects and New Zealand as projects completed in the previous
year were not fully replaced.
Technology and Communications Services revenue decreased
2.0% to $485.5 million as lower revenue on the Chorus contract
in New Zealand was partially offset by favourable performance
on the nbnTM contracts in Australia.
Utilities Services revenue increased 35.2% to $788.8 million,
predominantly due to a full year contribution from Tenix
(compared to eight months in the prior year) and strong
contributions from power, gas and water projects in Australia
and New Zealand.
Rail revenue decreased 5.4% to $826.2 million primarily due to
the completion of manufacturing contracts and weaker After
Market Services (AMS) sales, offset by increased revenue from
the Keolis Downer joint ventures.
EC&M revenue decreased 4.7% to $1.9 billion as a result of the
downturn in the resources sector in Australia, with significant
projects completed in the prior year not being fully replaced. This
was offset by increased activities on the Gorgon and Wheatstone
projects in Western Australia and also in New Zealand.
Mining revenue remains strong at $1.6 billion which is in line with
the prior year.
Employee benefits expenses increased by 5.9% to $2.8 billion
and represent 41.9% of Downer’s cost base. This increase is
mainly due to 12 months of Tenix contribution compared to
eight months in the prior year and restructuring costs. Excluding
Tenix and restructuring costs, employee benefits related costs
increased by 3.0% reflecting enterprise bargaining agreement
wage increases and an increase in self-perform work on some
contracts – which was offset by lower subcontractor costs.
Subcontractor costs decreased by 6.9% to $1.5 billion and
represent 22.1% of Downer’s cost base. This decrease accords
with the reduction in total revenue and a shift to self-perform on
some contracts. The continued use of subcontracting accords
with the Group’s strategy to retain cost base variability.
Raw materials and consumables expense decreased 8.4% to
$1.2 billion and represents 17.8% of Downer’s cost base. The
decrease reflects the completion of contracts and lower activity
compared to prior year.
Plant and equipment costs decreased by 9.5% to $580.2 million
and represent 8.8% of Downer’s cost base. The reduction
largely reflects reduced reliance upon operating leased assets
coupled with increased utilisation of owned assets, more
efficient maintenance practices and scope reduction on some of
Mining’s contracts.
Depreciation and amortisation increased by 2.2% to
$258.7 million and represents 3.9% of Downer’s cost base. This
increase is predominantly a result of higher utilisation of plant
and equipment on projects in Mining and EC&M.
Other expenses, communication, travel, occupancy and
professional fees have decreased by 4.5% to $363.3 million
and represent 5.5% of Downer’s cost base. Included in other
expenses is $13.0 million referable to Downer’s share of pre-tax
bid costs in relation to Downer’s unsuccessful bid for Canberra’s
new light rail project (Capital Metro).
8 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2016 The Group recognised $10.0 million in R&D incentives compared
to $25.1 million in the prior year, reflecting a change in legislation
that limited eligible R&D expenditure to $100 million.
Net finance costs increased by $3.1 million, or 10.4%, to
$33.0 million due to a higher average net debt balance during
the 2016 financial year, following the refinance of Tenix, ATE and
VEC acquisitions at higher long-term interest rates.
The effective tax rate of 26.0% is lower than the statutory rate
of 30.0% due to non-assessable R&D incentives, non-taxable
distributions from joint ventures and lower overseas tax rates.
Earnings
EBIT for the Group decreased 10.6% to $276.9 million, largely
due to lower margins in Rail and EC&M and reduced Research &
Development (R&D) incentives. Net Profit After Tax (NPAT) for
the Group decreased 14.1% to $180.6 million which includes the
$13.0 million write off of Capital Metro bid costs.
Transport Services EBIT increased 17.4% to $103.7 million
due to improved performance from the Road Services and
Infrastructure Projects businesses as well as the successful
integration of the VEC acquisition.
Technology and Communications Services EBIT increased 16.3%
to $29.9 million mainly as a result of strong performance on
nbnTM contracts in Australia.
Utilities Services EBIT increased 22.1% to $41.5 million, driven by
a full year contribution from Tenix (compared to a contribution
of eight months in the prior year) with water, power and gas
projects in Australia and New Zealand performing strongly.
Rail EBIT decreased $13.1 million to $14.4 million reflecting
$8.2 million of restructuring costs, lower build activity, reduced
orders for After Markets Services and lower performance from
joint venture operations. The prior year included a $4.0 million
provision release relating to the Waratah Train Project.
EC&M EBIT decreased 18.9% to $48.2 million due to reduced
activity in Australia and $10.6 million of restructuring costs
incurred to right-size the business. This was partially offset by
ramped up activities at Gorgon and Wheatstone and stabilising
the resources related consultancies (QCC Resources and
Mineral Technologies).
Mining EBIT decreased 2.0% to $130.0 million due to volume
and margin reductions on existing contracts, partially offset
by favourable one-off benefits from contract settlements and
adjustments of $21.1 million.
Corporate costs increased by $4.9 million, or 6.7%, to
$77.8 million, predominantly due to restructuring costs and
investment in the IT Transformation Program.
Annual Report 2016 9
Divisional Financial Performance
Transport Services
($m)
2,000
1,500
1,000
500
0
FY13
FY14
FY15
FY16
Revenue
EBIT margin
– Total revenue of $1.8 billion, down 3.9%;
– EBIT of $103.7 million, up 17.4%;
– EBIT margin of 5.6%, up 1.0 ppts;
– ROFE of 19.3%, up from 16.7%; and
– Work-in-hand of $4.7 billion.
Utilities Services
($m)
800
600
400
200
0
FY13
FY14
FY15
FY16
Revenue
EBIT margin
(%)
6.0
5.0
4.0
3.0
2.0
1.0
0.0
(%)
8.0
6.0
4.0
2.0
0.0
Technology and Communications Services
($m)
600
400
200
0
FY13
FY14
FY15
FY16
Revenue
EBIT margin
– Total revenue of $485.5 million, down 2.0%;
– EBIT of $29.9 million, up 16.3%;
– EBIT margin of 6.2%, up 1.0 ppts;
– ROFE of 83.4%, up from 44.6%; and
– Work-in-hand of $1.5 billion.
Rail
($m)
1,600
1,200
800
400
0
FY13
FY14
FY15
FY16
Revenue
EBIT margin
– Total revenue of $788.8 million, up 35.2%;
– EBIT of $41.5 million, up 22.1%;
– EBIT margin of 5.3%, down 0.5ppts;
– ROFE of 11.9%, down from 18.8%; and
– Work-in-hand of $3.3 billion.
– Total revenue of $826.2 million, down 5.4%;
– EBIT of $14.4 million, down 47.6%;
– EBIT margin of 1.7%, down from 3.1%;
– ROFE of 3.4%, down from 6.5%; and
– Work-in-hand of $4.7 billion.
Engineering, Construction and Maintenance (EC&M)
($m)
(%)
3,000
2,000
1,000
0
FY13
FY14
FY15
FY16
Revenue
EBIT margin
5.5
4.5
3.5
2.5
1.5
0.5
0.0
Mining
($m)
3,000
2,000
1,000
0
FY13
FY14
FY15
FY16
Revenue
EBIT margin
– Total revenue of $1.9 billion, down 4.7%;
– EBIT of $48.2 million, down 18.9%;
– EBIT margin of 2.6%, down 0.4 ppts;
– ROFE of 22.9%, down from 24.2%; and
– Work-in-hand of $1.9 billion.
10 Downer EDI Limited
– Total revenue of $1.6 billion, up 0.3%;
– EBIT of $130.0 million, down 2.0%;
– EBIT margin of 8.1%, down 0.2ppts;
– ROFE of 19.0%, up from 17.2%; and
– Work-in-hand of $2.5 billion.
(%)
8.0
6.0
4.0
2.0
0.0
(%)
5.0
4.0
3.0
2.0
1.0
0.0
(%)
10.0
8.0
6.0
4.0
2.0
0.0
Directors’ Report – continuedfor the year ended 30 June 2016 Group Financial Position
Funding, liquidity and capital are managed at Group level, with
Divisions focused on working capital and operating cash flow
management. The following financial position commentary
relates to the Downer Group.
Operating cash flow
Operating cash flow was strong at $447.8 million, though down
8.0% on last year due to completion of the Waratah Train
Project delivery phase payment milestones. Operating cash
flow / EBITDA conversion remained strong at 92.8%.
Investing cash
Total investing cash flow was $205.5 million, down 58.8%
or $292.7 million. The variance is predominantly due to the
acquisitions of Tenix, ATE and VEC Engineering in the prior year
for a combined total of $368.3 million.
Excluding acquisitions, investing cash flow increased by
$75.6 million due to investment in the Rosehill Asphalt site
and maintenance capital. Payments for intangible assets
increased by $15.2 million, largely representing the Group’s
investment in IT systems.
Debt and bonding
During the year, Downer completed an issue of 10 year fixed
rate US Private Placement Notes in two tranches for amounts of
US$100 million and $30 million, with a maturity date of July 2025.
The Group’s performance bonding facilities totalled
$1,336.5 million at 30 June 2016 with $614.5 million undrawn.
There is material available capacity to support the ongoing
operations of the Group.
As at 30 June 2016, Downer had liquidity of $1.1 billion
comprising cash balances of $569.4 million and undrawn
committed debt facilities of $525.0 million.
The Group continues to be rated BBB (Stable) by Fitch Ratings.
Current trade and other receivables was largely in line with the
prior year. Trade debtor days (excluding WIP) for the Group
decreased by 2.1 days, from 25.7 to 23.6 days. Trade debtor days
(including WIP) for the Group increased by 1.0 day, from 56.7
days at June 2015 to 57.7 days.
Inventories decreased $25.4 million to $327.2 million reflecting
a reduction in tyre inventories and raw materials as a result of
project completions and tight inventory management.
Current tax assets increased by $26.0 million to $46.3 million due
to the timing of cash tax payments.
Interest in joint ventures and associates decreased by $1.7 million
as $18.6 million of distributions received were offset by
Downer’s share of net profits from joint ventures and associates
of $17.7 million.
The net value of Property Plant and Equipment decreased by
$48.8 million principally due to depreciation exceeding capex
spend in response to the change in market conditions.
Intangible assets increased by $50.9 million due to the
Group’s investment in IT systems and $20.5 million of goodwill
following finalisation of acquisition accounting for Tenix and
VEC acquisitions.
Trade and other payables decreased by $52.6 million as a result
of lower business activities due to project completions. Trade
creditor days increased by 2.0 days from 35.2 to 37.2. Trade and
other payables represent 48.5% of Downer’s total liabilities.
Total drawn borrowings of $650.0 million represent 30.8% of
Downer’s total liabilities and has increased by $111.4 million
mainly as a result of the USPP notes issued in July 2015, partially
offset by repayment of debt.
Other financial liabilities of $15.8 million decreased by $2.3 million
and represent 0.7% of Downer’s total liabilities. The decrease
reflects the refund of advances to JVs and a lower mark to
market revaluation on cross-currency and interest rate swaps.
Balance sheet
The net assets of Downer increased by 2.6% to $2.1 billion.
Deferred tax liability increased by $43.8 million to $57.7 million
and is primarily due to temporary differences in WIP and accruals.
Cash and cash equivalents increased by $197.2 million or
53.0% to $569.4 million, reflecting positive cash contributions
from operations.
Net debt decreased from $179.0 million at June 2015 to
$87.4 million at June 2016. This reflects a strong cash position
partially offset by an increase in gross debt. The strong cash and
reduced net debt position resulted in 4.0% gearing (net debt
to net debt plus equity) at 30 June 2016, down from 8.1% in the
prior year. The present value of operating lease commitments
for plant and equipment also reduced from $151.1 million at June
2015 to $128.5 million, representing off balance sheet gearing of
9.4%, down from 14.0% in the prior year.
Provisions of $364.2 million increased by $42.6 million and
represent 17.2% of Downer’s total liabilities. Employee provisions
(annual leave and long service leave) made up 77.4% of this
balance with the remainder covering onerous contracts
provisions and return conditions obligations for leased assets
and property and warranty obligations.
Shareholder equity increased by $53.2 million with the net profit
after tax of $180.6 million partially offset by the $26.5 million on-
market share buy-back and $113.1 million of dividend payments
made during the year. Net foreign currency gains on translation
of foreign jurisdictions, particularly in New Zealand, resulted
in a movement in the foreign currency translation reserve
by $9.4 million.
Annual Report 2016 11
Dividends
The Downer Board resolved to pay a fully franked final
dividend of 12.0 cents per share (12.0 cents per share in the
prior corresponding period), payable on 15 September 2016 to
shareholders on the register at 18 August 2016.
The Board also determined to continue to pay a fully imputed
dividend on the ROADS security, which having been reset on 15
June 2016 has a yield of 6.29% per annum payable quarterly in
arrears, with the next payment due on 15 September 2016. As
this dividend is fully imputed (the New Zealand equivalent of
being fully franked), the actual cash yield paid by Downer will be
4.53% per annum for the next 12 months.
Zero Harm
During the first half of the year, tragically, an employee died while
working in the Western Australian EC&M business. This fatality
highlights the importance of continuing Downer’s focus on
controlling the critical risks that can cause death.
Downer’s Lost Time Injury Frequency Rate (LTIFR) reduced from
0.87 to 0.66 and Total Recordable Injury Frequency Rate (TRIFR)
reduced from 3.78 to 3.32 per million hours worked.
Downer Group Safety Performance
(12–month rolling frequency rates)
0.87
3.78
R
F
T
L
I
1.0
0.8
0.6
0.4
0.2
0.0
0.66
3.32
I
R
F
R
T
4.0
3.8
3.6
3.4
3.2
3.0
5
1
-
n
u
J
5
1
-
g
u
A
5
1
-
t
c
O
5
1
-
c
e
D
6
1
-
b
e
F
6
1
-
r
p
A
6
1
-
n
u
J
LTIFR
TRIFR
12 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2016 Group business strategies and prospects for future financial years
Downer strives to improve business performance through a focus on safety, enhanced customer relationships, business transformation,
cost efficiencies and productivity gains in response to changing economic conditions. Downer’s strategic objectives, prospects and
risks that could adversely impact the achievement of these objectives are outlined in the table below:
Strategic Objective
Prospects
Risk management
Maintain
focus on Zero Harm
Downer is an industry leader but seeks to
continually improve its performance to achieve
its goal of zero work related injuries and
environmental incidents.
Build core markets
and capabilities
Downer will continue to improve its existing
business and build on its market leading positions,
capabilities and Intellectual Property.
Downer will pursue initiatives to achieve these
objectives, including:
– developing and growing Asset
Management capabilities;
– focusing more closely on forward revenue
opportunities in public transport (network
construction, operations and maintenance),
electricity networks (through State
Government privatisations), passenger heavy
and light rail, outsourcing of road maintenance
by State Governments and the nbn roll-out;
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.
The achievement of these strategic objectives
may be affected by macro-economic risks
including global economic conditions, 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:
– forming strategic partnerships and joint
ventures with leading technology and
knowledge providers;
– forming strategic partnerships and joint
ventures with leading technology and
knowledge providers and enhancing
Downer’s Customer Relationship
Management (CRM) program;
– expanding into overseas markets selectively
through existing customer relationships;
– identification, and rigorous review, of
overseas opportunities;
– enhancing management capability to improve
– a succession planning process for
operational and financial performance;
all leadership roles and a leadership
development program;
– adapting tendering model for large
– bid governance process ensures i) there
infrastructure projects; and
is a substantial level of risk assessment to
inform Downer’s decision on whether to bid,
and the terms of the bid, and ii) there is a
strong focus on bid costs throughout the
tender process; and
– maintaining industry and geographical
– growth and development strategies to
diversification to achieve greater resilience
through economic cycles.
diversify revenue sources, including through
joint ventures.
Annual Report 2016 13
Strategic Objective
Prospects
Risk management
Strengthen
customer relationships
Drive efficiency
and productivity
Continuous improvement of the Company’s
engagement with customers, including working
with them constructively to reduce costs and
improve productivity.
Leveraging “cross-selling” opportunities.
Engaging more closely with customers to
understand their needs and play a more
substantial role in their success.
Downer has two key internal business initiatives:
– Fit 4 Business Program: which has achieved
more than $600 million in cost benefits since
its launch in FY11; and
– Business Transformation Program: involves
investment in core systems and the
consolidation of business services.
Downer has taken proactive steps to ‘right-size’ its
business in alignment with market conditions.
Ongoing analysis of markets, customers and
competitors to understand potential impacts and
determine necessary action.
Continuing to drive benefits from Downer’s broad
range of capabilities and CRM tools.
Downer restructured in 2015 to create better
alignment with its customer base and is
implementing a range of initiatives to develop a
more customer-focused organisation.
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, technological advancements
and cost management is a fundamental part of
Downer’s formal planning processes, day-to-day
management activities and governance activities.
Continue to improve tender, contract and project
risk management processes.
Rigorous tender, contract and project risk policies
and procedures consistently across the Group.
Continue to focus on asset utilisation and the
appropriateness of the carrying value and
allocation of non-current assets.
Assess growth opportunities Downer assesses merger and acquisition
opportunities on an ongoing basis, including
in new geographies, with a focus on the
following key criteria:
– strategic fit for Downer;
– growth of capability; and
– appropriate valuation.
Capital management
Downer intends to maintain strong balance sheet
and financial metrics. It also intends to maintain an
investment-grade external credit rating.
Detailed review of equipment, including age and
valuation. Asset specific maintenance plans and
continued assessment to ensure equipment is
allocated on a best fit-for-purpose basis.
Downer undertakes rigorous analysis of potential
opportunities to ensure they meet the key criteria
and are structured to mitigate downside risks. The
company is also focused on ensuring it remains
well within its financing covenant and credit
rating metrics.
In April 2016, Downer successfully completed
a partial extension of the Group’s $400 million
Syndicated Debt Facility that split the facility into
two tranches, with $200 million maturing in April
2019 and $200 million in April 2021. The Group
maintains ample capacity to support its ongoing
operations and continues to be rated BBB (Stable)
by Fitch Ratings.
14 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2016 The following table provides an overview of the key prospects relevant to each of Downer’s service lines and summarises Downer’s
intended strategic response across each sector to maximise the company’s performance and realise future opportunities.
Service line
Prospects
Downer’s response
Transport Services
Potential for further outsourcing as Governments
seek greater efficiency and smarter solutions.
Technology and
Communications Services
Utilities Services
Rail
EC&M
Mining
Customers are developing new performance-
based contracting models, based on closer
collaboration between parties, which are
generating longer term construction, operations
and maintenance opportunities.
The power, gas and water markets offer long-
term operations and maintenance contract
opportunities, with potential for growth through
increased outsourcing.
Governments are seeking value through:
– the procurement of large orders of
passenger rolling stock and long-term
maintenance contracts;
– the franchising of operations and
maintenance of heavy rail, light rail and bus
transport networks; and
– the development of multi-modal transport
infrastructure solutions.
Freight customers are seeking continual
improvements to fleet performance and reliability,
with a strong focus on technology and innovation.
EC&M opportunities, particularly in the resources
sector, are declining due to the mining downturn.
They are being replaced by opportunities at
different stages of the investment/asset lifecycle
and across adjacent sectors.
Depressed commodity prices have led to reduced
volumes and lower levels of investment, increasing
the industry’s focus on cost reduction. However,
opportunities exist for mining contractors that
can work collaboratively with customers to help
drive productivity improvements and reduce
production costs.
Downer is a market leader in Australia and
New Zealand and is well positioned for future
opportunities in both countries. Downer has a
vertically integrated Road Services business
with end-to-end service offering, including
asphalt production.
Downer is a market leader in both Australia and
New Zealand and works closely with its customers
in both countries to adapt to the changing
environment and help them achieve success.
Downer has market leading positions in both
Australia and New Zealand and is well positioned
for future opportunities, including those
flowing from State Government privatisation of
electricity assets.
Downer’s rail asset management model has
a strong focus on ‘return on investment’ – i.e.
increasing fleet availability and reliability.
Downer maintains strong strategic partnerships
with leading global transport solutions providers
and, through this model, is pursuing opportunities
in rolling stock manufacture and maintenance and
transport network operations and maintenance.
The Keolis Downer joint venture is a leading
Australian multi-modal transport operator, through
its light rail and bus operations.
Downer is building on its leading, multi-discipline
capability, working with customers to provide the
best project management delivery mode, and
developing its asset management capabilities to
become a strategic solutions provider across the
complete asset lifecycle.
Downer is also focused on optimising its
performance on existing LNG projects.
Downer’s Mining division continues to perform
strongly by focusing on cost reduction, increased
efficiencies and close collaboration with customers.
The business continues to examine
overseas opportunities.
Annual Report 2016 15
Outlook
Environmental
Whilst Downer faces continued pressure in its resources based
businesses, the company is progressing well in repositioning to
service increased investment and outsourcing in Roads and Rail,
Public Transport, Utilities, Defence and Communications.
Downer anticipates that the company’s diversity and strong
market positions in key sectors will continue to provide
reliable earnings, growth opportunities and high cash flow
generation in 2017.
Downer recognises its obligation to stakeholders – customers,
shareholders, employees, contractors and the community – to
operate in a way that advances sustainability and mitigates
the Company’s environmental impact. As a corporate citizen
Downer respects the places and communities in which it
operates. Downer’s values and beliefs are the spirit that
underpins everything it does and it is committed to conducting
its operations in a manner that is environmentally responsible
and sustainable.
As each of the major Rail bids will be announced in the first half
of the 2017 financial year, there remains a risk that Downer will be
required to expense a proportion or all of those bid costs in the
event it is unsuccessful on one or more of the bids.
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 its
operations and business activities on the environment.
Downer is targeting NPAT of around $170 million for the
2017 financial year (excluding any major Rail related bid
cost write-offs).
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 Group,
the results of those operations, or the state of affairs of the
Group in subsequent financial years.
Downer uses the international standard ISO 14001 as a
benchmark in assessing, improving and maintaining the integrity
of its environmental management system. In addition, all Downer
Divisions conduct regular internal environmental audits and the
system is independently certified by third parties.
The Company’s Divisions also adhere to environmental
management requirements established by customers in addition
to all applicable licence and regulatory requirements.
More information on Downer’s sustainability performance can be
found on pages 98 to 99.
Changes in state of affairs
Dividends
During the financial year there was no significant change in the
state of affairs of the Group other than that referred to in the
financial statements or notes thereto.
In respect of the financial year ended 30 June 2016, the Board:
– declared a fully franked interim dividend of 12.0 cents per
share that was paid on 17 March 2016 to shareholders on the
register at 18 February 2016; and
– declared a fully franked final dividend of 12.0 cents per
share, payable on 15 September 2016 to shareholders on the
register at 18 August 2016.
Due to the strength of Downer’s balance sheet, the Company’s
Dividend Reinvestment Plan remains suspended.
As detailed in the Directors’ Report for the 2015 financial year,
the Board declared a fully franked final dividend of 12.0 cents per
share, that was paid on 17 September 2015 to shareholders on
the register at 20 August 2015.
16 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2016 Employee Discount Share Plan (ESP)
An ESP 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-time 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 ESP during the years ended 30 June 2016 or 30 June 2015.
There are no performance rights or performance options, in relation to unissued shares, that are outstanding.
Directors’ meetings
The following table sets out the number of Directors’ meetings (including meetings of Board Committees) held during the 2016 financial
year and the number of meetings attended by each Director (while they were a Director or Board Committee member). During the
year, 13 Board meetings, six Audit and Risk Committee meetings, five Remuneration Committee meetings, four Zero Harm Committee
meetings and two Nominations and Corporate Governance Committee meetings were held. In addition, 17 ad hoc meetings (attended
by various Directors) were held in relation to various matters including tender reviews, treasury matters and the on-market share
buy-back program.
Director
R M Harding
G A Fenn
S A Chaplain
P S Garling
E A Howell
J S Humphrey2
C G Thorne3
Director
R M Harding
G A Fenn
S A Chaplain
P S Garling
E A Howell
J S Humphrey2
C G Thorne3
Board
Audit and Risk
Committee
Remuneration
Committee
Held1
13
13
13
13
13
13
13
Attended
12
13
13
12
13
13
13
Held1
–
–
6
6
–
6
6
Attended
–
–
6
5
–
6
6
Held1
5
–
–
5
–
5
–
Attended
5
–
–
5
–
4
–
Zero Harm
Committee
Nominations and
Corporate Governance
Committee
Held1
–
4
4
–
4
–
4
Attended
–
4
4
–
4
–
4
Held1
2
–
2
–
–
2
–
Attended
2
–
2
–
–
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, Buy-back Committee and IT Transformation Committee which meet on an unscheduled basis.
3
Dr Thorne is also Chairman of the Tender Risk Evaluation Committee which meets on an unscheduled basis.
Annual Report 2016 17
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.
Corporate Governance
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 43 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:
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 Group’s
corporate governance statement is set out on pages 100 to 108
of this Annual Report.
Non-audit services
Tax services
Sustainability assurance
Due diligence and other
non-audit services
June 2016
$
June 2015
$
743,567
107,500
306,842
1,157,909
733,510
106,000
315,742
1,155,252
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 Group. To ensure that there is no potential
conflict of interest in work undertaken by Downer’s external
auditors, KPMG, 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).
Rounding of amounts
Downer is a company of the kind referred to in ASIC
Corporations (Rounding in Financial / Directors’ reports)
Instrument 2016/191, relating to the “rounding off” of amounts
in the Directors’ Report and consolidated financial statements.
Unless otherwise expressly stated, amounts have been rounded
off to the nearest whole number of millions of dollars and one
place of decimals representing hundreds of thousands of dollars.
18 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2016 Remuneration Report – AUDITED
The Remuneration Report provides information about the remuneration arrangements for key management personnel (KMP), which
means Non-executive Directors and the Group’s most senior executives, for the year to 30 June 2016. The term “executive” in this
Report means KMPs who are not Non-executive Directors.
The Report covers the following matters:
1. Year in review;
2. Details of Key Management Personnel;
3. Remuneration policy, principles and practices;
4. Relationship between remuneration policy and company performance;
5. The Board’s role in remuneration;
6. Description of executive remuneration;
7. Details of executive remuneration;
8. Executive equity ownership;
9. Key terms of employment contracts;
10. Prior equity-based remuneration plans;
11. Related party information; and
12. Description of Non-executive Director remuneration.
1. Year in review
1.1 Summary of changes to remuneration policy
Downer has continued to refine its remuneration policy during the period. The Board considered Company strategy and 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 2015
Short-term incentive (STI) plan
– The Safety Critical Risk and Environmental Critical Risk measures have been further refined
to ensure continual stretch and ongoing Zero Harm improvement. These measures now
also require the implementation of risk controls for the most critical risks in each part of the
Company and a more challenging target for Action Close Outs.
Annual Report 2016 19
1.2 Key issues raised regarding the 2015 Remuneration Report
The Board has considered feedback from shareholders. Set out below is a summary of the Board’s responses to the key issues raised
by some shareholders in relation to the 2015 Remuneration Report.
Feedback
Response
A retention arrangement was put in place for the CEO Mining in August 2014. This retention
ensured the continued service of the CEO Mining for at least another three years at a time
when he was contemplating retirement in the near term. Notwithstanding a number of
internal successors being identified at the time, the Board formed the view that the skills
and experience of Mr Overall meant that he was best placed to lead the Mining division
through a period of difficult transition in the mining sector.
As part of the 2014 contract, subject to legislative requirements Mr Overall will be entitled
to a lump sum cash payment equivalent to 12 months’ fixed remuneration (‘Cash Payment’)
provided he remains employed by the Downer Group on 21 May 2017. Mr Overall will be
entitled to a pro-rata Cash Payment if his employment is terminated by Downer prior to
21 May 2017 (other than for gross misconduct) or if he ceases to be employed by reason
of death.
Further, in implementing this arrangement, the CEO Mining’s total potential remuneration
remained at a similar level due to:
– No change to fixed remuneration (which has remained unchanged since July 2012); and
– His participation level in the LTI plan reducing from 75% to 37.5%.
The Board remains of the view that this arrangement was in the best interests of the
shareholders and has delivered considerable value to the Company.
No new retention arrangements have been made for, or are in place for, any member of
the KMP.
The Managing Director was appointed in June 2010. The total remuneration package at the
time of appointment was 23% lower than the remuneration paid to his predecessor.
A benchmarking review of the Managing Director’s total remuneration package against
a sector peer group was undertaken by the Board’s external adviser in 2012. This review
showed that the current total remuneration package was appropriate at that time.
The Managing Director’s total remuneration package has been unchanged since that time.
No KMP’s fixed remuneration package has been increased in the past three years.
While acknowledging that disclosure in relation to the STI plan is comprehensive, it was
noted by some shareholders that specific financial and commercial targets at Divisional and
Corporate levels were not disclosed due to commercial sensitivity. The Board considers that
this approach continues to be in the best interest of shareholders.
In response to feedback, the range of IPMs awarded to key management personnel has been
disclosed at section 7.3.
One-off payment
The retention arrangement for the
CEO Mining does not provide value to
shareholders
Managing Director’s
Remuneration
The Managing Director’s fixed
remuneration is high
Short-term incentive (STI) plan
There could be more detail disclosed
in relation to the STI measures for
individual KMP
Individual Performance Modifiers
(IPMs) are not disclosed
20 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2016 Feedback
Response
Long-term incentive (LTI) plan
Scorecard hurdles are not disclosed
retrospectively
The TSR comparator group is too wide
While acknowledging that disclosure in relation to the LTI plan is comprehensive, it was noted
by some shareholders that specific financial targets (Net Profit After Tax and Free Cash Flow)
were not disclosed in relation to the Scorecard measure due to commercial sensitivity. The
Board considers that this approach continues to be in the best interest of shareholders.
A comment regarding the appropriate comparator group for the LTI plan was raised. Downer
uses the broader ASX100 (excluding financial institutions) rather than a small peer group as
its comparator group to measure performance.
The Board is firmly of the view that this is the most appropriate measure of relative
performance because:
– The Company competes against ASX100 companies for capital and therefore believes
that driving Management performance to exceed the performance of ASX100 companies
is appropriate;
– Limiting the comparator group to a small number of direct competitors could result in
very volatile outcomes from period to period; and
– In any event, the Company’s peer group is continually changing and difficult to define as a
result of consolidation, divestments and new market entrants from overseas.
Post-employment
Termination benefits potentially
payable to the Managing Director are
excessive
One party noted that payments to the Group CEO on termination could potentially exceed
12 months’ remuneration. As disclosed in previous remuneration reports, the Managing
Director’s employment contract contains a provision regarding the Corporations Act 2001
(Cth) limitations on termination benefits, such that shareholder approval would be required
prior to any payment being made in excess of those limitations.
2. Details of Key Management Personnel
The following persons acted as Directors of the Company during or since the end of the most recent financial year:
Director
R M Harding
G A Fenn
S A Chaplain
P S Garling
E A Howell
J S Humphrey
C G Thorne
Role
Chairman, Independent Non-executive Director
Managing Director and Chief Executive Officer
Independent Non-executive Director
Independent Non-executive Director
Independent Non-executive Director
Independent Non-executive Director
Independent Non-executive Director
The named persons held their current executive position for the whole of the most recent financial year, except as noted:
Executive
C W Bruyn
S Cinerari
M J Ferguson
K J Fletcher
M J Miller
L Nucifora
D J Overall
B C Petersen
Role
Chief Executive Officer – New Zealand
Chief Executive Officer – Infrastructure Services
Acting Chief Financial Officer, from 11 April 2016
Chief Financial Officer, to 10 April 2016
Acting Chief Executive Officer – Rail
Chief Executive Officer – Engineering, Construction & Maintenance, to 17 November 2015
Chief Executive Officer – Mining
Chief Executive Officer – Engineering, Construction & Maintenance, from 1 February 2016
In 2015, Downer Infrastructure was restructured into three Divisions. Following completion of this restructure, the KMP for 2016 are the
Group CEO, Group CFO and the CEOs of Downer’s five Divisions. With Mr Cattell ceasing in his role as CEO Downer Infrastructure, he is
not a KMP for 2016.
Annual Report 2016 21
3. Remuneration policy, principles and practices
3.1 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
Focus performance
Provide a Zero
Harm environment
Manage risk
– 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.
– Provide a substantial component of pay contingent on performance against targets;
– Focus attention on the most important drivers of value by linking pay to their achievement;
– Require profitability to reach a challenging level before any bonus payments can be made; and
– Provide a LTI plan 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 Downer’s 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 payments 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 LTI components in shares; 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.
22 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2016 4.2 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.
4. Relationship between remuneration policy
and company performance
4.1 Company strategy and remuneration
Downer’s business strategy includes:
– Maintaining focus on Zero Harm by continually improving
health, safety and environmental performance to
achieve Downer’s goal of zero work-related injuries and
environmental incidents;
– Driving growth in core markets through focusing on serving
existing customers better across multiple products and
service offerings, growing capabilities and expanding into
overseas markets with current customers of the Company;
– Reducing risk and enhancing 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
– Maintaining flexibility to be 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 and retention of its people to
help maintain a sustainable supply of talent.
Annual Report 2016 23
The following graph shows the Company’s performance compared to the median performance of the ASX100 over the three year
period to 30 June 2016.
Downer EDI TSR compared to S&P/ASX 100 median*
180
160
140
120
100
80
60
40
20
0
)
0
0
1
o
t
d
e
x
e
d
n
I
(
n
r
u
t
e
R
r
e
d
o
h
e
r
a
h
S
l
l
a
t
o
T
Jun
2013
Sep
2013
Dec
2013
Mar
2014
Jun
2014
Sep
2014
Dec
2014
Mar
2015
Jun
2015
Sep
2015
Dec
2015
Mar
2016
Jun
2016
* S&P/ASX100 companies as at 30/06/2013
Downer EDI TSR
S&P/ASX100 median TSR
The graphs below illustrate Downer’s performance against key financial and non-financial performance indicators over the
last five years.
Net profit after tax
Free cash flow
204.0
216.0
210.2
180.6
m
$
’
250
200
150
100
50
0
112.9
m
$
’
350
300
250
200
150
100
50
0
304.6
242.3
161.5
159.7
(11.7)
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
Basic earnings per share
Safety
LTIFR
TRIFR
e
r
a
h
s
r
e
p
s
t
n
e
C
60
50
40
30
20
10
0
23.7
45.7
48.3
46.6
40.3
s
r
u
o
h
0
0
0
0
0
0
,
1
,
r
e
p
s
e
i
r
u
n
j
i
I
e
m
T
t
s
o
L
1.2
1.0
0.8
0.6
0.4
0.2
0.0
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
24 Downer EDI Limited
12
10
8
6
4
2
0
s
r
u
o
h
0
0
0
0
0
0
,
1
,
r
e
p
s
e
i
r
u
n
j
l
I
e
b
a
d
r
o
c
e
R
l
a
t
o
T
Directors’ Report – continuedfor the year ended 30 June 2016
5. 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.
6. Description of executive remuneration
6.1 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% 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.
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
Maximum total
performance
based pay as a % of
fixed remuneration
75
75
56.25
100
100
75
100
75
50
200
175
125
Annual Report 2016 25
The proportions of STI to LTI take into account:
– Market practice;
– The service period before executives can receive equity rewards;
– The behaviours that the Board seeks to encourage through direct key performance indicators; and
– The guideline for the Managing Director to maintain a shareholding as a multiple of pay after long-term incentive
rewards have vested.
6.2 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 to fixed remuneration in the 2016 financial year. No KMP received an adjustment to fixed remuneration
in the past three years.
6.3 Short-term incentive
6.3.1 STI tabular summary
The following table outlines the major features of the 2016 LTI plan.
Purpose of STI plan
– Focus performance on drivers of shareholder value over 12-month period;
– Improve “Zero Harm” and people related results; and
– Ensure a part of remuneration costs varies with the Company’s 12-month performance.
Minimum performance “gateway”
before any payments can be made
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% of fixed remuneration; and
– KMP appointed from 2011: up to 75% of fixed remuneration.
Percentage of STI that can be
earned on achieving target
expectations
Individual Performance Modifier
(IPM)
75% 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.
– Application of an IPM cannot result in an award greater than the maximum STI% level set out
in section 6.1.
Discretion to vary payments
The Board, in its discretion, may vary STI payments by up to + or – 100% from the payment
applicable to the level of performance achieved, up to the maximum for that executive.
Performance period
1 July 2015 to 30 June 2016.
Performance assessed
August 2016, following audit of accounts.
Additional service period after
performance period for payment to
be made
Payment timing
50% of the award is deferred with the first tranche of 25% vesting one year following award and
the second tranche of 25% vesting two years following award.
August 2016 for the first cash payment of 50% 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% of
the award.
26 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2016 Form of payment
Cash for initial payment.
The value of deferred components will be settled in cash or 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
New recruits
Terminating executives
The Board may exercise discretion to:
– 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; and
– 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, the
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.
6.3.2 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 2016.
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 at a challenging level 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 6.1, the maximum STI that can be earned is capped to minimise excessive risk taking.
Deferral is a key feature as part of the STI structure. Payment of 50% of the award is paid at the time of award in cash and the remaining
50% of the award earned is deferred over two years.
The first payment of 50% of the award 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% 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.
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.
Annual Report 2016 27
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.
6.3.3 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 6.1.
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 percent x scorecard result x IPM.
6.3.4 STI performance requirements
Overall performance is assessed on NPAT, EBIT, FFO, Zero Harm and a measure of people development.
NPAT and EBIT include joint ventures and associates and include, 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.
For 2016, the Board made the Action Close Outs safety measure more challenging and further developed the Safety Critical Risk and
Environmental Critical Risk measures to ensure Downer continues to focus on effective risk controls.
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)
Critical risks
Environmental
Critical risk
Achieve a set reduction in the TRIFR at level of responsibility. 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 risk Action Close Outs and the development and implementation of risk controls and
assurance programs.
Implement risk mitigation plans for the area of control.
Sustainable development
Achieve energy efficiency targets for the area of control.
28 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2016 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 2016 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
30%
7.5%
–
22.5%
30%
30%
(7.5% Group,
22.5% division)
30%
30%
People
10%
10%
The Board has discretion to vary STI payments by up to + or – 100% 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 7.3.
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.
6.4 Long-term incentive
6.4.1 LTI tabular summary
The following table outlines the major features of the 2016 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;
– 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% of fixed remuneration;
– KMP appointed pre-2011: 75% of fixed remuneration; and
– KMP appointed from 2011: 50% of fixed remuneration.
Performance periods
1 July 2015 to 30 June 2018.
Performance assessed
September 2018.
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 2018.
Performance rights vest
1 July 2019.
Form of award and payment
Performance rights.
Annual Report 2016 29
Performance conditions
There are three performance conditions. Each applies to one-third of the performance rights granted to
each executive.
Relative TSR
The relative TSR performance condition is 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 three years to 30 June 2018.
The performance vesting scale that will apply to the performance rights subject to the relative TSR test
is shown in the table below:
Downer EDI Limited’s
TSR Ranking
Percentage of performance rights subject to TSR condition that
qualify for vesting
< 50th percentile
50th percentile
0%
30%
Above 50th and
below 75th percentile
Pro-rata so that 2.8% of the performance rights in the tranche will vest for
every 1 percentile increase between the 50th percentile and 75th percentile
75th percentile and above
100%
EPS growth
The EPS growth performance condition is based on the Company’s compound annual EPS growth over
the three years to 30 June 2018.
The performance vesting scale that will apply to the performance rights subject to the EPS growth test
is shown in the table below:
Downer EDI Limited’s EPS
compound annual growth
Percentage of performance rights subject to EPS condition that
qualify for vesting
< 5%
5%
0%
30%
Above 5% to < 10%
Pro-rata so that 14% of the performance rights in the tranche will vest
for every 1% increase in EPS growth between 5% and 10%
10% or more
100%
Scorecard
The Scorecard performance condition is based on the Group’s NPAT and FFO for each of the three years
to 30 June 2018.
The performance vesting scale that will apply to the performance rights subject to the Scorecard test is
shown in the table below:
Scorecard result
< 90%
90%
Above 90% to < 110%
Percentage of performance rights subject to Scorecard condition
that qualify for vesting
0%
30%
Pro-rata so that 3.5% of the performance rights in the tranche will vest
for every 1% increase in the Scorecard result between 90% and 110%
110% or more
100%
How performance rights
and shares are acquired
The rights are 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.
Treatment of dividends
and voting rights on
performance rights
Performance rights do not have voting rights or accrue dividends.
Restriction on hedging
Hedging of entitlements under the plan by executives is not permitted.
30 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2016 Restriction on trading
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 participants
Terminating executives
Change of control
New executives (either new starts or promoted employees) are eligible to participate in the LTI on the
first grant date applicable to all executives after they commence in their position. 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 including 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, EPS growth or
Scorecard 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.
6.4.2 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 (2013 and earlier), 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 2016 LTI represents 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 three equal tranches, with each tranche subject
to an independent performance requirement. The performance
requirements for each tranche will share two common features:
– Once minimum performance conditions are met, the
proportion of performance rights that qualify for vesting
commences at 30% 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.
Performance for the 2016 LTI grants will be measured over the
three-year period to 30 June 2018.
The proportion of performance rights that can vest will be
calculated in September 2018, but executives will be required
to remain in service until 30 June 2019 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.
6.4.3 Performance requirements
One tranche of performance rights in the 2016 LTI grant will
qualify for vesting subject to performance relative to other
companies, while the other two tranches of performance rights
will qualify for vesting subject to separate, independent absolute
performance requirements.
The relative performance requirement applicable to the first
tranche of performance rights is based on total shareholder
return (TSR). TSR is calculated as the difference in share
price over the performance period, plus the value of shares
earned from reinvesting dividends received over this period,
expressed as a percentage of the share price at the beginning
of the performance period. If the TSR for each company in the
comparator group is ranked from highest to lowest, the median
TSR is the percentage return to shareholders that exceeds the
TSR for half of the comparison companies. The 75th percentile
TSR is the percentage return required to exceed the TSR for 75%
of the comparison companies.
Annual Report 2016 31
NPAT and FFO targets are 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% upon meeting the
minimum three-year average component performance level
of 90% of target to 100% at the capped maximum three-year
average component performance level of 110% 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 2016 the components are
equally weighted.
At the beginning of
each financial year
NPAT and FFO target performance
levels are set.
At the end of
each financial year
– Calculate actual performance; and
– Assess actual performance compared
to target to determine performance
percentage for the year.
– Calculate average annual performance
for each component; and
– Calculate award based
on performance against
the vesting range.
At the end of
three years
Consider the continued service condition
and determine vesting.
6.4.4 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 long-term incentive shares equal in value to 100%
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.
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.
The tranche of performance rights dependent on the EPS
performance condition will vest pro-rata between 5% compound
annual EPS growth and 10% compound annual EPS growth.
At the end of
three years
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% of the tranche vest at
the 50th percentile, 32.8% at the 51st percentile, 35.6% at the
52nd percentile and so on until 100% vest at the 75th percentile.
The comparator group for the 2016 LTI grants will be the
companies, excluding financial services companies, in the
ASX100 index as at the start of the performance period on 1 July
2015. 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
second tranche of performance rights is based on Earnings per
Share (EPS) growth over the three year performance period
to 30 June 2018. The EPS measure is based on AASB 133
Earnings per Share.
Vesting applies on a pro-rata basis from 30% upon meeting the
minimum compound annual EPS growth performance level of 5%
to 100% at 10% 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%.
The absolute performance requirement applicable to
the third tranche of performance rights is based on the
Scorecard condition over the three year performance period
to 30 June 2018.
The Scorecard condition is designed to:
– Strengthen retention through the setting of challenging
targets on an annual basis that reflect prevailing market
conditions, for a portion of LTI awards;
– Align 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 is comprised of two independent
absolute components of equal weighting. These components are
based on Group NPAT and Group FFO.
The performance of each component will be measured over the
three year period to 30 June 2018.
32 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2016 7. Details of Director and executive remuneration
7.1 Remuneration received in relation to the 2016 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 2016 financial year, comprising fixed remuneration, cash STIs
relating to 2016, deferred STIs payable in 2016 in respect of prior years and the value of LTI grants that vested during the 2016 financial
year. This information differs to that provided in the statutory remuneration table at section 7.2 which shows the accounting expense
of LTIs and deferred STIs for 2016 determined in accordance with accounting standards rather than the value of LTI grants that vested
during the year.
Cash Bonus
paid or payable
in respect of
current year
$
Deferred
Bonus paid
or payable
in respect
of prior years
$
Fixed
Remuneration1
$
2,013,400
826,172
1,056,607
113,095
988,806
570,000
418,736
1,324,955
354,167
7,665,938
644,700
–
476,000
35,670
631,806
–
–
595,213
63,194
2,446,583
799,702
151,232
187,500
–
587,855
–
–
589,401
–
2,315,690
Total
payments
$
3,457,802
977,404
1,720,107
148,765
2,208,467
570,000
418,736
2,509,569
417,361
12,428,211
Equity that
vested during
20164
$
Total
remuneration
received
$
696,316
175,789
232,105
–
232,105
–
–
348,157
–
1,684,472
4,154,118
1,153,193
1,952,212
148,765
2,440,572
570,000
418,736
2,857,726
417,361
14,112,683
G A Fenn2,5
C W Bruyn2,6
S Cinerari2,6
M J Ferguson3,8
K J Fletcher7
M J Miller3
L A Nucifora
D J Overall2,5
B C Petersen2
1
2
3
4
5
Fixed remuneration comprises salary and fees, payment of leave entitlements, non-monetary benefits and superannuation payments.
Cash Bonus paid or payable in respect of current year represents cash payments in relation to the 2016 financial year. These comprise the 50% cash component of the
award. The remaining 50% of the total award is deferred as described in section 6.3.
Cash Bonus paid or payable in respect of current year represents cash payments in relation to the 2016 financial year. These comprise 100% of the award as the executive is
currently serving in an ‘Acting’ capacity and accordingly STI deferral does not apply.
Represents the value of restricted shares granted in previous years that vested during the year, calculated as the number of restricted shares that vested multiplied by the
closing market price of Downer shares on the vesting date.
Deferred Bonus represents the deferred cash bonus amount to be paid in August 2016, being the second deferred component of the 2014 award and the first deferred
component of the 2015 award, being 25% of each award.
6 Deferred Bonus represents the deferred cash bonus amount to be paid in August 2016, being the first deferred component of the 2015 award (being 25% of the total
2015 award).
7 Mr K J Fletcher passed away on 10 April 2016. Fixed Remuneration includes $140,015 in accrued leave benefits paid in relation to cessation of employment. The Board
determined that Mr Fletcher’s full 2016 STI award and unvested deferred STI entitlements (being the second deferred component of the 2014 award and the first and second
deferred components of the 2015 award) be paid to his estate.
8 Mr M J Ferguson’s current annual fixed remuneration is $500,000. Amounts represent the portion of his remuneration earned as a member of the KMP in his role as Acting
Chief Financial Officer.
Annual Report 2016 33
7.2 Remuneration of executive key management personnel required under the Corporations Act 2001 (Cth)
2016
G A Fenn2,4
C W Bruyn2,4
S Cinerari2,4
M J Ferguson1,3,8
K J Fletcher4,7
M J Miller3
L A Nucifora1
D J Overall2,4,6
B C Petersen1,2
Salary
and fees
$
1,817,359
794,942
1,006,980
108,728
870,784
536,446
402,019
1,305,647
339,406
7,182,311
Short-term
employee benefits
Cash Bonus
paid or
payable in
respect of
current year
$
Deferred
Bonus paid
or payable in
respect of
prior years
$
Post-employment
benefits
Non-
monetary
$
Super-
annuation
$
Other
benefits
$
Subtotal
$
Share-
based
payment
transac-
tions5
$
Total
$
644,700
–
476,000
35,670
631,806
–
–
595,213
63,194
2,446,583
735,192
126,027
354,583
–
261,285
–
–
594,700
26,331
2,098,118
176,733
31,230
23,046
–
86,492
14,246
9,143
–
6,716
347,606
19,308
–
26,581
4,367
31,530
19,308
7,574
19,308
8,045
136,021
–
–
–
–
–
–
–
445,627
–
4,196,435
1,204,372
2,140,180
148,765
2,657,870
570,000
418,736
3,336,366
443,692
445,627 12,656,266 2,460,150 15,116,416
3,393,292
952,199
1,887,190
148,765
1,881,897
570,000
418,736
2,960,495
443,692
803,143
252,173
252,990
–
775,973
–
–
375,871
–
1
2
3
Amounts represent the payments relating to the period during which the individuals were Key Management Personnel (KMP).
Cash Bonus paid or payable in respect of current year represents cash payments in relation to the 2016 financial year. These comprise the 50% cash component of
the award.
Cash Bonus paid or payable in respect of current year represents cash payments in relation to the 2016 financial year. These comprise 100% of the award as the executive is
currently serving in an ‘Acting’ capacity and accordingly STI deferral does not apply.
4 Deferred Bonus represents the value of deferred components attributable to the 2016 financial year based on amortisation of deferred components over the period from the
5
commencement of the relevant performance year to the end of financial year to which payment of the relevant deferred component relates.
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 Payment, related to grants made to the executive, as outlined in sections 8.2 and 8.3. Vesting of the majority of securities
remains subject to significant performance and service conditions as outlined in section 6.4.
6 D J Overall: Other benefits represents the accrual of the cash retention benefit payable on 21 May 2017 ($445,627), being 12 months’ fixed remuneration.
7 Mr K J Fletcher passed away on 10 April 2016. Salary and fees includes $140,015 in accrued leave benefits paid in relation to cessation of employment. The Board
determined that Mr Flecher’s full 2016 STI award and unvested deferred STI entitlements (being the second deferred component of the 2014 award and the first and second
deferred components of the 2015 award) be paid to his estate. All unvested STI and LTI entitlements were expensed in the 2016 financial year.
8 Mr M J Ferguson’s current annual fixed remuneration is $500,000. Amounts represent the portion of his remuneration earned as a member of the KMP in his role as Acting
Chief Financial Officer.
2015
G A Fenn2
C W Bruyn1,3
D A Cattell2,8
S Cinerari1,3
K J Fletcher2
L A Nucifora1,3
D J Overall2,7
R A Spicer2,6
Salary
and fees
$
1,876,216
334,909
1,525,000
383,333
925,969
281,296
1,229,217
778,086
7,334,026
Short-term
employee benefits
Cash Bonus
paid or
payable in
respect of
current year
$
Deferred
Bonus paid
or payable in
respect of
prior years4
$
Post-employment
benefits
Non-
monetary
$
Super-
annuation
$
Other
benefits
$
Subtotal
$
Share-
based
payment
transac-
tions5
$
Total
$
800,000
234,486
–
312,500
392,000
196,595
600,912
210,000
2,746,493
399,702
–
–
–
195,855
–
288,945
105,000
989,502
146,350
12,803
47,563
2,899
76,521
10,763
13,960
152,941
463,800
–
–
762,589
–
–
–
18,783
–
35,000
10,553
35,000
7,826
18,783
18,783
3,695,212
454,161
3,241,051
632,366
50,168
582,198
2,370,152
–
2,370,152
54,408
763,693
709,285
165,210 1,790,555
1,625,345
496,480
496,480
2,766,829
406,665 2,558,482
1,264,810
1,264,810
144,728 1,169,254 12,847,803 932,294 13,780,097
–
208,347
–
–
1
2
3
4
5
Amounts represent the payments relating to the period during which the individuals were Key Management Personnel (KMP).
Cash Bonus paid or payable in respect of current year represents cash payments in relation to the 2015 financial year. These comprise the 50% cash component of
the award.
Cash Bonus paid or payable in respect of current year represents cash payments in relation to the 2015 financial year. These comprise the 50% cash component of the
award and the 50% transitional payment. The remaining 50% of the total award is deferred. The short-term incentive plan is described in section 6.3.
Amounts represent the first deferred component of the bonus awards in relation to the 2014 financial year, being 25% of the total 2014 award. The remaining 25% is subject
to meeting the employment condition as described in section 6.3.
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 Payment, related to grants made to the executive, as outlined in sections 8.2 and 8.3. Vesting of the majority of securities
remains subject to significant performance and service conditions as outlined in section 6.4.
6 Due to the nature of the Downer business, non-monetary benefits include living away from home expenses.
7
8 D A Cattell: Other benefits represents the accrual of the cash retention benefit paid on 1 July 2015 ($762,589) being nine months’ fixed remuneration.
D J Overall: Other benefits represents the accrual of the cash retention benefit payable on 21 May 2017 ($406,665), being 12 months’ fixed remuneration.
34 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2016 7.3 Performance related remuneration
7.3.1 Performance outcomes required under the Corporations Act 2001 (Cth)
The table below lists the proportions of remuneration paid during the year ended 30 June 2016 that are performance and non-
performance related and the proportion of STIs that were earned during the year ended 30 June 2016 due to the achievement of the
relevant performance targets.
G A Fenn1
C W Bruyn1
S Cinerari1
M J Ferguson
K J Fletcher
M J Miller
D J Overall1
B C Petersen
Proportion of
2016 remuneration
2016
Short-term incentive
Performance
Related
%
Non-
performance
Related
%
Paid
%
Forfeited
%
52
31
41
24
63
–
54
15
48
69
59
76
37
100
46
85
64
–
48
64
64
–
95
48
36
100
52
36
36
100
5
52
1
Performance related portion includes the reversal of expense for forfeited equity incentives described in section 6.4.
7.3.2 STI performance outcomes
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% of the budgeted profit target must be met. For corporate executives, the hurdle is
90% of the Group budgeted profit target. Profit for this purpose is defined as NPAT. For divisional executives, the hurdle is 90% of the
division budgeted profit target. Profit for this purpose is defined as EBIT.
The following table summarises the average performance achieved by the KMP across each element of the scorecard.
Weighting of scorecard element
Corporate
Division2
Percentage of the element achieved1 Corporate
Division
Group
NPAT
Divisional
EBIT
Group
FFO
Divisional
FFO
30.0
7.5
52.4
52.4
22.5
44.2
30.0
7.5
100.0
100.0
22.5
59.6
Zero
Harm
30.0
30.0
29.2
71.8
People
10.0
10.0
100.0
100.0
1
2
Performance includes the results for each element, even if the NPAT or EBIT gateway was not achieved.
The weighting for the Engineering, Construction and Maintenance Division (B C Petersen) was 15.0 for each of Group NPAT, Divisional EBIT, Group FFO and Divisional FFO.
For 2016, the IPM applied to each member of the KMP remained at 1.
7.3.3 LTI performance outcomes
The table below summarises LTI performance measures tested and the outcomes for each executive.
Relevant
executives
G A Fenn,
C W Bruyn,
S Cinerari,
K J Fletcher,
D J Overall
Relevant
LTI measure
2013 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.
Performance
outcome
% LTI tranche
that vested
Actual performance ranked at
the 43rd percentile.
0% became provisionally qualified.
The shares were forfeited
Actual performance was –5.15% 0% became provisionally qualified.
The shares were forfeited
Annual Report 2016 35
8. Executive equity ownership
8.1 Ordinary shares
KMP equity holdings in fully paid ordinary shares and performance rights issued by Downer EDI Limited are as follows:
Ordinary shares
Performance rights
Balance at
1 July 2015
Net
change
Balance at
30 June 2016
Balance at
1 July 2015
Net
change
Balance at
30 June 2016
No.
355,665
33,387
3,401
–
23,201
–
3,602
–
No.
270,827
54,763
72,307
–
71,221
–
104,858
–
No.
626,492
88,150
75,708
–
94,422
–
108,460
–
No.
1,200,505
361,389
378,159
–
441,185
–
561,836
–
No.
225,752
98,167
111,398
–
(163,788)
–
(51,463)
59,450
No.
1,426,257
459,556
489,557
–
277,397
–
510,373
59,450
G A Fenn
C W Bruyn
S Cinerari
M J Ferguson
K J Fletcher
M J Miller
D J Overall
B C Petersen
8.2 Options and rights
No performance options were granted or exercised during the 2016 financial year.
As outlined in section 6.4.1, the LTI plan for the 2016 financial year is 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. During the year,
grants of performance rights were made to KMP in respect of the 2016 financial year.
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.
2013 Plan
2014 Plan
2015 Plan
2016 Plan
Number
of per-
formance
rights1
445,682
119,373
140,390
–
163,788
–
–
208,579
–
Vested
%
Forfeited
%
–
–
–
–
–
–
–
–
–
100
100
100
–
100
–
–
100
–
Number
of per-
formance
rights2
243,576
74,242
76,726
–
89,514
–
–
113,993
–
G A Fenn
C W Bruyn
S Cinerari
M J Ferguson
K J Fletcher
M J Miller
L A Nucifora
D J Overall
B C Petersen
Vested
%
Forfeited
%
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Number
of per-
formance
rights3
511,247
167,774
161,043
–
187,883
–
–
239,264
–
Vested
%
Forfeited
%
Number
of per-
formance
rights4
Vested
%
Forfeited
%
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
671,434
217,540
251,788
–
–
–
–
157,116
59,450
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Grant date 15 October 2013. The fair value of shares granted was $3.81 per share for the EPS tranche and $2.26 per share for the TSR tranche.
Grant date 2 June 2015. The fair value of shares granted was $4.45 per share for the EPS tranche and $1.77 per share for the TSR tranche.
Grant date 2 June 2015. The fair value of shares granted was $4.23 per share for the EPS and Scorecard tranches and �1.70 per share for the TSR tranche.
1
2
3
4 Grant date 30 June 2016. The fair value of shares granted was $3.24 per share for the EPS and Scorecard tranches and $0.97 per share for the TSR tranche.
36 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2016 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:
G A Fenn
C W Bruyn
S Cinerari
M J Ferguson
K J Fletcher
M J Miller
L A Nucifora
D J Overall
B C Petersen
Maximum number of shares
for the vesting year
2018
243,576
74,242
76,726
–
89,514
–
–
113,993
–
2019
511,247
167,774
161,043
–
187,883
–
–
239,264
–
2020
671,434
217,540
251,788
–
–
–
–
157,116
59,450
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.
G A Fenn
C W Bruyn
S Cinerari
M J Ferguson
K J Fletcher
M J Miller
L A Nucifora
D J Overall
B C Petersen
2017
1,694,308
532,466
536,060
–
418,443
–
–
662,906
49,201
2018
1,118,841
364,847
354,788
–
206,959
–
–
393,588
49,201
2019
555,687
180,038
270,360
–
–
–
–
130,031
49,202
8.3 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.
G A Fenn
C W Bruyn
S Cinerari
M J Ferguson
K J Fletcher
M J Miller
L A Nucifora
D J Overall
B C Petersen
2012 Plan
Number of
shares1
Vested
%
Forfeited
%
464,996
117,392
154,999
–
154,999
–
–
232,498
–
47
47
47
–
47
–
–
47
–
–
–
–
–
–
–
–
–
–
1
Grant date 22 June 2012. The fair value of shares granted was $3.10 per share for the EPS tranche and $1.85 per share for the TSR tranche.
Annual Report 2016 37
8.4 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.
9. Key terms of employment contracts
9.1 Notice and termination payments
Executives are on contracts with no fixed end date.
The following table captures the notice periods applicable to termination of the employment of executives.
Termination notice
period by Downer
Termination notice
period by employee
Termination payments
payable under contract
Managing Director
Other Executives
12 months
12 months
6 months
6 months
12 months
12 months
Termination payments are calculated based upon total fixed remuneration at the date of termination. No payment is made for
termination due to gross misconduct.
There was one variation from policy during this financial year:
– On 10 April 2016, Downer’s Chief Financial Officer, K J Fletcher, passed away. At the time of Mr Fletcher’s passing, he was
participating in a number of STI and LTI plans (relating to the current and prior years). Having regard to Mr Fletcher’s significant
contribution to Downer over many years and his role in helping to achieve the FY16 outcomes, the Board made the following
determinations in relation to the finalisation of his employment entitlements:
– Mr Fletcher’s unvested deferred STI amounts in respect of his 2014 and 2015 awards vest and will be paid to his estate in cash
(rather than in shares on a deferred basis);
– Mr Fletcher is eligible to receive a 2016 STI award and the full amount awarded under the plan will be paid to his estate in cash
(rather than 50% in shares being on a deferred basis);
– Grants made under the 2014 and 2015 LTI plans will remain on foot and will be tested in accordance with the plan rules (with any
future vesting being paid to Mr Fletcher’s estate).
Mr Fletcher did not receive a grant of performance rights under the 2016 LTI plan.
In making the above determinations, the treatment of Mr Fletcher’s incentive entitlements is fully in accordance with the discretions
available to the Board under Downer’s remuneration policies (i.e. the outcomes are the same as if Mr Fletcher was determined
to be an ‘Eligible Leaver’ under the plan rules), other than Mr Fletcher’s 2016 STI award being on a full-year rather than pro-rata
(nine months) basis.
38 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2016 9.2 Managing Director and Chief Executive Officer of Downer’s employment agreement
Mr Fenn was appointed as the Managing Director of Downer commencing on 30 July 2010. The following table sets out the key terms
of the Managing Director’s employment agreement.
Term
Until terminated by either party.
Fixed remuneration
STI opportunity
LTI opportunity
Termination
$2.0 million per annum. This has remained unchanged since July 2012.
Fixed remuneration includes superannuation and non-cash benefits but excludes entitlements to
reimbursement for Mr Fenn’s home telephone rental and call costs, home internet costs and medical, 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.
Mr Fenn is eligible to receive an annual STI and the maximum STI opportunity is 100% 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% (up to the 100% maximum) based on its assessment of performance. The STI
deferral arrangements in place for KMP 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% 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 6.4.
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.
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.
Immediately for misconduct or other circumstances justifying summary dismissal; or
Downer can terminate Mr Fenn’s employment:
c)
d) 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.
Other
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 2016 39
10. Prior equity-based remuneration plans
Details of LTI plans from prior years in which executives retained an interest during the reporting period are set out in the table below.
Plan name
2012 Executive Share Plan
Type of award
Grant of restricted shares delivered in two equal tranches
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% to 12%.
The performance period for both tranches is three years.
Re-test
There is no re-test.
Service
requirements
The service condition requires that the executive remains employed at all times for a period of 12 months from
31 December in the final year of the performance period for which the performance condition is satisfied.
Vesting
schedule
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% of the shares vest at the 51st percentile, 8% at the 52nd percentile and so on until 100%
vest at the 75th percentile.
Tranche Two: Pro-rata from 6% to 12% EPS growth such that 16.67% of the restricted shares in the tranche vest for
every 1% increase in EPS growth between 6% and 12%.
11. Related party information
11.1 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 2016.
KMP
G A Fenn
S A Chaplain
P S Garling
R M Harding
J S Humphrey
M J Miller
D J Overall
Entity
Australian Constructors Association Ltd
KDR Gold Coast Pty Ltd
KDR Victoria Pty Ltd
Keolis Downer Pty Ltd
Ausgrid
Endeavour Energy
Ergon
Essential Energy
Cleanaway Waste Management Limited
King Wood Mallesons
Queensland University of Technology
EDI Rail Bombardier Transportation (Maintenance) Pty Ltd
EDI Rail Bombardier Transportation Pty Ltd
Minerals Council of Australia
Transaction type
Sales of
goods and
services
$’000
Purchase of
goods and
services
$’000
Sponsorship
$’000
–
–
–
–
–
–
–
–
–
–
–
–
–
18
–
–
2,767
1,631
3,066
97
–
48
250
–
–
–
42,443
–
69
1
–
90
97
40
5
5
278
7
373
735
5
268
40 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2016 12. Description of Non-executive Director remuneration
12.1 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 judgment to steward the Company.
There has been no change to the level of Non-executive Director fees since the prior reporting period and there will be no changes in
the 2017 financial year.
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 $2.0 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.
12.2 Non-executive Directors’ remuneration
The table below sets out the remuneration paid to Non-executive Directors for the 2016 and 2015 financial years.
R M Harding
S A Chaplain
P S Garling
E A Howell
J S Humphrey
C G Thorne
Short-term benefits
Post-employment
benefits
Board fee
$
Chair fee
$
Total fees
$
Superannuation
$
375,000
375,000
150,000
150,000
150,000
150,000
150,000
150,000
150,000
150,000
150,000
150,000
–
–
35,000
35,000
15,000
15,000
15,000
15,000
–
–
15,000
15,000
375,000
375,000
185,000
185,000
165,000
165,000
165,000
165,000
150,000
150,000
165,000
165,000
35,000
35,625
17,575
17,575
15,675
15,675
15,675
15,675
14,250
14,250
15,675
15,675
Year
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
Total
$
410,000
410,625
202,575
202,575
180,675
180,675
180,675
180,675
164,250
164,250
180,675
180,675
Annual Report 2016 41
12.3 Equity held by Non-executive Directors
The table below sets out the equity in Downer held by Non-executive Directors for the 2016 and 2015 financial years.
2016
2015
Balance at
1 July 2015
Net
change
Balance at
30 June 2016
Balance at
1 July 2014
Net
change
Balance at
30 June 2015
R M Harding
S A Chaplain
P S Garling
E A Howell
J S Humphrey
C G Thorne
10,150
64,142
12,100
10,000
68,367
59,230
–
10,000
–
–
–
–
10,150
74,142
12,100
10,000
68,367
59,230
10,150
64,142
12,100
–
68,367
59,230
–
–
–
10,000
–
–
10,150
64,142
12,100
10,000
68,367
59,230
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, 4 August 2016
42 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2016 Auditor’s Independence Declaration
Auditor’s Independence Declaration
Auditor’s Independence Declaration
Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001
To: the directors of Downer EDI Limited
I declare that, to the best of my knowledge and belief, in relation to the audit for the financial year ended 30 June
2016 there have been:
(i)
Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001
no contraventions of the auditor independence requirements as set out in the Corporations Act
2001 in relation to the audit; and
To: the directors of Downer EDI Limited
(ii) no contraventions of any applicable code of professional conduct in relation to the audit.
I declare that, to the best of my knowledge and belief, in relation to the audit for the financial year ended 30 June
2016 there have been:
(i)
no contraventions of the auditor independence requirements as set out in the Corporations Act
2001 in relation to the audit; and
(ii) no contraventions of any applicable code of professional conduct in relation to the audit.
KPMG
KPMG
John Teer
Partner
Sydney
4 August 2016
John Teer
Partner
Sydney
4 August 2016
KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation.
KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation.
Annual Report 2016 43
Independent Auditor’s Report
for the year ended 30 June 2016
Independent Auditor's Report
for the year ended 30 June 2016
INDEPENDENT AUDITOR’S REPORT
INDEPENDENT AUDITOR’S REPORT
To the Members of Downer EDI Limited
REPORT ON THE FINANCIAL REPORT
REPORT ON THE FINANCIAL REPORT
Opinion
Basis for Opinion
We have audited the accompanying financial report of
Downer EDI Limited (the Company), which comprises the
consolidated statement of financial position as at 30 June
2016, the consolidated statement of profit or loss and other
comprehensive income, the consolidated statement of
changes in equity and the consolidated statement of cash
flows for the year then ended, Notes A to G, comprising a
summary of significant accounting policies and other
explanatory information, and the Directors’ Declaration of
the Group comprising the Company and the entities it
controlled at the year’s end or from time to time during the
financial year.
In our opinion:
(a)
the accompanying financial report of the Group is in
accordance with the Corporations Act 2001, including:
i.
ii.
giving a true and fair view of the Group’s
financial position as at 30 June 2016 and of its
performance for the year ended on that date;
and
complying with Australian Accounting Standards
and the Corporations Regulations 2001.
(b)
the financial report also complies with International
Financial Reporting Standards as disclosed in Note A.
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 about whether the financial report is
free from material misstatement. Our responsibilities under
those standards are further described in the Auditor’s
Responsibility section of our report. We are independent of
the Group in accordance with the Corporations Act 2001
and the ethical requirements of the Accounting Professional
and Ethical Standards Board’s APES 110 Code of Ethics
for Professional Accountants (the Code) that are relevant to
our audit of the financial report in Australia. We have also
fulfilled our other ethical responsibilities in accordance with
the Code.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
Key audit matters
Key audit matters are those matters that, in our
professional judgement, were of most significance in our
audit of the financial report of the current period. These
matters were addressed in the context of our audit of the
financial report as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these
matters
Key audit matter
Key audit matter
How our audit addressed the key audit matter
How our audit addressed the key audit matter
Recognition of revenue
Refer to Note B2 ‘Revenue and other income’. ($6,850.0m).
A substantial amount of the Group’s revenue relates to
revenue from the rendering of services, mining services
and construction contracts. Where these services and/or
contracts have a long-term duration, revenue and margin
are recognised based on the stage of completion of
individual contracts. This is calculated on the proportion
of total costs incurred at the reporting date compared to
management’s estimation of total costs of the contract.
We focussed on these types of contracts due to the high
level of management estimation involved, in particular
relating to:
•
Forecasting total cost to complete at initiation of the
contract, including the estimation of cost
contingencies for contracting risks;
• Revisions to total forecast costs for certain events or
conditions that occur during the performance of the
contract, or are expected to occur to complete the
contract; and
•
The recognition of variations and claims, based on
an assessment by the Group as to whether it is
Our procedures included, amongst others:
• We evaluated management’s process regarding accounting for
the Group’s contract revenues. We tested controls such as:
-
the authorisation of monthly project valuations, which
involves management reviewing key contract KPIs
including cashflows;
- management’s review and assessment of significant
changes in work in progress balances;
- management’s review and assessment of project
unapproved variations and claims, and responses to
project risk ratings;
-
the review and approval of bid information including
estimated project milestones, projected Earnings Before
Interest and Tax (EBIT), Net Present Value (NPV), Return
On Funds Employed (ROFE) and any potential legal
implications by the Group risk and legal team, as
prescribed in the Group’s risk management process;
KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation.
44 Downer EDI Limited
Independent Auditor's Report
for the year ended 30 June 2016
probable that the amount will be approved by the
customer and therefore recovered.
We focused on this area as a key audit matter due to the
number and type of estimation events that may occur
over the course of the contract life, leading to complex
and judgemental revenue recognition from contracts.
• We undertook a sample of site visits (to both contract sites and
commercial offices) across the Group’s major divisions and
geographies to obtain a detailed understanding of the Group’s
contract processes, their consistent application, and to
understand the variety of risk elements of the contracts;
• We used data analytic routines to select a sample of contracts
for testing based on a number of quantitative and qualitative
factors. These factors included contracts with significant
deterioration in margin, significant variations and claims, and
factors which indicated to us that a greater level of judgement
was required by management when assessing the revenue
recognition based on the estimates developed for current and
forecast contract performance. For the sample selected:
-
-
-
-
-
-
-
we read the contract terms and conditions to evaluate
whether the individual characteristics of each contract
were reflected in management’s estimate;
we assessed the estimation of costs to complete by
agreeing key forecast cost assumptions to underlying
evidence such as Enterprise Bargaining Agreements for
wage rates, previous purchase invoices for parts,
historical costs for maintenance events and agreements
with subcontractors;
we assessed the Group’s ability to forecast margins on
contracts by analysing the accuracy of previous margin
forecasts to actual outcomes;
we tested the variations and claims both within contract
revenue and contract costs to underlying documentation,
such as timesheets, correspondence with customers and
independent time and cost claim experts (where
applicable) for consistency and appropriateness with
contract terms;
we evaluated the Group’s legal and external experts’
reports received on contentious matters to identify
conditions that may indicate the inappropriate recognition
of variations and claims. We checked the consistency of
this to the inclusion or not of an amount in the estimates
used for revenue recognition;
For contracts that had significant variation and claim
elements, we used our KPMG major project specialists to
evaluate the claim elements for risk of non-recovery. Our
major projects specialists are project management
experts; and
we evaluated significant exposures to liquidated damages
for late delivery of contract works by assessing the
variation registers, which track the nature, quantum and
status of current exposures.
Value of goodwill
Refer to C7 ‘Intangible assets - Goodwill’ ($805.3m).
The Group’s Cash Generating Units (CGUs) are
subject to the cyclical nature of service and
infrastructure spend in the sectors in which those CGUs
operate. These sectors have experienced the impacts
of reductions in capital expenditure, constrained
government spending, cost reduction mandates, project
cancellations and deferrals, along with volatile
commodity prices. Changes in those sectors impact the
business activity for the Group’s CGUs and the
resulting forecast cash flows used in the Group’s value
Our procedures included, amongst others:
• We evaluated management’s goodwill impairment assessment
process and tested controls such as the review of forecasts by
management;
• We assessed management’s determination of the Group’s
CGUs based on our understanding of the nature of the Group’s
business units. We compared this to the internal reporting of the
Group to assess how earnings are monitored and reported;
KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation.
Annual Report 2016 45
Independent Auditor’s Report
for the year ended 30 June 2016
Independent Auditor's Report
for the year ended 30 June 2016
in use models. Given these changes, the value of
goodwill was a key audit matter.
Other conditions giving rise to our focus on this area
included the significant level of judgement in respect of
factors such as:
•
•
•
The determination of CGUs;
Budgeted future revenue and costs;
• Discount rates;
•
•
Terminal growth rate; and
The outcome of tenders.
Management have identified the Rail CGU as having
sensitivity to impairment due the fact that a reasonably
possible change in projected cash flows could result in
the carrying value of the CGU exceeding its
recoverable amount.
Management have also identified the Mining CGU as
having sensitivity to impairment due to the
macroeconomic challenges facing the sector.
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 A,
the Directors also state, in accordance with Australian
Accounting Standard AASB 101 Presentation of
Financial Statements, that the financial report complies
with International Financial Reporting Standards.
In preparing the financial report, the Directors are
responsible for assessing the Group’s ability to
continue as a going concern, disclosing, as applicable,
matters related to going concern and using the going
• We obtained the Group’s value in use models and agreed
amounts to a combination of the FY17 budget and the FY18-
FY20 business plan.
Key inputs to the value in use models included forecast
revenue, costs, capital expenditure, discount rates and terminal
growth rates. We challenged these inputs by corroborating the
key market based assumptions to external analyst reports,
published industry growth rates and industry reports. For non-
market based assumptions we corroborated those assumptions
by comparing forecasts to historical costs incurred or margins
on similar projects. We also assessed the inclusion of key
ongoing revenue contracts by comparing the margins in the
impairment model to historical contract margins and for current
tenders we assessed the probability weighting and margins
based on our understanding of the business;
• We assessed the accuracy of previous Group forecasting to
inform our evaluation of forecasts included in the value in use
model. We applied increased scepticism to current period
forecasts in areas where previous forecasts were not achieved
and/or where future uncertainty is greater or volatility is
expected;
• We involved our valuation specialists, for those CGUs with a
higher risk of impairment, to recalculate management’s discount
rates based on the Group and its industry. Valuation specialists
were also involved in assessing the value in use model for
valuation methodology, including the treatment of assumptions
for capital expenditure, working capital, terminal value and the
net present value calculation;
• We performed sensitivity analysis on all CGUs in two main
areas being the discount rate and terminal growth rate
assumptions. For the CGUs with a higher risk of impairment we
performed a range of sensitivity analyses including the discount
rate and terminal growth rate assumptions, revenue growth and
cost savings targets set by management, as well as probability
adjusting the outcomes of key tenders;
• We assessed the allocation of corporate overheads and assets
to CGUs by comparing the allocation methodology to our
understanding of the business and industry;
• We assessed the Group’s disclosures of the quantitative and
qualitative considerations in relation to the valuation of goodwill,
by comparing these disclosures to our understanding of the
matter.
concern basis of accounting unless the directors either intend to
liquidate the Group or to cease operations, or have no realistic
alternative but to do so.
Auditor’s responsibility
Our responsibility is to express an opinion on the financial report
based on our audit. Our objectives are to obtain reasonable
assurance about whether the financial report as a whole is free from
material misstatement, whether due to fraud or error, and to issue an
auditor’s report that includes our opinion. Reasonable assurance is a
high level of assurance, but is not a guarantee that an audit
conducted in accordance with Australian Auditing Standards will
always detect a material misstatement when it exists. Misstatements
can arise from fraud or error and are considered material if,
individually or in the aggregate, they could reasonably be expected
to influence the economic decisions of users taken on the basis of
this financial report.
KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation.
46 Downer EDI Limited
Independent Auditor's Report
for the year ended 30 June 2016
As part of an audit in accordance with Australian Auditing
Standards, we exercise professional judgement and maintain
professional scepticism throughout the audit.
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.
The risk of not detecting a material misstatement resulting
from fraud is higher than for one resulting from error, as fraud
may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of 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 conclude on the appropriateness of the Directors’ use of
the going concern basis of accounting and, based on the audit
evidence obtained, whether a material uncertainty exists
related to events or conditions that may cast significant doubt
on the Group’s ability to continue as a going concern. If we
conclude that a material uncertainty exists, we are required to
draw attention in our auditor’s report to the related disclosures
in the financial report or, if such disclosures are inadequate, to
modify our opinion. Our conclusions are based on the audit
evidence obtained up to the date of our auditor’s report.
However, future events or conditions may cause the Group to
cease to continue as a going concern.
The Auditing Standards require that we comply with relevant
ethical requirements relating to audit engagements. We also
provide the Directors with a statement that we have complied
with relevant ethical requirements regarding independence,
and to communicate with them all relationships and other
matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
From the matters communicated with the Directors, we
determine those matters that were of most significance in the
audit of the consolidated financial report of the current period
and are therefore key audit matters. We describe these
matters in our auditor’s report unless law or regulation
precludes public disclosure about the matter or when, in
extremely rare circumstances, we determine that a matter
should not be communicated in our report because the
adverse consequences of doing so would reasonably be
expected to outweigh the public interest benefits of such
communication.
REPORT ON THE REMUNERATION REPORT
REPORT ON THE REMUNERATION REPORT
We have audited the Remuneration Report included in pages
19 to 42 of the Directors’ Report for the year ended 30 June
2016. 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 on the Remuneration Report
In our opinion, the Remuneration Report of Downer EDI
Limited for the year ended 30 June 2016, complies with
Section 300A of the Corporations Act 2001.
We evaluate the overall presentation, structure and content of
the financial report, including the disclosures, and whether the
financial report represents the underlying transactions and
events in a manner that achieves fair presentation.
KPMG
We obtain sufficient appropriate audit evidence regarding the
financial information of the entities or business activities within
the Group to express an opinion on the financial report. We
are responsible for the direction, supervision and performance
of the group audit. We remain solely responsible for our audit
opinion.
We communicate with the Directors regarding, among other
matters, the planned scope and timing of the audit and
significant audit findings, including any significant deficiencies
in internal control that we identify during our audit.
John Teer
Partner
Sydney
4 August 2016
Cameron Slapp
Partner
Sydney
4 August 2016
KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation.
Annual Report 2016 47
Financial Statements
Page 49
Page 50
Page 51
Page 52
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 consolidated financial statements
A
B
C
D
E
F
About this
report
Business
performance
Operating assets
and liabilities
Employee
benefits
Capital structure
and financing
Group
structure
G
Other
Page 53-54
Page 55-62
Page 63-71
Page 72
Page 73-79
Page 80-86
Page 87-96
D1
Employee benefits
E1
Borrowings
F1
Joint arrangements
and associate
entities
G1
New accounting
standards
D2
Key management
personnel
compensation
E2
Financing facilities
F2
Acquisition of
businesses
G2
Capital and financial
risk management
D3
Employee discount
share plan
E3
Commitments
F3
Disposal of
subsidiary
G3
Other financial
assets and liabilities
E4
Issued capital
F4
Controlled entities
E5
Dividends
F5
Related party
information
F6
Parent entity
disclosures
B1
Segment
information
C1
Reconciliation of
cash flow from
operating activities
B2
Profit from ordinary
activities
C2
Trade and other
receivables
B3
Earnings per share
B4
Taxation
B5
Remuneration
of auditors
B6
Subsequent events
C3
Rendering of
services and
construction
contracts
C4
Inventories
C5
Trade and other
payables
C6
Property, plant
and equipment
C7
Intangible assets
C8
Provisions
C9
Contingent
liabilities
Page 97
Directors’ Declaration
48 Downer EDI Limited
Consolidated Statement of Profit or Loss and Other Comprehensive Income
for the year ended 30 June 2016
Revenue from ordinary activities
Other income
Total revenue and other income
Employee benefits expense
Subcontractor costs
Raw materials and consumables used
Plant and equipment costs
Depreciation and amortisation
Other expenses from ordinary activities
Total expenses
Share of net profit of joint ventures and associates
Earnings before interest and tax
Finance income
Finance costs
Net finance costs
Profit before income tax
Income tax expense
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 on cross currency and interest rate swaps taken to equity
– Income tax relating to components of other comprehensive income
Other comprehensive income for the year (net of tax)
Note
B2(a)
B2(a)
D1
C6,C7
2016
$’m
6,846.2
3.8
6,850.0
(2,758.6)
(1,455.2)
(1,174.8)
(580.2)
(258.7)
(363.3)
(6,590.8)
2015
$’m
7,014.9
5.0
7,019.9
(2,605.3)
(1,562.3)
(1,282.7)
(641.1)
(253.1)
(380.4)
(6,724.9)
F1(a)
17.7
14.7
276.9
309.7
B4(a)
7.2
(40.2)
(33.0)
243.9
(63.3)
180.6
9.4
(2.5)
(0.8)
1.0
7.1
6.4
(36.3)
(29.9)
279.8
(69.6)
210.2
(11.7)
2.2
(0.3)
(0.5)
(10.3)
Total comprehensive income for the year
187.7
199.9
Earnings per share (cents)
– Basic earnings per share
– Diluted earnings per share
B3
B3
40.3
37.8
46.6
44.9
The consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying
notes on pages 53 to 96.
Annual Report 2016 49
Consolidated Statement of Financial Position
as at 30 June 2016
ASSETS
Current assets
Cash and cash equivalents
Trade and other receivables
Other financial assets
Inventories
Current tax assets
Prepayments and 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
Prepayments and other assets
Total non-current assets
Total assets
LIABILITIES
Current liabilities
Trade and other payables
Borrowings
Other financial liabilities
Employee benefits provision
Provisions
Current tax liabilities
Total current liabilities
Non-current liabilities
Trade and other payables
Borrowings
Other financial liabilities
Employee benefits provision
Provisions
Deferred tax liabilities
Total non-current liabilities
Total liabilities
Net assets
EQUITY
Issued capital
Reserves
Retained earnings
Total equity
30 June
2016
$’m
30 June
2015
$’m
Note
C2
G3
C4
F1(a)
C6
C7
G3
B4(b)
C5
E1
G3
D1
C8
E1
G3
D1
C8
B4(b)
E4
569.4
1,124.3
10.1
327.2
46.3
38.2
2,115.5
17.3
81.6
988.3
969.9
22.1
–
5.6
2,084.8
4,200.3
1,010.9
45.5
15.1
254.2
51.6
0.5
1,377.8
12.7
604.5
0.7
27.6
30.8
57.7
734.0
2,111.8
2,088.5
1,427.8
(8.8)
669.5
2,088.5
372.2
1,123.4
11.5
352.6
20.3
41.9
1,921.9
15.9
83.3
1,037.1
919.0
19.6
0.7
6.9
2,082.5
4,004.4
1,066.5
62.2
15.9
228.1
50.1
0.7
1,423.5
9.7
476.4
2.2
29.5
13.9
13.9
545.6
1,969.1
2,035.3
1,449.1
(15.8)
602.0
2,035.3
The consolidated statement of financial position should be read in conjunction with the accompanying notes on pages 53 to 96.
50 Downer EDI Limited
Consolidated Statement of Changes in Equity
for the year ended 30 June 2016
2016
$’m
Balance at 1 July 2015
Profit after income tax
Other comprehensive income for the year
(net of tax)
Total comprehensive income for the year
Group on-market share buy-back
Vested executive incentive share
transactions
Share-based employee benefits expense
Income tax relating to share-based
transactions during the year
Payment of dividends(i)
Balance at 30 June 2016
Issued
capital
1,449.1
–
–
–
(26.5)
5.2
–
–
–
1,427.8
Foreign
currency
translation
reserve
Hedge
reserve
Employee
benefits
reserve
Retained
earnings
(0.3)
–
(2.3)
(2.3)
–
–
–
–
–
(2.6)
(27.8)
–
9.4
9.4
–
–
–
–
–
(18.4)
12.3
–
–
–
–
(5.2)
4.9
0.2
–
12.2
602.0
180.6
–
180.6
–
–
–
–
(113.1)
669.5
(i) Payment of dividends relates to 2015 final dividend, 2016 interim dividend and ROADS dividends paid during the financial year.
2015
$’m
Balance at 1 July 2014
Profit after income tax
Other comprehensive income for the year
(net of tax)
Total comprehensive income for the year
Group on-market share buy-back
Vested executive incentive share
transactions
Share-based employee benefits expense
Income tax relating to share-based
transactions during the year
Payment of dividends(i)
Balance at 30 June 2015
Issued
capital
1,457.9
–
–
–
(11.7)
2.9
–
–
–
1,449.1
Foreign
currency
translation
reserve
Hedge
reserve
Employee
benefits
reserve
Retained
earnings
(1.7)
–
1.4
1.4
–
–
–
–
–
(0.3)
(16.1)
–
(11.7)
(11.7)
–
–
–
–
–
(27.8)
15.3
–
–
–
–
(2.9)
1.5
(1.6)
–
12.3
506.6
210.2
–
210.2
–
–
–
–
(114.8)
602.0
Total
2,035.3
180.6
7.1
187.7
(26.5)
–
4.9
0.2
(113.1)
2,088.5
Total
1,962.0
210.2
(10.3)
199.9
(11.7)
–
1.5
(1.6)
(114.8)
2,035.3
(i) Payment of dividends relates to 2014 final dividend, 2015 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 53 to 96.
Annual Report 2016 51
Consolidated Statement of Cash Flows
for the year ended 30 June 2016
Cash flows from operating activities
Receipts from customers
Distributions from equity accounted investees
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
Receipts from / (payments for) investments
Advances to joint ventures
Proceeds from sale of businesses
Payments for businesses acquired
Net cash used in investing activities
Cash flows from financing activities
Group on-market share buy-back
Proceeds from borrowings
Repayments of borrowings
Dividends paid
Net cash used in financing activities
Net increase / (decrease) 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
Note
F1(a)
C1
E4
2016
$’m
2015
$’m
7,615.0
18.6
(7,123.4)
6.8
(33.3)
(35.9)
447.8
20.4
(185.7)
(45.4)
0.6
(1.5)
7.2
(1.1)
(205.5)
(26.5)
173.8
(80.0)
(113.1)
(45.8)
196.5
372.2
0.7
569.4
7,916.4
8.0
(7,363.7)
6.7
(31.9)
(49.0)
486.5
79.3
(177.6)
(30.2)
(50.1)
(3.0)
1.9
(318.5)
(498.2)
(11.7)
1,247.0
(1,167.3)
(114.8)
(46.8)
(58.5)
431.8
(1.1)
372.2
The consolidated statement of cash flows should be read in conjunction with the accompanying notes on pages 53 to 96.
52 Downer EDI Limited
Notes to the consolidated financial statements
for the year ended 30 June 2016
A
About this report
Statement of compliance
These financial statements represent the consolidated results
of Downer EDI Limited (ABN 97 003 872 848). The consolidated
Financial Report (Financial Report) is general purpose
financial statements which has been prepared in accordance
with Australian Accounting Standards (AASBs) adopted by
the Australian Accounting Standards Board (AASB) and the
Corporations Act 2001 (Cth). The Financial Report complies with
International Financial Reporting Standards (IFRS) adopted by
the International Accounting Standards Board (IASB).
The Financial Report was authorised for issue by the Board of
Directors on 4 August 2016.
Rounding of amounts
Downer is a company of the kind referred to in ASIC
Corporations (Rounding in Financial / Directors’ reports)
Instrument 2016/191, relating to the “rounding off” of amounts
in the Directors’ Report and consolidated financial statements.
Unless otherwise expressly stated, amounts have been rounded
off to the nearest whole number of millions of dollars and one
place of decimals representing hundreds of thousands of
dollars in accordance with that Instrument. Amounts shown
as $- represent amounts less than $50,000 which have
been rounded down.
Basis of preparation
The Financial Report has been prepared on an 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 2015, except in relation to the
relevant amendments and their effects on the current period or
prior periods as described in Note G1.
Accounting estimates and judgements
Preparation of the Financial Report requires management to
make judgements, estimates and assumptions about future
events. Information on material estimates and judgements
used in applying the accounting policies can be found in the
following notes:
Accounting estimates and judgements
Note
Page
Revenue recognition
Recovery of deferred tax assets
Income taxes
Capitalisation of tender / bid costs
Impairment of assets
Provisions
Annual leave and long service leave
B2
B4
B4
C2
C7
C8
D1
58
61
61
64
68
70
72
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. Other significant accounting policies are contained in
the notes to the Financial Report to which they relate.
(i) 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 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.
Annual Report 2016 53
A. About this report – continued
(ii) Foreign currency
Transactions, assets and liabilities denominated in foreign
currencies are translated into Australian dollars at reporting date
using the following applicable exchange rates:
Foreign currency amount
Applicable exchange rate
Transactions
Date of transaction
Monetary assets and liability
Reporting date
Non-monetary assets and
liabilities carried at fair value
Date fair value is determined
Foreign exchange gains and losses resulting from translation are
recognised in the statement of profit or loss, except for qualifying
cash flow hedges which are deferred to equity.
On consolidation the assets, liabilities, income and expenses of
foreign operations are translated into Australian dollars using the
following applicable exchange rates:
Foreign currency amount
Applicable exchange rate
Income and expenses
Average exchange rate
Assets and liabilities
Equity
Reserves
Reporting date
Historical date
Reporting date
Foreign exchange differences resulting from translation are
initially recognised in the foreign currency translation reserve
and subsequently transferred to the profit or loss on disposal
of the foreign operation.
(iii) Finance and borrowing costs
Finance costs comprise interest expense on borrowings, cost to
establish financing facilities (which are expensed over the term
of the facility), losses on ineffective hedging instruments that are
recognised in profit or loss and finance lease charges.
(iv) 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.
54 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2016 B
Business performance
This section provides the information that is most relevant to understanding the financial performance of the Group during
the financial year and, where relevant, the accounting policies applied and the critical judgements and estimates made.
B1. Segment information
B2. Profit from ordinary activities
B3. Earnings per share
B1. Segment information
B4. Taxation
B5. Remuneration of auditors
B6. Subsequent events
Identification of reportable 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 in order to effectively
allocate Group resources and assess performance.
The Group has identified its operating segments based
on the internal reports that are reviewed and used by the
Group CEO 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
Group CEO on a recurring basis.
The reportable segments are based on a combination of
operating segments determined by the similarity of the services
provided, and the sources of the Group’s major risks that could
therefore have the greatest effect on the rates of return. Downer
has determined that reportable segments are best represented
as service lines.
The reportable segments identified within the Group are outlined below:
Service line
Segment description
Transport Services Comprises Downer’s road, rail infrastructure, bridge, airport and port businesses and provides a broad range
of transport infrastructure services including: earthworks; civil construction; asset management; maintenance;
surfacing and stabilisation; supply of bituminous products and logistics; open space and facilities management;
and rail track signalling and electrification works.
Technology and
Communications
Services
Provides an end-to-end infrastructure service offering comprising feasibility, design, civil construction, network
construction, commissioning, testing, operations and maintenance across fibre, copper and radio networks as
well as data centre services, automated ticketing and intelligent transport technology systems.
Utilities Services
Provides complete lifecycle solutions to customers in the power, gas, water and renewable energy sectors
including: planning, designing, constructing, operating, maintaining, managing and decommissioning power
and gas network assets; providing complete water lifecycle solutions for municipal and industrial water users;
and design, build and maintenance services for wind farms and wind turbine sites, solar farms, landfill methane
generation plants, sugar cane waste fired cogeneration plants, and other biomass fired cogeneration plants.
Rail
Provides total rail asset solutions including passenger and freight build, operations and maintenance,
component overhauls and after-market services.
Engineering,
Construction
and Maintenance
(EC&M)
Provides design, engineering, construction and maintenance services for greenfield and brownfield projects
across a range of sectors and all stages of the project lifecycle including: feasibility studies; engineering design;
civil works; structural, mechanical and piping; electrical and instrumentation; mineral process equipment design
and manufacture; commissioning; operations maintenance; shutdowns, turnarounds and outages; strategic asset
management; and decommissioning.
Mining
Provides services across all stages of the mining lifecycle including: asset management; blasting services,
explosive supply; civil projects; crushing; exploration drilling; mine closure and mine site rehabilitation; mobile
plant maintenance; open cut mining; training and development for ATSI employees; tyre management; and
underground mining.
Annual Report 2016 55
B1. Segment information – continued
2016
$’m
Revenue
Inter-segment sales
Total segment revenue
Share of sales revenue from joint ventures
and associates(i)
Total revenue including joint ventures
and other income(i)
Share of net profit of joint ventures
and associates
Research and development incentives
Depreciation and amortisation
Total reported segment results (EBIT)
Net finance costs
Total profit before tax
Transport
Services
Tech &
Comms
Services
Utilities
Services
Rail
EC&M Mining
Un-
allocated
Total
1,786.7
–
1,786.7
485.5
–
485.5
788.8
–
788.8
421.8
–
421.8
1,856.7
–
1,856.7
1,548.9
–
1,548.9
4.5 6,892.9
(42.9)
(42.9)
(38.4) 6,850.0
62.8
–
–
404.4
30.4
46.3
–
543.9
1,849.5
485.5
788.8
826.2
1,887.1
1,595.2
(38.4) 7,393.9
6.8
3.0
39.7
103.7
–
0.8
5.5
29.9
–
0.7
13.8
41.5
6.3
0.5
10.8
14.4
0.5
0.2
18.2
48.2
4.1
4.8
153.6
130.0
–
–
17.1
(90.8)
17.7
10.0
258.7
276.9
(33.0)
243.9
Acquisition of segment assets
Segment assets
Segment liabilities
Carrying value of equity accounted investees
42.2
957.2
328.9
7.6
5.6
163.0
122.8
–
20.2
478.6
135.0
–
8.6
604.1
132.1
58.7
20.5
596.8
326.0
5.9
116.3
872.3
318.2
9.4
54.3
267.7
528.3 4,200.3
2,111.8
748.8
81.6
–
2015
$’m
Revenue
Inter-segment sales
Total segment revenue
Share of sales revenue from joint ventures
and associates(i)
Total revenue including joint ventures
and other income(i)
Share of net profit of joint ventures
and associates
Research and development incentives
Depreciation and amortisation
Total reported segment results (EBIT)
Net finance costs
Total profit before tax
Transport
Services
Tech &
Comms
Services
Utilities
Services
Rail
EC&M Mining
Un-
allocated
Total
1,863.6 (ii)
–
1,863.6 (ii)
495.5
–
495.5
583.5
–
583.5
611.6
–
611.6
1,948.8 (ii)
–
1,948.8 (ii)
1,532.4
–
1,532.4
14.3
(29.8)
(15.5)
7,049.7
(29.8)
7,019.9
60.6
–
–
261.9
30.4
57.3
–
410.2
1,924.2 (ii)
495.5
583.5
873.5
1,979.2 (ii)
1,589.7
(15.5)
7,430.1
0.6
2.5
43.3
88.3 (ii)
–
1.1
4.6
25.7
–
1.2
9.5
34.0
8.8
0.7
10.3
27.5
1.8
0.5
14.0
59.4 (ii)
3.5
4.0
155.8
132.6
–
15.1
15.6
(57.8)
14.7
25.1
253.1
309.7
(29.9)
279.8
Acquisition of segment assets
Segment assets
Segment liabilities
Carrying value of equity accounted investees
46.5
986.0
343.5
4.0
4.6
165.6
58.8
–
292.2
442.2
163.3
–
60.9
589.7
154.0
59.7
52.7
597.3
347.2
10.7
117.2
960.1
353.3
8.9
33.4
263.5
549.0
–
607.5
4,004.4
1,969.1
83.3
(i) This is a non-statutory disclosure as it relates to Downer’s share of revenue from equity accounted joint ventures and associates.
(ii) The 2015 revenue and EBIT have been reclassified by $89.9 million and $7.9 million respectively to better reflect the current segment structure and appropriate contribution
by service line. There has been no impact on total revenue and EBIT as a result of these changes.
56 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2016 B1. Segment information – continued
Reconciliation of segment net operating profit to net profit after tax:
Segment net operating profit
Unallocated:
Research and development incentives
Bid costs referable to Canberra light rail project(i)
Corporate costs
Total unallocated
Earnings before interest and tax
Net finance costs
Profit before income tax
Income tax expense
Profit after income tax
Note
B4(a)
Segment results
2016
$’m
367.7
–
(13.0)
(77.8)
(90.8)
276.9
(33.0)
243.9
(63.3)
180.6
2015
$’m
367.5
15.1
–
(72.9)
(57.8)
309.7
(29.9)
279.8
(69.6)
210.2
(i) Downer was a member of the ACTivate consortium. On 1 February 2016, the consortium was advised that it had not been successful in its bid to build, operate and maintain
Canberra’s new light rail project (“Capital Metro”). Accordingly, an amount of $13.0 million, referable to Downer’s share of pre-tax bid costs has been expensed.
By geographic location(ii)
Australia
New Zealand and Pacific
Asia
Africa
South America
Other
Total
Total revenue(i)
Segment assets
2016
$’m
2015
$’m
2016
$’m
2015
$’m
5,502.7
1,303.3
1.3
25.4
14.3
3.0
6,850.0
5,691.0
1,270.5
2.9
34.7
15.5
5.3
7,019.9
3,607.3
546.0
6.7
21.3
16.5
2.5
4,200.3
3,450.7
507.6
8.3
17.9
15.2
4.7
4,004.4
Acquisition of
segment assets
2016
$’m
238.2
20.5
–
4.9
4.1
–
267.7
2015
$’m
573.6
32.8
–
0.5
0.5
0.1
607.5
(i) Total revenue includes other income and inter-segment sales, recorded at amounts equal to competitive market prices charged to external customers for similar goods.
(ii) Revenue and assets are allocated based on geographical location of the legal entity.
Annual Report 2016 57
B2. Profit from ordinary activities
a) Revenue and other income
Sales revenue
Rendering of services
Mining services
Construction contracts
Sale of goods
Other revenue
Total revenue from ordinary
activities
Other income
Total revenue and other income
Share of sales revenue from joint
ventures and associates(i)
Total revenue including joint
ventures and associates and
other income(i)
2016
$’m
2015
$’m
4,387.6
1,507.7
713.8
205.3
31.8
6,846.2
3.8
6,850.0
4,469.6
1,479.4
789.4
232.7
43.8
7,014.9
5.0
7,019.9
543.9
410.2
7,393.9
7,430.1
(i) This is a non-statutory disclosure as it relates to Downer’s share of revenue from
equity accounted joint ventures and associates.
Recognition and measurement
Revenue
Revenue is measured at the fair value of the consideration
received or receivable. Revenue is recognised if it meets the
criteria below.
(i) Rendering of services
The Group primarily generates service revenue from the
following activities:
– Maintenance and management of transport infrastructure;
– Utilities infrastructure maintenance services (gas,
power and water);
– Maintenance and installation of infrastructure in the
telecommunications sector;
– Industrial plant maintenance;
– Contract mining services, mining assets maintenance
services, tyre management and blasting;
– Rolling stock maintenance and rail asset
management services;
– Engineering and consultancy services; and
– Facilities management.
These services are provided either under a fixed price service
contract or a time and materials contract. Time and materials
contract revenue is recognised at the contractual rates as labour
hours are delivered and direct expenses are incurred.
58 Downer EDI Limited
Other short-term service contracts are recognised when the
services are completed in accordance with the terms of the
contract. Service contracts that have a long-term duration
are recognised in proportion to the stage of completion at
balance sheet date.
(ii) Construction contracts
Construction contracts are contracts specifically negotiated
for the construction of an asset or combination of assets
(including rail and infrastructure assets). Revenue is recognised
in proportion to the stage of completion of the contract at
balance sheet date.
(iii) Sale of goods
Revenue is recognised when the significant risks and rewards of
ownership of the goods have passed to the buyer.
(iv) Other revenue
Other revenue primarily includes rental income and government
grants relating to research and development incentives received
by the Group. The Group elects to present the net amount in
“Other revenue” as allowed under AASB120 Accounting for
Government grants and disclosure of Government assistance.
Key estimate and judgement:
Revenue recognition
Determining the stage of completion requires an estimate
of expenses incurred to date as a percentage of total
estimated costs. Where variations and claims are made
to the contract, assumptions are made regarding the
probability that the customer will approve the variations
and claims and the amount of revenue that will arise.
Changes in these estimation methods could have a
material impact on the financial statements of Downer.
b) Individually significant item
The following material item is relevant to an understanding of the
Group’s financial performance:
Bid costs referable to Canberra
light rail project
2016
$’m
13.0
2015
$’m
–
Downer was a member of the ACTivate consortium. On
1 February 2016, the consortium was advised that it had
not been successful in its bid to build, operate and maintain
Canberra’s new light rail project (“Capital Metro”). Accordingly an
amount of $13.0 million, referable to Downer’s share of pre-tax
bid costs has been expensed.
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2016 B3. Earnings per share
B4. Taxation
Basic earnings per share
The calculation of basic earnings per share (EPS) is based on the
profit attributable to ordinary shareholders and the weighted-
average number of ordinary shares outstanding.
a) Reconciliation of income tax expense
The prima facie income tax expense on profit before income
tax reconciles to the income tax expense in the financial
statements as follows:
Profit attributable to members of
the parent entity ($’m)
Adjustment to reflect ROADS
dividends paid ($’m)
Profit attributable to members
of the parent entity used in
calculating EPS ($’m)
Weighted average number of
ordinary shares (WANOS) on issue
(m’s)(i)
Basic earnings per share
(cents per share)
2016
2015
180.6
(9.6)
210.2
(10.7)
171.0
199.5
424.7
428.1
40.3
46.6
Diluted earnings per share
The calculation of diluted EPS is based on the profit attributable
to ordinary shareholders and the weighted-average number of
ordinary shares outstanding after adjustments for the effects of
all dilutive potential ordinary shares.
Profit attributable to members of
the parent entity ($’m)
Weighted average number of
ordinary shares – diluted
Weighted average number of
ordinary shares (WANOS) on
issue (m’s)(i)(ii)
WANOS adjustment to reflect
potential dilution for ROADS
(m’s)(iii)
WANOS used in the calculation of
diluted EPS (m’s)
Diluted earnings per share
(cents per share)
2016
2015
180.6
210.2
424.7
428.2
53.3
39.8
478.0
468.0
37.8
44.9
(i) The WANOS on issue has been adjusted by the weighted average effect of
on-market share buy-back and the unvested executive incentive shares.
(ii) For diluted earnings 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 $190.7 million
(2015: $177.2 million), divided by the average market price of the Company’s
ordinary shares for the period 1 July 2015 to 30 June 2016 discounted by 2.5%
according to the ROADS contract terms, which was $3.58 (2015: $4.45).
Profit before income tax
Tax using the Company’s statutory
tax rate
Effect of tax rates in foreign
jurisdictions
Non-deductible expenses
Profits and franked distributions
from joint ventures and associates
Non-taxable government grant
Other items
(Over) / under provision of income
tax in previous year
Total income tax expense
Current tax expense
Deferred tax expense
2016
$’m
2015
$’m
243.9
279.8
73.2
83.9
(1.2)
0.8
(5.6)
(3.0)
(0.7)
(0.2)
63.3
24.9
38.4
(1.2)
2.3
(6.9)
(7.5)
0.1
(1.1)
69.6
59.2
10.4
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
corporate tax rate when compared with the previous year.
Annual Report 2016 59
B4. Taxation – continued
b) Movement in deferred tax balances
Net
balance
at
1 July
Charged
to income
statement
Charged to
compre-
hensive
income and
equity
Net
foreign
currency
exchange
differences
Acquisition
and
disposal
Net
balance
at
30 June
Deferred
tax
assets
Deferred
tax
liabilities
(85.3)
(3.0)
(2.8)
(12.0)
(20.4)
25.5
87.9
(3.1)
(34.3)
(0.7)
1.5
(9.6)
2.2
(17.2)
17.4
2.3
(13.2)
(38.4)
–
–
–
–
–
–
–
1.2
1.2
(1.4)
–
–
(0.1)
–
(0.1)
0.5
(0.2)
–
–
–
–
–
0.2
(6.2)
–
(121.0)
(3.7)
(1.3)
(21.7)
(18.2)
8.4
99.6
0.2
–
–
–
–
–
8.4
99.6
0.2
(121.0)
(3.7)
(1.3)
(21.7)
(18.2)
–
–
–
(1.3)
(6.0)
(57.7)
108.2
(165.9)
–
(108.2)
108.2
(57.7)
–
(57.7)
Net
balance
at
1 July
Charged
to income
statement
Charged to
compre-
hensive
income and
equity
Net
foreign
currency
exchange
differences
Acquisition
and
disposal
Net
balance
at
30 June
Deferred
tax
assets
Deferred
tax
liabilities
(94.5)
(1.9)
(5.3)
(5.7)
(7.6)
15.6
88.3
(0.1)
5.1
(0.8)
2.5
(6.7)
2.2
9.8
(21.9)
(0.6)
–
–
–
–
–
–
–
(2.1)
0.8
(0.3)
–
0.3
–
–
(0.2)
(0.3)
3.3
–
–
0.1
(15.0)
0.1
21.7
–
(85.3)
(3.0)
(2.8)
(12.0)
(20.4)
25.5
87.9
(3.1)
–
–
–
–
–
25.5
87.9
–
(85.3)
(3.0)
(2.8)
(12.0)
(20.4)
–
–
(3.1)
(11.2)
(10.4)
(2.1)
0.3
10.2
(13.2)
113.4
(126.6)
–
(112.7)
112.7
(13.2)
0.7
(13.9)
2016
$’m
Trade and other
receivables
Inventories
Joint ventures and
associates
Property, plant and
equipment
Intangible assets
Trade and other
payables
Provisions
Other
Tax assets /
(liabilities)
before set-off
Set-off of DTA
against DTL
Net tax assets /
(liabilities)
2015
$’m
Trade and other
receivables
Inventories
Joint ventures and
associates
Property, plant and
equipment
Intangible assets
Trade and other
payables
Provisions
Other
Tax assets /
(liabilities)
before set-off
Set-off of DTA
against DTL
Net tax assets /
(liabilities)
60 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2016 B4. Taxation – continued
Recognition and measurement
Current tax
Current tax assets and liabilities are measured at 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.
Deferred tax
Deferred tax is accounted for in respect of temporary differences
arising from differences between the carrying amount of assets
and liabilities and the corresponding tax base.
Deferred tax liabilities are recognised for all taxable temporary
differences. Deferred tax assets are recognised for all deductible
temporary differences, unused tax losses and tax offsets, to the
extent that it is probable that sufficient future taxable profits will
be available to utilise them.
However, deferred tax assets and liabilities are not
recognised for:
– taxable temporary differences that arise from the initial
recognition of assets or liabilities in a transaction that is not
a business combination which affects neither taxable income
nor accounting profit;
– taxable temporary differences relating to investments in
subsidiaries, associates and joint ventures to the extent that
the Group is able to control the timing of the reversal of the
temporary differences and it is probable that they will not
reverse in the foreseeable future; and
– taxable temporary differences arising from goodwill.
Deferred tax assets and liabilities are measured at the tax rates
and tax laws that are expected to apply in the year when the
asset is utilised or liability is settled, based on tax rates and tax
laws that have been enacted or substantively enacted at the
reporting date.
Income taxes relating to items recognised directly in equity are
recognised directly in equity and not in the income statement.
Offsetting deferred tax balances
Deferred tax assets and liabilities are offset when they relate
to income taxes levied by the same taxation authority and the
Company / Group intends to settle its current tax assets and
liabilities on a net basis.
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 agreement and a tax sharing
agreement with the head entity. Under the terms of the tax
funding agreement, 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.
Key estimate and judgement:
Recovery of deferred tax assets
Deferred tax assets are only recognised for deductible
temporary differences to the extent it is probable that
sufficient future taxable profits will be available to utilise
them. 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.
Key estimate and judgement:
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 and in assessing whether deferred tax balances are
recognised on the statement of financial position. Changes
in circumstances will alter expectations, which may impact
the amount of provision for income taxes and deferred tax
balances recognised.
Annual Report 2016 61
B5. Remuneration of auditors
B6. Subsequent events
At the date of this report there is no matter or circumstance
that has arisen since the end of the financial year, that has
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.
2016
$
2015
$
2,505,000
524,000
3,029,000
2,596,000
490,000
3,086,000
743,567
107,500
733,510
106,000
306,842
1,157,909
315,742
1,155,252
Audit or review of financial reports:
Auditor of the Group
– Australia
– Overseas
Non-audit services:
Tax services
Sustainability assurance
Due diligence and other non-audit
services
The auditor of the Group is KPMG.
62 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2016 C
Operating assets and liabilities
This section provides information relating to the operating assets and liabilities of the Group. Downer has a strong focus
on maintaining a strong balance sheet through continued focus on cash conversion. The Group’s strategy also considers
expenditure, growth and acquisition requirements.
C1. Reconciliation of cash flow from operating activities
C6. Property, plant and equipment
C2. Trade and other receivables
C7. Intangible assets
C3. Rendering of services and construction contracts
C8. Provisions
C4. Inventories
C5. Trade and other payables
C9. Contingent liabilities
C1. Reconciliation of cash flow 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 businesses
Bid costs referable to Canberra light rail project
Research and development incentives
Foreign exchange (gain) / loss
Movement in current tax balances
Movement in deferred tax balances
Share-based employee benefits expense
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
Note
C6,C7
B2(b)
D1
2016
$’m
180.6
0.9
258.7
2.6
(3.0)
2.3
13.0
(10.0)
(0.3)
(11.0)
38.4
4.9
1.2
297.7
(23.4)
18.5
4.2
(1.1)
1.2
(71.9)
25.2
2.0
14.8
(30.5)
447.8
2015
$’m
210.2
(6.7)
253.1
2.7
(5.0)
–
–
(25.1)
1.5
10.1
10.4
1.5
1.9
244.4
121.3
40.2
(1.6)
(0.2)
0.7
(61.6)
(62.3)
4.6
(9.2)
31.9
486.5
Annual Report 2016 63
C2. Trade and other receivables
Note
2016
$’m
2015
$’m
Current
Trade receivables
Allowance for doubtful
debts
Amounts due from
customers under contracts
and rendering of services
Other receivables
Ageing profile of trade
receivables
Neither past due nor
impaired
Past due but not impaired
Impaired
441.4
491.4
(3.7)
437.7
(4.4)
487.0
C3
635.9
591.1
50.7
1,124.3
45.3
1,123.4
360.3
77.4
3.7
441.4
402.5
84.5
4.4
491.4
Recognition and measurement
Trade receivables
Trade receivables and other receivables are initially recognised
at fair value and subsequently at amortised cost using the
effective interest rate method, less an allowance for impairment.
Fair value
Due to the short-term nature of these financial rights, their
carrying amounts are estimated to represent their fair values.
Impairment of trade receivables
The Group has considered the collectability and recoverability
of trade receivables. An allowance for doubtful debts has been
made for the estimated irrecoverable trade receivable amounts
arising from services provided, determined by reference to past
default experience.
Capitalisation of tender / bid costs
When it is probable that a contract will be awarded, the
expenditure incurred in relation to tender / bid costs is
capitalised. Capitalised costs are expensed in accordance with
contract accounting principles once the contract is awarded.
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
the subsequent financial year.
Key estimate and judgement:
Capitalisation of tender / bid costs
Judgement is exercised 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 as an expense in the following
financial year.
64 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2016
C3. Rendering of services and
construction contracts
C4. Inventories
Note
2016
$’m
2015
$’m
Cumulative contracts
in progress as at
reporting date:
Cumulative costs incurred
plus recognised profits less
recognised losses to date
Less: progress billings
Net amount
Recognised and included
in the financial statements
as amounts due:
From customers under
contracts
To customers under
contracts
Net amount
7,121.0
10,987.1
(6,648.4)
472.6
(10,548.0)
439.1
C2
C5
635.9
591.1
(163.3)
472.6
(152.0)
439.1
Recognition and measurement
Services and 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 the 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.
Current
Raw materials
Work in progress
Finished goods
Components and spare parts
2016
$’m
208.0
0.5
88.7
30.0
327.2
2015
$’m
246.7
0.9
73.7
31.3
352.6
Recognition and measurement
Inventories are valued at the lower of cost and net realisable
value. Net realisable value represents the estimated selling price
less all estimated costs of completion and costs to be incurred in
marketing, selling and distribution.
C5. Trade and other payables
Note
2016
$’m
2015
$’m
Current
Trade payables
Amounts due to customers
under contracts and
rendering of services
Accruals
Other
C3
358.9
369.8
163.3
414.8
73.9
1,010.9
152.0
458.1
86.6
1,066.5
Recognition and measurement
Trade and other payables
Trade payables and other accounts payable are recognised when
the Group becomes obliged to make future payments resulting
from the purchase of goods and services.
Fair value
Due to the short-term nature of these financial obligations, their
carrying amounts are estimated to represent their fair values.
Annual Report 2016 65
C6. Property, plant and equipment
2016
$’m
Carrying amount as at 1 July 2015
Additions
Disposals at net book value
Acquisition of business
Disposal of business at net book value
Depreciation expense
Reclassifications at net book value
Reclassified as intangible assets(i)
Net foreign currency exchange differences at net book value
Closing net book value as at 30 June 2016
Cost
Accumulated depreciation
2015
Carrying amount as at 1 July 2014
Additions
Disposals at net book value
Acquisition of business
Depreciation expense
Reclassifications at net book value
Reclassified as intangible assets(i)
Net foreign currency exchange differences at net book value
Closing net book value as at 30 June 2015
Cost
Accumulated depreciation
Freehold
Land and
Buildings
Plant and
Equipment
Equipment
under
Finance
Lease
59.1
13.6
–
–
–
(4.7)
–
–
0.5
68.5
95.5
(27.0)
53.0
13.5
(2.4)
0.2
(5.5)
0.7
–
(0.4)
59.1
80.9
(21.8)
895.1
168.8
(16.8)
1.7
(0.6)
(217.7)
24.4
(1.2)
6.2
859.9
2,143.3
(1,283.4)
1,010.4
163.1
(72.2)
18.7
(213.9)
(1.1)
(3.0)
(6.9)
895.1
2,060.9
(1,165.8)
82.9
14.0
(0.5)
–
–
(12.1)
(24.4)
–
–
59.9
109.8
(49.9)
83.5
8.2
(0.7)
0.4
(9.2)
0.4
–
0.3
82.9
138.3
(55.4)
Total
1,037.1
196.4
(17.3)
1.7
(0.6)
(234.5)
–
(1.2)
6.7
988.3
2,348.6
(1,360.3)
1,146.9
184.8
(75.3)
19.3
(228.6)
–
(3.0)
(7.0)
1,037.1
2,280.1
(1,243.0)
(i) Refers to the reclassification of software from Capital Work in Progress to Intangible Assets.
Recognition and measurement
The value of property, plant and equipment is measured as the cost of the asset less accumulated depreciation and impairment.
The expected useful life and depreciation methods used are listed below:
Item
Freehold land
Buildings
Leasehold improvements
Useful life
n/a
20-30 years
Life of lease
Depreciation method
No depreciation
Straight-line
Straight-line
Plant and equipment – mining, power and gas
Working hours
Based on hours of use
Plant and equipment – other
Equipment under finance lease
3-25 years
5-15 years
Straight-line
Straight-line – lease term
66 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2016 C7. Intangible assets
2016
$’m
Carrying amount as at 1 July 2015
Additions
Acquisition of business
Reclassifications at net book value(i)
Amortisation expense
Net foreign currency exchange differences at net book value
Closing net book value as at 30 June 2016
Cost
Accumulated amortisation and impairment
2015
Carrying amount as at 1 July 2014
Additions
Acquisition of business
Reclassifications at net book value(i)
Amortisation expense
Net foreign currency exchange differences at net book value
Closing net book value as at 30 June 2015
Cost
Accumulated amortisation and impairment
Customer
contracts
and
relationships
Intellectual
property,
software
and system
development
Goodwill
781.7
–
20.5
–
–
3.1
805.3
881.3
(76.0)
521.6
–
261.9
–
–
(1.8)
781.7
857.7
(76.0)
43.5
–
–
–
(6.4)
–
37.1
50.1
(13.0)
–
–
50.1
–
(6.6)
–
43.5
50.1
(6.6)
93.8
49.1
–
1.2
(17.8)
1.2
127.5
255.3
(127.8)
67.9
32.2
9.2
3.0
(17.9)
(0.6)
93.8
200.4
(106.6)
Total
919.0
49.1
20.5
1.2
(24.2)
4.3
969.9
1,186.7
(216.8)
589.5
32.2
321.2
3.0
(24.5)
(2.4)
919.0
1,108.2
(189.2)
(i) Refers to the reclassification of software from Capital Work in Progress to Intangible Assets.
Recognition and measurement
Goodwill
Goodwill acquired in a business combination is measured at
cost and subsequently measured at cost less any impairment
losses. The cost represents the excess of the cost of a business
combination over the fair value of the identifiable assets,
liabilities and contingent liabilities acquired.
Customer contracts and relationships
Customer contracts and relationships acquired in a business
combination are carried at cost less accumulated amortisation
and any accumulated impairment losses.
Intellectual property, software and system development
Intangible assets acquired by the Group, including intellectual
property (purchased patents, trademarks and licences) and
software are initially recognised at cost, and subsequently
measured at cost less accumulated amortisation and any
impairment losses. Internally developed systems are capitalised
once the project is assessed to be feasible.
The costs capitalised include consulting, licensing and direct
labour costs. Costs incurred in determining project feasibility are
expensed as incurred.
Amortisation
Intangible assets with finite useful lives are amortised on a
straight-line basis over their useful lives. The estimated useful
lives are generally:
Item
Customer contracts and relationships
Software and system development
Other intangible assets (other than
indefinite useful life intangible assets)
Useful Life
5-10 years
5-15 years
20 years
The estimated useful life and amortisation method are reviewed
at the end of each annual reporting period.
Annual Report 2016 67
C7. Intangible assets – continued
Impairment of assets
Goodwill and intangible assets that have an indefinite useful
life 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.
Allocation of goodwill to cash-generating units
Goodwill has been allocated, for impairment testing purposes,
to CGUs that are significant individually or in aggregate, taking
into consideration the nature of service, resource allocation, how
operations are monitored and where independent cash inflows
are identifiable. Six independent CGUs (by service line) have
been identified across the Group against which impairment
testing has been undertaken. Goodwill has been allocated to
these CGUs as follows:
Transport Services
Technology and
Communications Services
Utilities Services
Rail
EC&M
Mining
Carrying value of
consolidated goodwill
2016
$’m
215.7
46.1
243.2
69.5
154.4
76.4
805.3
2015
$’m
212.5
45.1
226.8
69.5
151.4
76.4
781.7
Key estimate and judgement:
Impairment of assets
Determination of potential impairment requires an
estimation of the recoverable amount of the CGUs to
which the goodwill and intangible assets with indefinite
useful lives are allocated. The Group uses the “value
in use” method to determine the recoverable amount.
Key assumptions requiring judgement include projected
cash flows, growth rate estimates, discount rates, working
capital and capital expenditure.
68 Downer EDI Limited
Recoverable amount testing –key assumptions
The table below shows the key assumptions utilised in the “value
in use” calculations.
Budgeted
EBITDA(i)
Long-term
growth rate
Discount
rate
9.5%
2.5%
10.9%
(3.5%)
12.3%
10.6%
0.3%
2.8%
2.5%
2.5%
2.5%
2.5%
2.5%
10.8%
10.9%
11.0%
11.0%
11.5%
Transport Services
Technology and
Communications
Services
Utilities Services
Rail
EC&M
Mining
(i) Budgeted EBITDA used for impairment testing is expressed as the compound
annual growth rates from FY17 to terminal year based on the business plans.
(i) Projected cash flows
The Group determines the recoverable amount based on a
“value in use” calculation, using four years cash flow projections
based on the FY17 budget for the year ending 30 June 2017
and the business plan for the subsequent financial years ending
30 June 2018, 2019 and 2020 (as discussed with the Board).
For FY21 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.
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:
– Transport Services and Utilities Services are expected
to benefit from an expected increase in activity across
the transport infrastructure, electricity, water and
renewables sectors;
– Rail is expected to benefit from growth in its maintenance,
after-market parts sales activities and other growth
opportunities. In addition, closer integration with strategic
partners is expected to continue to contribute to revenue
and EBITDA growth;
– Mining and EC&M’s revenue and EBITDA include
assumptions that take into account the cyclical nature of the
resources industry and various growth opportunities; and
– Technology and Communications Services is expected to be
impacted by the potential reduction in revenue from existing
significant contracts.
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2016 C7. Intangible assets – continued
(ii) Long-term growth rate
The future annual growth rates for FY21 onwards to perpetuity
are based on the historical nominal GDP rates for the
country of operation.
(iii) Discount rates
Post-tax discount rates of between 10.8% and 11.5% 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.
(iv) 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.
(v) Budgeted working capital
Working capital has been maintained at a level required to
support the business activities of each CGU, taking into account
changes in the business cycle. 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. A
number of scenarios, including further contract losses 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. Discussed below is the
sensitivity analysis 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 the financial performance
of its business. The timing of the cash flows arising from these
improvements may be affected by macro-economic risks,
including volatile commodity prices which may result in further
reduction in capital expenditure in the Australian resources
sector and insourcing by key customers for rolling stock
maintenance. In the event that these risks ultimately eventuate
and cannot be mitigated, the Rail CGU carrying value may
exceed its recoverable amount.
In addition, Downer is currently participating in three major bids
which, if successful, will result in significant long-term contracts.
The financial impact of these bids has not been included in the
calculation of the recoverable amount. In the event that Downer
is successful in at least one of these bids, the resulting increase
in the recoverable amount will be greater than the impact of the
downside sensitivity analysis set out above.
Annual Report 2016 69
Warranties
and
contract
claims
Decomm-
issioning
Other
Total
12.6
2.9
(0.6)
(0.5)
–
14.4
4.5
9.9
26.0
19.5
(6.0)
(17.3)
–
22.2
21.7
0.5
25.4
47.9
(3.3)
(24.3)
0.1
45.8
25.4
20.4
64.0
70.3
(9.9)
(42.1)
0.1
82.4
51.6
30.8
Key estimate and judgement: Provisions
(i) Decommissioning and restoration
Judgement is required in determining the expected
expenditure required to settle rectification obligations at
the reporting date, based on current legal requirements
and technology.
(ii) Warranties and contract claims
The provision is estimated having regard to previous
claims experience.
(iii) Other provisions
The return condition provision is estimated based on the
costs associated with returning leased assets to the lessor
in certain condition.
C8. Provisions
2016
$’m
At 1 July 2015
Additional provisions recognised
Unused provision reversed
Utilisation of provision
Net foreign currency exchange differences
At 30 June 2016
Current
Non-current
Recognition and measurement
Provisions
Provisions are recognised when:
– the Group has a present obligation as a result of a past event;
– it is probable that resources will be expended to settle the
obligation; and
– the amount of the provision can be measured reliably.
(i) Decommissioning and restoration
Provisions for decommissioning and restoration are made for
close down, restoration and environmental rehabilitation costs,
including the cost of dismantling and demolition of infrastructure,
removal of residual materials and remediation of disturbed areas.
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.
The provision is discounted using a pre-tax rate that reflects
current market assessments of the time value of money and the
risks specific to the liability.
(ii) Warranties and contract claims
Provisions for warranties and contract claims 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.
(iii) Other provisions
Other provisions primarily include amounts recognised in relation
to onerous supply contracts and return conditions provisions
for leased assets. The Group has leases that require the leased
asset to be returned to the lessor in a certain condition.
The onerous contract provision is discounted using a pre-tax
rate that reflects current market assessments of the time value
of money and the risks specific to the liability.
70 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2016 C9. Contingent liabilities
Bonding
Note
2016
$’m
2015
$’m
The Group has bid bonds
and performance bonds
issued in respect of
contract performance
in the normal course of
business for wholly-owned
controlled entities
E2
722.0
808.4
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.
Other contingent liabilities
i) 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.
ii) The Group is subject to product liability claims. 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, a contingent
liability may exist for any amounts that ultimately becomes
payable in excess of current provisioning levels.
iii) Controlled entities have entered into various joint
arrangements under which the controlled entity is jointly
and severally liable for the obligations of the relevant
joint arrangements.
iv) 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 during the
course of a project. Potential liability may arise from 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 claims, arbitration and litigation processes in
relation to services, supply and construction contracts as
well as in relation to personal injury and property damage
claims arising from project delivery.
v) Several New Zealand entities in the Group have been named
as co-defendants in six “leaky building” claims. The leaky
building claims where Group entities are co-defendants
generally relate to water damage arisen from historical
design and construction methodologies (and certification)
for residential and other buildings in New Zealand during
the early-mid 2000s. The Directors are of the opinion
that disclosure of any further information relating to
the leaky building claims would be prejudicial to the
interests of the Group.
vi) Ground subsidence at the Waratah Train Maintenance
Centre located on Manchester Road, Auburn (“AMC”) has
been identified. The design and construction of the AMC
formed part of the Waratah Train Project, with Reliance
Rail contracting Downer to design and build the AMC. 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 continue,
with an estimated remediation cost in the order of
$30 million. The Directors are of the opinion that, 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) The Group is defending a claim brought by Port Waratah
Coal Services Limited and a cross claim by another
defendant, Menard Bachy Pty Ltd in respect of alleged
non-conforming excavation and civil work performed at
Kooragang Island Coal Terminal by Downer and its joint
venture partner, Daracon Contractors Pty Ltd. The value of
the claim against Downer and Daracon is $39 million. 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.
viii) On 16 September 2015, the Group announced that it had
terminated a contract with Tecnicas Reunidas S.A. (“TR”)
following TR’s failure to remedy a substantial breach of the
contract and that the Group is pursuing a claim against TR in
the order of $65 million. Downer has since demobilised from
the site and has formally commenced an arbitration process,
with a hearing expected to take place in calendar year 2017.
TR has initiated a counter-claim as part of the arbitration
although no particulars of the counter-claim have been
provided yet. 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) Under the terms of the agreement reached between the
New South Wales 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.
Annual Report 2016 71
D
Employee benefits
This section provides a breakdown of the various
programs Downer uses to reward and recognise
employees and key executives, including Key
Management Personnel (KMP). Downer believes that
these programs reinforce the value of ownership and
incentives and drive performance both individually and
collectively to deliver better returns to shareholders.
D1. Employee benefits
D2. Key management personnel compensation
D3. Employee discount share plan
D1. Employee benefits
Employee benefits provision:
– Current
– Non-current
Total
2016
$’m
254.2
27.6
281.8
2015
$’m
228.1
29.5
257.6
Recognition and measurement
The employee benefits liability represents accrued wages and
salaries, leave entitlements and other incentives 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.
Key estimate and judgement: Annual leave
and long service leave
Long-term employee benefits are measured at the present
value of estimated future payments for the services
provided by employees up to the end of the reporting
period. This calculation requires judgement in determining
the following key assumptions:
– Future increase in wages and salary rates;
– Future on-cost rates; and
– Expected settlement dates based on staff
turnover history.
The liability is discounted using the Australian corporate
bond rates which most closely match the terms to maturity
of the entitlement.
72 Downer EDI Limited
Employee benefits expense:
– Defined contribution plans
– Shared-based employee benefits
expense
– Employee benefits
– Redundancy costs
Total
2016
$’m
2015
$’m
148.4
140.6
4.9
2,580.8
24.5
2,758.6
1.5
2,441.6
21.6
2,605.3
D2. Key management personnel compensation
2016
$
2015(i)
$
Short-term employee benefits
Post-employment benefits
Share-based payments
Total
13,279,618
695,498
2,460,150
16,435,266
12,776,321
1,432,020
932,294
15,140,635
(i) 2015 figures reflect compensation paid to KMP as reported in the 2015
Annual Report.
Recognition and measurement
Equity-settled transactions
Equity-settled share-based transactions are measured at fair
value at the date of grant. The cost of these transactions are
recognised in the profit or loss and credited to equity over
the vesting period. At each balance sheet date, the Group
revises its estimates of the number of rights that are expected
to vest for service and non-market performance conditions.
The expense recognised each year takes into account the most
recent estimate.
The fair value at grant date is independently determined using
an option pricing model and takes into account any market
related performance conditions. Non-market vesting conditions
are not considered when determining value; however they are
included in assumptions about the number of rights that are
expected to vest.
Cash-settled transactions
The amount payable to employees in respect of cash-settled
share-based payments is recognised as an expense, with a
corresponding increase in liabilities, over the period which the
employees become unconditionally entitled to the payment.
The liability is remeasured at each reporting date and at
settlement date based on the fair value, with any changes in the
liability being recognised in profit or loss.
D3. Employee discount share plan
No shares were issued under the Employee Discount Share Plan
during the years ended 30 June 2016 and 30 June 2015.
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2016 E
Capital structure and financing
This section provides information relating to the Group’s capital structure and its exposure to financial risk, how they affect
the Group’s financial position and performance, and how the risks are managed.
The capital structure of the Group consists of debt and equity. The Directors determine the appropriate capital structure
of Downer, specifically how much is raised from shareholders (equity) and how much is borrowed from financial institutions
(debt) in order to finance the current and future activities of the Group. The Directors review the Group’s capital structure
and dividend policy regularly and do so in the context of the Group’s ability to continue as a going concern, to invest in
opportunities that grow the business and enhance shareholder value.
E4. Issued capital
E5. Dividends
E1. Borrowings
E2. Financing facilities
E3. Commitments
E1. Borrowings
Current
Secured:
– Finance lease liabilities
– Hire purchase liabilities
– Supplier finance
Unsecured:
– Bank loans
– AUD medium term notes (2009-1)
– AUD medium term notes (2010-1)
– Deferred finance charges
Total current borrowings
Note
E3(c)
E3(d)
2016
$’m
2015
$’m
13.1
0.5
5.8
19.4
15.1
13.3
–
(2.3)
26.1
45.5
22.5
6.0
–
28.5
16.6
13.3
6.3
(2.5)
33.7
62.2
Annual Report 2016 73
Note
E3(c)
E3(d)
2016
$’m
2015
$’m
13.9
0.6
14.5
8.6
144.1
30.0
13.3
150.0
250.0
(6.0)
590.0
604.5
650.0
18.3
1.1
19.4
28.3
9.1
–
26.6
150.0
250.0
(7.0)
457.0
476.4
538.6
E1. Borrowings – continued
Non-current
Secured:
– Finance lease liabilities
– Hire purchase liabilities
Unsecured:
– Bank loans
– USD notes
– AUD notes
– AUD medium term notes (2009-1)
– AUD medium term notes (2013-1)
– AUD medium term notes (2015-1)
– Deferred finance charges
Total non-current borrowings
Total borrowings
Recognition and measurement
Borrowings
Borrowings are initially recognised at fair value, net of transaction
costs. They are subsequently measured at amortised cost using
the effective interest rate method.
Total borrowings (i)
Fair value of total borrowings (i)
2016
$’m
616.1
687.4
2015
$’m
490.7
544.8
(i) Exclude finance lease liabilities, hire purchase liabilities and supplier finance.
Fair value
The cash flows under the Group’s debt instruments are
discounted using current market base interest rates and adjusted
for current market credit default swap spreads for industrial
companies with a BBB credit rating.
74 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2016 E2. Financing facilities
At 30 June 2016, the Group 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
bonding facilities
Total unutilised bonding facilities
2016
$’m
400.0
125.0
525.0
2015
$’m
400.0
210.0
610.0
614.5
614.5
524.9
524.9
Bank loans
Syndicated loan facility
The syndicated loan facility, totalling $400.0 million, is unsecured
and is split into two tranches:
– $200.0 million maturing in April 2019; and
– $200.0 million maturing in April 2021.
Bilateral bank loans and overdrafts
These facilities are unsecured and due for renewal in
multiple tranches in calendar years 2017 and 2018 excluding
$23.7 million of loans which are supported by Export Credit
Agency guarantees and which amortise through even, semi-
annual instalments with final maturity dates of October
2017 and July 2018.
USD notes
USD unsecured private placement notes are on issue for a
total amount of US$107.0 million. US$7.0 million notes mature in
September 2019 and US$100.0 million in July 2025. The USD
denominated principal and interest amounts have been fully
hedged against the Australian dollar.
AUD notes
AUD unsecured private placement notes are on issue for a total
amount of $30.0 million with a maturity of July 2025.
AUD Medium Term Notes (MTNs)
The Group has the following unsecured 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 $26.6 million;
– Series 2013-1 for $150.0 million, which matures in
November 2018; and
– Series 2015-1 for $250.0 million, which matures in March 2022.
The above facilities and notes are subject to certain
Group guarantees.
Finance lease / Hire purchase / Supplier
finance facilities
The Group has certain secured facilities of these types which
are for an aggregate amount of $33.9 million and which amortise
over different periods of up to four years.
Covenants on financing facilities
Certain of the Group’s financing facilities contain undertakings
to comply at all times with financial covenants. This requires
the Group to operate within certain financial ratios 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 2016.
Bonding
The Group has $1,336.5 million of bank guarantee and insurance
bond facilities to support its contracting activities. $510.5 million
of these facilities are provided to the Group on a committed
basis and $826.0 million on an uncommitted basis.
The Group’s facilities are provided by a number of banks and
insurance companies on an unsecured basis and are subject
to certain Group guarantees. $722.0 million (refer to Note
C9) of these facilities were utilised as at 30 June 2016 with
$614.5 million unutilised. These facilities have varying maturity
dates between calendar years 2016 and 2018.
The underlying risk being assumed by the relevant financier
under all 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 election of the Group, be utilised
for bonding purposes.
Refinancing requirements
Where existing facilities approach maturity, the Group will
negotiate with existing and new financiers to extend the maturity
date of these facilities. The Group’s financial metrics and credit
rating as well as conditions in financial markets and other factors
may influence the outcome of these negotiations.
Credit ratings
The Group 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, reduced tenors and lower
facility limits) on debt and bonding facilities, to reflect the
deteriorating credit risk profile.
Annual Report 2016 75
E3. Commitments
a) Capital expenditure commitments
Plant and equipment
Within one year
b) Operating lease commitments
Non-cancellable operating leases relate to premises with lease terms of between one to 20 years.
Within one year
Between one and five years
Greater than five years
Non-cancellable operating leases relate to plant and equipment with lease terms of
between one to seven years.
Within one year
Between one and five years
Greater than five years
c) Finance lease commitments
Finance leases relate to plant and equipment with lease terms of between one to five years.
Within one year
Between one and five years
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 years
Minimum hire purchase payments
Future finance charges
Hire purchase liabilities
Included in the financial statements as:
Current borrowings
Non-current borrowings
76 Downer EDI Limited
Note
E1
E1
E1
E1
2016
$’m
18.2
18.2
56.0
155.3
138.0
349.3
58.9
76.8
6.9
142.6
14.1
14.3
28.4
(1.4)
27.0
13.1
13.9
27.0
0.6
0.6
1.2
(0.1)
1.1
0.5
0.6
1.1
2015
$’m
24.9
24.9
50.7
144.1
157.4
352.2
66.2
83.9
7.7
157.8
24.4
19.2
43.6
(2.8)
40.8
22.5
18.3
40.8
6.1
1.2
7.3
(0.2)
7.1
6.0
1.1
7.1
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2016 E3. Commitments – continued
e) Operating lease expenses
Operating lease expenses relating
to land and building
Operating lease expenses relating
to plant and equipment
Total operating lease expenses
2016
$’m
66.8
105.6
172.4
2015
$’m
68.3
123.3
191.6
Recognition and measurement
Leases
When the terms of a lease transfer substantially all the risks and
rewards of ownership to the Group, the lease is classified as a
finance lease. All other leases are classified as operating leases.
E4. Issued capital
(i) Operating leases
Operating lease payments are recognised as an expense
on a straight-line basis over the term of the lease, except
where another systematic basis is more representative of
the time pattern in which economic benefits from the leased
assets are consumed.
(ii) Finance leases
Assets held under finance leases are initially recognised at
an amount equal to the lower of their fair value or the present
value of the minimum lease payments. Subsequently the assets
are depreciated on a straight-line basis over the lesser of the
estimated useful life or the lease term.
Finance lease payments are apportioned between the finance
expense and the reduction of outstanding liability. The finance
expense is allocated to each period during the lease term so as
to achieve a constant rate of interest on the remaining balance of
the liability.
Ordinary shares
424,785,204 ordinary shares (2015: 432,683,214)
Unvested executive incentive shares
4,453,456 ordinary shares (2015: 5,295,993)
200,000,000 Redeemable Optionally Adjustable
Distributing Securities (ROADS) (2015: 200,000,000)
a) Fully paid ordinary share capital
Fully paid ordinary shares carry one vote per share and carry the right to dividends.
2016
$’m
2015
$’m
1,270.2
1,296.7
(21.0)
(26.2)
178.6
1,427.8
178.6
1,449.1
Fully paid ordinary share capital
Balance at the beginning of the financial year
Group on-market share buy-back
Balance at the end of the financial year
b) Unvested executive incentive shares
Balance at the beginning of the financial year
Vested executive incentive share transactions(i)
Balance at the end of the financial year
2016
m’s
$’m
2015
m’s
$’m
432.7
(7.9)
424.8
5.3
(0.8)
4.5
1,296.7
(26.5)
1,270.2
(26.2)
5.2
(21.0)
435.4
(2.7)
432.7
1,308.4
(11.7)
1,296.7
6.0
(0.7)
5.3
(29.1)
2.9
(26.2)
(i) Represents 842,537 vested shares for a value of $5,155,989 referable to the first deferred component of the 2014 STI award and to the 2012 LTI plan. June 2015 figures
referable to vested shares under the LTI plan totalling 742,705 shares for a value of $2,920,601.
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.
Annual Report 2016 77
E4. Issued capital – continued
c) Redeemable Optionally Adjustable Distributing
Securities (ROADS)
Balance at the beginning and at the end of the financial year
2016
m’s
200.0
$’m
178.6
2015
m’s
200.0
$’m
178.6
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 2016 is 6.29% per annum (2015: 7.21% per annum) which is equivalent to the one
year swap rate on 15 June 2016 plus the Step-up margin of 4.05% per annum.
Share options and performance rights
During the financial year 2,130,318 performance rights (2015: 2,184,741) in relation to unissued shares were granted to senior
executives of the Group under the LTI plan. Further details of the Key Management Personnel (KMP) LTI plan are contained in the
Remuneration Report.
Recognition and measurement
Ordinary shares
Incremental costs directly attributed to the issue of ordinary shares are accounted for as a deduction from equity, net of any tax effects.
Executive incentive shares
When executive incentive shares subsequently vest to employees under the Downer employee share plans, the carrying value of the
vested shares is transferred from issued capital to the employee benefits reserve.
78 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2016 E5. Dividends
a) Ordinary shares
Dividend per share (in Australian cents)
Franking percentage
Cost (in $’m)
Payment date
Dividend record date
2016
Final
2016
Interim
2015
Final
2015
Interim
12.0
100%
51.0
15/09/2016
18/08/2016
12.0
100%
51.7
17/03/2016
18/02/2016
12.0
100%
51.9
17/09/2015
20/08/2015
12.0
100%
51.9
19/03/2015
19/02/2015
Recognition and measurement
Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the entity,
before or at the end of the financial year but not distributed at balance date.
The final 2016 dividend has not been declared at the reporting date and therefore is not reflected in the consolidated
financial statements.
b) Redeemable Optionally Adjustable Distributing Securities (ROADS)
2016
Quarter 1
Quarter 2
Quarter 3
Quarter 4
Dividend per ROADS (in Australian cents)
New Zealand imputation credit percentage
Cost (in A$’m)
Payment date
1.18
100%
2.4
15/09/2015
1.22
100%
2.4
15/12/2015
1.17
100%
2.3
15/03/2016
1.24
100%
2.5
15/06/2016
2015
Quarter 1
Quarter 2
Quarter 3
Quarter 4
Dividend per ROADS (in Australian cents)
New Zealand imputation credit percentage
Cost (in A$’m)
Payment date
1.28
100%
2.6
15/09/2014
1.37
100%
2.7
15/12/2014
1.40
100%
2.8
16/03/2015
1.27
100%
2.6
15/06/2015
c) Franking credits
The franking account balance as at 30 June 2016 is nil (2015: nil).
Total
4.81
100%
9.6
Total
5.32
100%
10.7
Annual Report 2016 79
F
Group structure
This section explains significant aspects of Downer’s group structure, including joint arrangements where the Group has
interest in its controlled entities and how changes have affected the Group structure. It also provides information on business
acquisitions and disposals made during the financial year as well as information relating to Downer’s related parties, the extent
of related party transactions and the impact they had on the Group’s financial performance and position.
F1. Joint arrangements and associate entities
F4. Controlled entities
F2. Acquisition of businesses
F3. Disposal of subsidiary
F5. Related party information
F6. Parent entity disclosures
F1. Joint arrangements and associate entities
a) Interest in joint ventures and associates
Interest in joint ventures at the beginning of the financial year
Share of net profit
Share of distributions
Additional interest in joint ventures
Acquisition of controlling interest
Foreign currency exchange differences
Interest in joint ventures at the end of the financial year
Interest in associates at the beginning of the financial year
Share of net profit
Share of distributions
Additional interest in associates
Interest in associates at the end of the financial year
Interest in joint ventures and associates
2016
$’m
13.3
14.4
(9.6)
–
(1.1)
0.3
17.3
70.0
3.3
(9.0)
–
64.3
81.6
2015
$’m
13.6
7.8
(8.0)
0.1
–
(0.2)
13.3
26.5
6.9
–
36.6
70.0
83.3
80 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2016 F1. Joint arrangements and associate entities – continued
a) Interest in joint ventures and associates – continued
The Group has interests in the following joint ventures and associates which are equity accounted:
Name of arrangement
Principal activity
Joint ventures
Allied Asphalt Limited
Bitumen Importers Australia Joint Venture
Bitumen Importers Australia Pty Ltd
EDI Rail-Bombardier Transportation Pty Ltd
Emulco Limited
Green Vision Recycling Limited (i)
Isaac Asphalt Limited
RTL Mining and Earthworks Pty Ltd
Asphalt plant
Construction of bitumen storage facility
Bitumen importer
Sale and maintenance of railway rolling stock
Emulsion plant
Recycling
Manufacture and supply of asphalt
Contract mining, civil works and plant hire
Country of
operation
New Zealand
Australia
Australia
Australia
New Zealand
New Zealand
New Zealand
Australia
Associates
MHPS Plant Services Pty Ltd
Keolis Downer Pty Ltd
Reliance Rail Pty Ltd (ii)
Refurbishment, construction and maintenance
of boilers
Operation and maintenance of Gold Coast light
rail, Melbourne tram network and bus operation
Rail manufacturing and maintenance
Australia
Australia
Australia
Ownership interest
2016
%
2015
%
50
50
50
50
50
–
50
44
27
49
49
50
50
50
50
50
33
50
44
27
49
49
(i) Downer acquired the remaining ownership interest on 18 December 2015 (refer to Note F2).
(ii) Downer previously wrote down its investment in Reliance Rail Pty Ltd to nil. The New South Wales Government has the right in February 2018 to acquire Downer’s ownership
of Reliance Rail Pty Ltd for nil consideration. As a consequence, Downer does not include Reliance Rail Pty Ltd in its equity accounted disclosure.
There are no material commitments held by joint ventures or associates.
All joint ventures and associates have a statutory reporting date of 30 June, with the exception of MHPS Plant Services Pty Ltd which
has a statutory reporting date of 31 March.
Recognition and measurement
Equity accounting
(i) Investments in joint ventures
Investments in joint ventures are accounted for using the equity method of accounting.
(ii) Investments in associates
Investments in entities over which the Group has the ability to exercise significant influence, but not control, are accounted for using
equity method of accounting. The investment in associates is carried at cost plus post-acquisition changes in the Group’s share of the
associates’ net assets, less any impairment in value.
Proportionate consolidation
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.
Annual Report 2016 81
F1. Joint arrangements and associate entities – continued
b) Interest in joint operations
The Group has interests in the following joint operations which are proportionately consolidated:
Name of joint operation
Principal activity
Ownership interest
Country of
operation
2016
%
2015
%
BPL Downer Joint Venture
CDJV Construction Pty Ltd
Clough Downer Joint Venture
CMC and Downer Joint Venture
Dampier Highway Joint Venture
Downer-Carey Mining JV
Downer Clough Joint Venture
Downer CSS Joint Venture (i) (iv)
Downer Daracon Joint Venture
Downer EDI Works Pty Ltd & Leighton
Contractors Pty Ltd
Downer Electrical GHD JV (i)
Downer HEB Joint Venture
DownerMouchel (ii)
DownerMouchel Services Pty Ltd
Downer New Zealand Projects 1 Limited &
Soletanche Bachy International (NZ) Limited
John Holland EDI Joint Venture
John Holland Pty Ltd & Downer Utilities
Australia Pty Ltd Partnership
Karlayura ReGen Joint Venture
Landloch ReGen Joint Venture
LD&C Joint Venture
Leighton Works Joint Venture
Macdow Downer Joint Venture
Organic Water Joint Venture
Synergy Joint Venture
Thiess Downer EDI Works
Thiess VEC Joint Venture
Total Spaces Joint Venture (iv)
Utilita Water Solutions
VEC Shaw Joint Venture
Wiri Train Depot Joint Venture
York Civil Pty Ltd and Downer EDI
Engineering Pty Ltd Joint Venture
Building construction
Employment of labour force deployed in Clough
Downer
Gas compression facilities and pipelines
Road construction
Highway construction and design
Management of run of mine and ore rehandling
services
Ammonium nitrate production
Telecommunications
Construction
Design and construction of rail works
Singapore
Australia
Australia
Australia
Australia
Australia
Australia
Thailand
Australia
Australia
Traffic control infrastructure
Design and build of the New Zealand National War
Memorial Park
Road maintenance
Employment of labour force deployed in
DownerMouchel in New South Wales
Enabling works for Auckland City Rail Link
Australia
New Zealand
Australia
Australia
New Zealand
Research reactor
Operation of water recycling plant at Mackay
Road construction
Rehabilitation works, earthworks and plant
monitoring and maintenance
Design and construction of pipes and structures
Road construction
Road construction
Design, construction and operation of water
recycling plant
Road and pavement construction
Construction of coast to coast railway
Highway construction
Roading, landscaping and earthworks
Plant maintenance
Road construction
Construction of the Wiri train depot
Construction of water pump station
Australia
Australia
Australia
Australia
Australia
New Zealand
New Zealand
Australia
Australia
Australia
Australia
New Zealand
Australia
Australia
New Zealand
Australia
50
50
50
50
50
46
50
–
50
50
90
50
60
50
50
40
50
50
(iii)
37.5
50
50
50
33
25
50
–
50
50
50
50
50
50
50
50
50
46
50
60
50
50
90
50
60
50
50
40
50
50
(iii)
37.5
50
50
50
33
25
50
50
–
–
50
50
(i) Contractual arrangement prevents control despite ownership of more than 50% of these joint ventures.
(ii) 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.
(iii) Joint control is effected through unanimous vote by joint venture partners to direct the joint arrangement’s relevant activities however the Group’s interest may vary based
on discrete phases of works performed.
(iv) Downer’s interest in the joint operation was disposed of during the financial year ended 30 June 2016 following completion of the contract.
82 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2016 F2. Acquisition of businesses
c) Purchase consideration – cash outflow
Note
$’m
Gross purchase consideration
Less: Cash balances acquired
F2(a)
Acquisition related costs
Outflow of cash – investing activities
333.0
(29.3)
303.7
5.2
308.9
VEC
On 31 October 2014, the Group acquired 100% of VEC Civil
Engineering Pty Ltd and VEC Plant & Equipment Pty Ltd
(collectively known as “VEC”) for $11.5 million. The principal
activity of VEC is to design and construct concrete structures.
VEC is a leader in its field and provides new capability for the
Group. The total cash outflow for this acquisition was $9.4 million
which comprises consideration of $11.5 million, net of $1.4 million
cash balances acquired and $0.7 million deferred consideration.
At the date of acquisition, the net asset value of VEC was $1.6
million resulting in $9.9 million of goodwill being recognised.
Recognition and measurement
Business combinations
The Group accounts for business combinations using the
acquisition method when control is transferred to the Group.
The consideration transferred in the acquisition is measured at
fair value. Acquisition-related costs are expensed as incurred in
profit or loss.
F3. Disposal of subsidiary
2016
On 31 August 2015, the Group sold the Rimtec business to Rimex
Wheel Pty Ltd for a total consideration of $7.2 million. The Group
has incurred a $2.3 million loss as a result of this transaction.
2015
The Group did not dispose any businesses during the financial
year ended 30 June 2015.
2016
Green Vision Recycling Limited
On 18 December 2015, the Group acquired the remaining 67%
of Green Vision Recycling Limited for $0.9 million. Green Vision
is a New Zealand company specialised in recycling horizontal
infrastructure (roads, footpath, kerbs and soil).
2015
Tenix
On 31 October 2014, the Group acquired 100% of Tenix Holdings
Australia Pty Ltd and its subsidiaries (“Tenix”) for $300 million
on a cash and debt free basis. Adjusting for acquired cash, net
working capital and other minor adjustments, the gross purchase
consideration was $333 million. The principal activity of Tenix
is to provide design, construction, fabrication and installation,
operation and maintenance services in the water, power and
gas industries. Tenix is a leader in the electricity, gas and water
sectors in Australia and New Zealand and the acquisition of
Tenix is a strategic growth initiative for the Group.
a) Identifiable assets acquired and liabilities assumed
There have been no changes to the valuation techniques used
for measuring the fair value of material assets acquired since last
reported in the 2015 Annual Report.
The final accounting and tax values for the acquisition of Tenix
have been determined at the end of the measurement period,
resulting in total identifiable net assets acquired of $60.5 million
(inclusive of $29.3 million cash balance acquired). As a result,
$19.1 million of additional goodwill was recognised.
b) Goodwill
Goodwill arising from Tenix’s acquisition has been
recognised as follows:
Gross purchase consideration
Fair value of identifiable net
assets acquired
Goodwill arising from acquisition
Note
$’m
F2(a)
333.0
(60.5)
272.5
The goodwill represents revenue growth opportunities, the skills
and technical talent of Tenix’s workforce and expected synergies
to be achieved from integrating the company into the Group’s
existing business. 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
the acquisition is expected to be deductible for tax purposes.
Annual Report 2016 83
F4. Controlled entities
The controlled entities of the Group listed below were wholly owned during the current and prior year, unless otherwise stated:
Australia (continued)
Roche Bros. Superannuation Pty. Ltd.
Roche Services Pty Ltd
RPC Roads Pty Ltd
SACH Infrastructure Pty Ltd
Snowden Holdings Pty Ltd
Snowden Mining Industry Consultants Pty Ltd
Snowden Technologies Pty Ltd
Southern Asphalters Pty Ltd
VEC Civil Engineering Pty Ltd
VEC Plant and Equipment Pty Ltd
New Zealand and Pacific
A F Downer Memorial Scholarship Trust
DGL Investments Limited
Downer Construction (Fiji) Limited
Downer Construction (New Zealand) Limited
Downer Construction PNG Limited
Downer EDI Engineering Power Limited
Downer EDI Mining NZ Limited
Downer EDI Works Vanuatu Limited
Downer New Zealand Limited
Downer New Zealand Projects 1 Limited
Downer New Zealand Projects 2 Limited
Downer Professional Services Limited
Downer Utilities Alliance New Zealand Limited
Downer Utilities New Zealand Limited
Downer Utilities PNG Limited
Green Vision Recycling Limited (iii)
Richter Drilling (PNG) Limited
Roche Mining (PNG) Limited (ii)
Techtel Training & Development Limited
Underground Locators Limited
Waste Solutions Limited
Works Finance (NZ) Limited
Africa
Downer EDI Mining – Ghana Ltd
MD Mineral Technologies SA (Pty) Ltd.
MD Mining and Mineral Services (Pty) Ltd (i)
Otraco Botswana (Proprietary) Limited
Otraco Southern Africa (Pty) Ltd
Otraco Tyre Management Namibia (Proprietary) Limited
Snowden Mining Industry Consultants (Proprietary) Ltd
Snowden Training (Pty) Ltd
Australia
Advanced Separation Engineering Australia Pty Ltd (iv)
Dean Adams Consulting Pty Ltd
Downer Australia Pty Ltd
Downer EDI Associated Investments Pty Ltd
Downer EDI Engineering Company Pty Limited
Downer EDI Engineering CWH Pty Limited
Downer EDI Engineering Electrical Pty Ltd
Downer EDI Engineering Group Pty Limited
Downer EDI Engineering Holdings Pty Ltd
Downer EDI Engineering Power Pty Ltd
Downer EDI Engineering Pty Limited
Downer EDI Engineering Transmission Pty Ltd (ii)
Downer EDI Limited Tax Deferred Employee Share Plan
Downer EDI Mining Pty Ltd
Downer EDI Mining-Blasting Services Pty Ltd
Downer EDI Mining-Minerals Exploration Pty Ltd
Downer EDI Rail Pty Ltd
Downer EDI Services Pty Ltd
Downer EDI Works Pty Ltd
Downer Energy Systems Pty Limited
Downer Group Finance Pty Limited
Downer Holdings Pty Limited
Downer Mining Regional NSW Pty Ltd
Downer PPP Investments Pty Ltd
Downer Utilities Australia Pty Ltd
Downer Utilities Holdings Australia Pty Ltd
Downer Utilities Networks Pty Ltd
Downer Utilities New Zealand Pty Ltd
Downer Utilities Projects Pty Ltd
Downer Utilities SDR Australia Pty Ltd
Downer Utilities SDR Pty Ltd
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 (ii)
Locomotive Demand Power Pty Ltd
Lowan (Management) Pty. Ltd.
Mineral Technologies (Holdings) Pty Ltd
Mineral Technologies Pty Ltd
Otraco International Pty Ltd
Otracom Pty Ltd
Primary Producers Improvers Pty. Ltd.
QCC Resources Pty Ltd
Quality Coal Consulting Pty Ltd (ii)
Rail Services Victoria Pty Ltd
REJV Services Pty Ltd
Reussi Pty Ltd (ii)
Rimtec Pty Ltd (v)
84 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2016 F4. Controlled entities – continued
Asia
Chan Lian Construction Pte Ltd
Chang Chun Ao Da Technical Consulting Co Ltd
Downer EDI Engineering Holdings (Thailand) Limited
Downer EDI Engineering Thailand Ltd
Downer EDI Engineering (S) Pte Ltd
Downer EDI Group Insurance Pte Ltd
Downer EDI Rail (Hong Kong) Limited
Downer EDI Works (Hong Kong) Limited
Downer Pte Ltd
Downer Singapore Pte Ltd
Duffill Watts Pte Ltd
Duffill Watts Vietnam Ltd (ii)
MD Mineral Technologies Private Limited
PT Duffill Watts Indonesia
PT Otraco Indonesia
Roche Bros. (Hong Kong) Limited (iv)
(i) 70% ownership interest.
(ii) Entity currently undergoing liquidation.
(iii) Entity acquired during the financial year ended 30 June 2016.
(iv) Entity liquidated during the financial year ended 30 June 2016.
(v) Entity disposed of during the financial year ended 30 June 2016.
Americas
DBS Chile SpA
Mineral Technologies Comercio de Equipamentos para
Processamento de Minerais LTD
Mineral Technologies, Inc.
Otraco Brasil Gerenciamento de Pneus Ltda
Otraco Chile SA
Snowden Consultoria do Brasil Limitada
Snowden Mining Industry Consultants Inc.
United Kingdom
Sillars (B. & C.E.) Limited
Sillars (TMWD) Limited
Sillars Holdings Limited
Sillars Road Construction Limited
Snowden Mining Industry Consultants Limited
Works Infrastructure (Holdings) Limited
Works Infrastructure Limited
F5. 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 F6. Amounts contributed to the
defined contribution plan are disclosed in Note D1.
Other transactions occurred during the financial year between
the parent entity and wholly-owned subsidiaries, as well as
between entities in the wholly-owned Group, are 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 F4.
Equity interests in joint arrangements and
associate entities
Details of interests in joint arrangements and associate entities
are disclosed in Note F1.
c) Controlling entity
The parent entity of the Group is Downer EDI Limited.
Annual Report 2016 85
F6. 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
2016
$’m
2015
$’m
505.9
894.7
1,400.6
30.6
3.8
34.4
1,366.2
1,249.2
104.8
12.2
1,366.2
466.9
890.0
1,356.9
32.8
5.3
38.1
1,318.8
1,270.5
36.0
12.3
1,318.8
172.2
172.2
67.6
67.6
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 2016 (2015: nil) other than those disclosed in Note C9 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 2016 (2015: nil).
86 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2016 G
Other
This section provides details on other required disclosures relating to the Group to comply with the accounting standards
and other pronouncements including the Group’s capital and financial risk management disclosure. This disclosure provides
information around the Group’s risk management policies and how Downer uses derivatives to hedge the underlying exposure
to changes in interest rates and to foreign exchange rate fluctuations.
G1. New accounting standards
G2. Capital and financial risk management
G3. Other financial assets and liabilities
G1. New accounting standards
a) 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 July 2015.
The new and revised standard adopted by the Group for its annual reporting period beginning on 1 July 2015 is AASB 2015-3
Amendments to Australian Accounting Standards arising from the Withdrawal of AASB 1031 Materiality, which completes the withdrawal
of references to AASB 1031 in all Australian Accounting Standards and Interpretations, allowing that standard to effectively be
withdrawn. The adoption of this standard has not resulted in any impact to the financial reporting of the Group.
b) New accounting standards and interpretations not yet adopted
The following standards, amendments to standards and interpretations are relevant to current operations. They are available for early
adoption but have not been applied by the Group in this Financial Report.
– AASB 9 Financial Instruments, becomes mandatory for the Group’s 2019 Financial Report and includes changes to the classification
and measurement of financial assets including a new expected credit loss model for calculating impairment. It also includes the
new hedge accounting model to simplify hedge accounting requirements and more closely align hedge accounting with risk
management activities.
– AASB 15 Revenue from Contracts with Customers, becomes mandatory for the Group’s 2019 Financial Report and outlines a single
comprehensive model for entities to use in accounting for revenue arising from contracts with customers; and replaces AASB
111 Construction Contracts, AASB 118 Revenue, Interpretation 13 Customer Loyalty Programmes, Interpretation 15 Agreements
for Construction of Real Estate, Interpretation 18 Transfer of Assets from Customers and Interpretation 131 Revenue-Barter
Transactions involving Advertising Services. The core principle is that an entity recognises revenue to depict the transfer of
promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services.
– AASB 16 Leases, becomes mandatory for the Group’s 2020 Financial Report and removes the classification of leases between
finance and operating leases effectively treating all leases as finance leases for the lessee. The purpose is to provide greater
transparency of a lessee’s financial leverage and capital employed.
The Group has not yet determined the potential effect of these standards on the Group’s future Financial Reports.
Annual Report 2016 87
G2. Capital and financial risk management
a) Capital risk management
The capital structure of the Group consists of debt and equity.
The Group may vary its capital structure by adjusting the
amount of dividends, returning capital to shareholders, issuing
new shares or increasing or reducing debt.
The Group’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 and ensure ongoing
access to funding.
c) Foreign currency risk management
The Group 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 and cross-currency swaps.
The carrying amounts of the Group’s material unhedged foreign
currency denominated financial assets and financial liabilities at
the reporting date are as follows:
b) Financial risk management objectives
The Group’s Treasury function manages the funding, liquidity
and financial risks of the Group. These risks include foreign
exchange, interest rate, commodity and counterparty credit risk.
US dollar (USD)
New Zealand dollar (NZD)
Euro (EUR)
Financial
assets(i)
2016
$’m
2015
$’m
Financial
liabilities(i)
2015
$’m
2016
$’m
4.8
1.2
0.7
6.7
25.2
0.2
0.8
26.2
11.7
–
–
11.7
21.0
0.1
0.7
21.8
(i) The above table shows foreign currency financial assets and liabilities in
Australian dollar equivalent.
The Group may enter into a variety of derivative financial
instruments to manage its exposures including:
i)
ii)
Forward foreign exchange contracts to hedge the exchange
rate risk arising from cross-border trade flows, foreign
income and debt service obligations;
Cross-currency interest rate swaps to manage the interest
rate and currency risk associated with foreign currency
denominated borrowings; and
iii) Interest rate swaps to manage interest rate risk.
The Group does not enter into or trade derivative financial
instruments for speculative purposes.
Financial assets and liabilities are offset and the net amount
reported in the consolidated statement of financial position,
when there is a legally enforceable right to offset the recognised
amounts and there is an intention to settle on a net basis or
realise the asset and settle the liability simultaneously. No
material amounts with a right to offset were identified in the
statement of financial position.
88 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2016 G2. Capital and financial risk management – continued
c) Foreign currency risk management – continued
Foreign currency forward contracts
The following table summarises by currency, the Australian dollar (AUD) value (unless otherwise stated) of forward exchange contracts
outstanding as at the reporting date:
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 AUD / Sell EUR
Less than 3 months
Weighted average
exchange rate
2016
2015
0.7165
0.7328
0.7304
0.7854
0.7991
0.7659
0.7109
–
–
0.8039
0.7630
0.7678
0.6325
0.6191
–
0.6736
0.6640
0.6416
0.6629
–
Foreign currency
Contract value
Fair value
2016
FC’m
2015
FC’m
2016
$’m
2015
$’m
2016
$’m
2015
$’m
7.2
10.5
0.3
18.0
0.8
–
–
0.8
6.4
2.1
–
8.5
2.0
2.0
14.5
8.6
7.9
31.0
4.7
0.5
0.8
6.0
3.0
1.7
3.2
7.9
–
–
10.0
14.3
0.5
24.8
1.2
–
–
1.2
10.1
3.3
–
13.4
3.0
3.0
18.4
10.8
10.4
39.6
5.9
0.7
1.0
7.6
4.5
2.5
5.0
12.0
–
–
(0.4)
(0.2)
–
(0.6)
0.1
–
–
0.1
(0.7)
(0.2)
–
(0.9)
–
–
0.6
0.6
0.2
1.4
(0.2)
–
–
(0.2)
(0.1)
(0.1)
(0.2)
(0.4)
–
–
Annual Report 2016 89
G2. Capital and financial risk management – continued
c) Foreign currency risk management – continued
Cross-currency interest rate swaps
Under cross-currency interest rate swaps, the Group is committed to exchange certain foreign currency loan principal and interest
amounts at agreed future dates at fixed foreign exchange and interest rates. Such contracts enable the Group to eliminate the risk of
adverse movements in foreign exchange and interest rates related to foreign currency denominated borrowings.
The following table details the Australian dollar equivalent of cross-currency interest rate swaps outstanding as at the reporting date:
Weighted average
interest rate (including
credit margin)
2016
%
2015
%
Weighted average
exchange rate
2016
2015
7.8
5.9
6.8
5.9
0.7168
0.7739
0.7220
0.7739
Outstanding
contracts
Buy USD / Sell AUD
1 to 5 years
5 years or more
Contract value
Fair value
2016
$’m
9.8
129.2
139.0
2015
$’m
9.7
129.2
138.9
2016
$’m
2015
$’m
(0.5)
2.8
2.3
(0.3)
(0.8)
(1.1)
The above cross-currency interest rate swap contracts are designated as effective cash flow hedges.
Foreign currency sensitivity analysis
The Group is mainly exposed to United States dollar (USD) and Euro (EUR).
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 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.
USD impact
– 15% rate change
+ 15% rate change
EUR impact
– 15% rate change
+ 15% rate change
Profit / (loss)(i)
Equity(ii)
2016
$’m
2015
$’m
2016
$’m
2015
$’m
(1.2)
0.9
0.1
(0.1)
0.7
(0.5)
–
–
4.1
(3.0)
1.4
(1.4)
5.7
(4.2)
1.7
(1.7)
(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.
(ii) This is as a result of the changes in the value of forward foreign exchange contracts designated as cash flow hedges.
90 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2016 G2. Capital and financial risk management – continued
d) Interest rate risk management
The Group 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 and the
issue of long term fixed rate debt securities.
The Group’s exposure to interest rates on financial assets and financial liabilities is detailed in the table below:
Floating interest rates – cash flow exposure
Bank loans
AUD medium term notes (2010-1)
Cash and cash equivalents
Total cash flow exposure
Fixed interest rates – fair value exposure
Bank loans(i)
USD notes(iii)
AUD notes
AUD medium term notes (2009-1)(i) (iii)
AUD medium term notes (2013-1)(ii)
AUD medium term notes (2015-1)(ii)
Supplier finance
Finance lease and hire purchase
Total fair value exposure
Weighted average
interest rate
(including credit margin)
Liability / (asset)
2016
%
2015
%
2016
$’m
2015
$’m
3.8
–
2.1
–
6.0
5.8
7.2
6.0
4.7
4.9
5.2
3.9
5.1
2.3
5.6
6.8
–
7.2
6.0
4.7
–
5.3
23.7
–
(569.4)
(545.7)
–
141.7
30.0
27.5
150.0
250.0
5.8
28.1
633.1
35.7
6.3
(372.2)
(330.2)
9.4
10.3
–
41.6
150.0
250.0
–
47.9
509.2
(i) These underlying loans and notes were issued on a floating rate basis and fixed through interest rate swaps.
(ii) Weighted average interest rate is shown on a yield-to maturity basis.
(iii) The value of the interest rate and cross-currency swaps have been included in the debt numbers.
All interest rates in the above table reflect rates in the currency of the relevant loan other than USD notes, where the AUD rates under
the cross-currency swaps are used.
In addition, the Group has $400.0 million syndicated bank loan facility and $125.0 million bilateral bank loan facilities that, if drawn, will
be on a floating interest rate basis (refer to Note E2).
Annual Report 2016 91
G2. Capital and financial risk management – continued
d) Interest rate risk management – continued
Interest rate swap contracts
The Group uses interest rate swap contracts to manage interest rate exposures. Under these contracts, the Group commits to
exchange the difference between fixed and floating rate interest amounts calculated on notional principal amounts. The fair values of
interest rate swaps are based on market values of equivalent instruments at the reporting date.
The following table details the interest rate swap contracts and related notional principal amounts as at the reporting date:
Outstanding floating to
fixed swap contracts
AUD interest rate swaps
1 to 5 years
Weighted average
interest rate
Notional
principal amount
2016
%
2015
%
2016
$’m
2015
$’m
Fair value
2016
$’m
�015
$’m
5.2
5.2
26.6
49.0
(0.8)
(2.0)
Interest rate sensitivity analysis
The sensitivity analysis 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.
Sensitivities have been based on a movement in interest rate by
50 and 75 basis points on profit and equity respectively across
the yield curve of the relevant currencies (2015: 75 basis points).
The selected basis points increase or decrease represents the
Group’s assessment of the possible change in interest rates on
variable rate instruments, cross-currency interest rate swaps and
interest rate swaps. Based on the sensitivity analysis performed,
the change in interest rates at reporting date does not have a
material impact on either profit or equity.
e) 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 Group. The Group’s exposure and the credit ratings of its
counterparties are regularly monitored and transactions are
diversified 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
receivable counterparties. Refer to Note C2 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
Group has exposure to banks at the A+ and A rating levels.
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. Investments for limited amounts and relatively
short tenors are made from time to time with A+ and A rated
counterparties. In a few circumstances, restricted amounts
of surplus funds are held in foreign jurisdictions where there
are no financial institutions that meet the above minimum
rating thresholds.
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
Group’s maximum exposure to credit risk.
f) Liquidity risk management
Liquidity risk arises from the possibility that the Group is unable
to settle a financial transaction on the due date. Liquidity risk
management is ultimately a Board’s responsibility, which has
been built an appropriate risk management framework for the
Group’s funding and liquidity management.
The Group manages liquidity risk by maintaining adequate cash
reserves and committed undrawn debt facilities, by monitoring
forecast and actual cash flows and where possible by matching
the maturity profiles of financial assets and liabilities. Included in
Note E2 is a summary of committed undrawn bank loan facilities.
92 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2016 G2. Capital and financial risk management – continued
f) Liquidity risk management – continued
Liquidity risk tables
The following tables detail the Group’s contractual maturity of its financial liabilities. The tables are based on the undiscounted cash
flows of financial liabilities. The tables include both interest and principal cash flows.
$’m
2016
Trade payables
Finance lease, hire purchase and supplier
finance liabilities
Bank loans
USD notes
AUD notes
AUD medium term notes (2009-1)
AUD medium term notes (2013-1)
AUD medium term notes (2015-1)
Total borrowings including interest
Cross-currency interest rate swaps (i)
– Receive leg
– Pay leg
Interest rate swaps
Foreign currency forward contracts
Total derivative instruments (iii)
Total
2015
Trade payables
Finance lease, hire purchase and supplier
finance liabilities
Bank loans
USD notes
AUD medium term notes (2009-1)
AUD medium term notes (2010-1)
AUD medium term notes (2013-1)
AUD medium term notes (2015-1)
Total borrowings including interest
Cross-currency interest rate swaps (i)
– Receive leg (ii)
– Pay leg (ii)
Interest rate swaps
Foreign currency forward contracts
Total derivative instruments (iii)
Total
Less than
1 year
1 to 2
years
2 to 3
years
3 to 4
years
4 to 5
years
More than
5 years
358.9
–
20.6
15.8
6.7
1.7
14.3
8.6
11.3
58.4
(6.8)
8.4
0.7
1.3
3.6
13.2
6.7
6.7
1.7
13.7
8.6
11.3
48.7
(6.8)
8.4
0.3
–
1.9
–
1.6
2.1
6.7
1.7
–
154.3
11.3
176.1
(6.8)
8.4
–
–
1.6
441.5
63.8
179.3
369.8
30.5
18.0
0.6
14.8
6.5
8.6
11.3
59.8
126.6
(124.7)
1.3
–
3.2
463.3
–
10.1
14.4
0.6
14.3
–
8.6
11.3
49.2
(6.5)
8.3
0.8
0.8
3.4
62.7
–
10.0
7.0
0.6
13.8
–
8.6
11.3
41.3
(6.5)
8.3
0.3
0.1
2.2
53.5
–
0.1
–
15.8
1.7
–
–
11.3
28.8
(15.9)
17.8
–
–
1.9
30.8
–
0.3
5.8
0.6
–
–
154.3
11.3
172.0
(6.5)
8.3
–
–
1.8
174.1
–
–
–
6.1
1.7
–
–
11.3
19.1
(6.2)
7.6
–
–
1.4
–
–
–
161.8
37.9
–
–
261.3
461.0
(162.4)
163.5
–
–
1.1
20.5
462.1
–
–
2.8
9.4
–
–
–
11.3
23.5
(15.4)
17.6
–
–
2.2
25.7
–
–
–
–
–
–
–
272.5
272.5
(162.8)
171.1
–
–
8.3
280.8
(i) Bond basis.
(ii) Amount in less than 1 year includes the front end principal cash flows under the cross-currency interest rate swaps where Downer receives AUD and pays USD.
(iii) Includes assets and liabilities.
Annual Report 2016 93
G2. Capital and financial risk management – continued
Recognition and measurement
Derivative financial instruments
Derivative financial instruments are initially recognised at fair
value on the date a derivative contract is entered into and are
subsequently re-measured to their fair value at each reporting
date. Any gains or losses arising from changes in fair value of
derivatives, except those that qualify as effective hedges, are
immediately recognised in profit or loss.
Hedge accounting
When the Group designates certain derivatives to be part of
a hedging relationship, and they meet the criteria for hedge
accounting, the hedges are classified as either fair value or
cash flow hedges.
Fair value hedges
Fair value hedges are used to hedge the exposure to changes in
the fair value of a recognised asset, liability or firm commitment.
For fair value hedges, changes in the fair value of the derivative,
together with any changes in the fair value of the hedged asset
or liability that is attributable to the hedged risk, are immediately
recorded in profit or loss. Hedge accounting is discontinued
when the hedge instrument expires or is sold, terminated,
exercised, or no longer qualifies for hedge accounting.
Cash flow hedges
Cash flow hedges are used to hedge risks associated with
contracted and highly probable forecast transactions. For cash
flow hedges, the effective portion of changes in the fair value of
the derivative is deferred in equity and the gain or loss relating to
the ineffective portion is recognised immediately in profit or loss.
Amounts deferred in equity are transferred to profit or loss
in the same period the hedged item is recognised in profit or
loss. When the forecast transaction that is hedged results in
the recognition of a non-financial asset or liability, the gains
and losses previously deferred in equity are transferred to form
part of the initial measurement of the cost of the non-financial
asset or liability.
If the forecast transaction is no longer expected to occur, the
cumulative gain or loss that was deferred in equity is recognised
immediately in profit or loss. If the hedge instrument expires or
is sold, terminated, exercised, or no longer qualifies for hedge
accounting, any gain or loss deferred in equity remain in equity
until the forecast transaction occurs.
94 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2016 G3. Other financial assets and liabilities
2016
$’m
At amortised cost:
Other financial assets
Advances from joint ventures and associates
At fair value:
Level 2
Foreign currency forward contracts – Cash flow hedge
Cross-currency and interest rate swaps – Cash flow hedge
Level 3
Unquoted equity investments – Available for sale
Total
2015
$’m
At amortised cost:
Deferred consideration receivable
Other financial assets
Advances from joint ventures and associates
At fair value:
Level 2
Foreign currency forward contracts – Cash flow hedge
Foreign currency forward contracts – Fair value through profit or loss
Cross-currency and interest rate swaps – Cash flow hedge
Level 3
Unquoted equity investments – Available for sale
Total
Financial Assets
Financial Liabilities
Current Non-current
Current Non-current
9.8
–
9.8
0.3
–
0.3
–
10.1
13.4
–
13.4
–
3.6
3.6
5.1
22.1
–
12.0
12.0
1.7
1.4
3.1
–
15.1
–
–
–
–
0.7
0.7
–
0.7
Financial Assets
Financial Liabilities
Current Non-current
Current Non-current
–
9.8
–
9.8
1.6
0.1
–
1.7
–
11.5
–
13.4
–
13.4
–
–
–
–
6.2
19.6
0.7
–
13.5
14.2
0.7
–
1.0
1.7
–
15.9
–
–
–
–
0.1
–
2.1
2.2
–
2.2
Reconciliation of Level 3 fair value measurements of financial assets
Level 3 investments decreased by $1.1 million from prior year (2015: $1.1 million increase) mostly due to revaluation and
return on investment.
Annual Report 2016 95
G3. Other financial assets and liabilities – continued
Recognition and measurement
Fair value measurement
When a derivative is designated as the cash flow hedging instrument, the effective portion of changes in the fair value of the derivative
is recognised in Other Comprehensive Income and accumulated in the hedging reserve. Any ineffective portion of changes in the fair
value of the derivative is recognised immediately in profit or loss.
Valuation of financial instruments
For financial instruments measured and carried at fair value, the Group uses the following to categorise the methods used:
– Level 1: fair value is calculated using quoted prices in active markets for identical assets or liabilities;
– Level 2: fair value is estimated using inputs other than quoted prices included within Level 1 that are observable for the asset or
liability, either directly (as prices) or indirectly (derived from prices); and
– Level 3: fair value is estimated using inputs for the asset or liability that are not based on observable market data.
During the year there were no transfers between Level 1, Level 2 and Level 3 fair value hierarchies.
The following table shows the valuation technique used in measuring Level 2 and 3 fair values, as well as significant unobservable
inputs used:
Type
Valuation technique
Significant unobservable input
Cross-currency and interest rate swaps
Foreign currency forward contracts
Unquoted equity investments
Calculated using the present value of the
estimated future cash flows based on
observable yield curves.
Not applicable
Calculated using forward exchange rates
prevailing at the balance sheet date.
Not applicable
Calculated based on the Group’s interest in
the net assets of the unquoted entities.
Assumptions are made with regard
to future expected revenues and
discount rates.
Changing the inputs to the valuations
to reasonably possible alternative
assumptions would not significantly change
the amounts recognised in profit or loss,
total assets or total liabilities, or total equity.
96 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2016 Directors’ Declaration
for the year ended 30 June 2016
In the opinion of the Directors of Downer EDI Limited:
(a) The financial statements and notes set out on pages 49 to 96 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 A 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, 4 August 2016
Annual Report 2016 97
Sustainability Performance Summary 2016
Downer’s ability to understand and manage the sustainability
of its activities is fundamental to its long-term success as a
business. Consequently, Downer’s approach to sustainable
development is intrinsically linked to its business objectives, and
seeks to maintain an acceptable balance between the longer-
term impacts of the Company’s operations and the need for
short-term results by:
– Always putting health and safety first, continually reducing
the potential for people to be harmed;
– Reducing Downer’s ecological footprint by minimising
environmental impact and maximising resource efficiency;
– Promoting diversity, inclusiveness and employee growth;
– Benefiting host communities through economic participation
and community investment;
– Assisting customers to improve the sustainability of their
businesses; and
– Optimising Downer’s portfolio and performance.
Sustainability risks are identified, evaluated and managed
through Downer’s Group-wide Risk Management Framework
and divisional integrated management systems, with the latter
certified (as a minimum) to the following standards: AS/NZS
4801 occupational health and safety management systems;
ISO 14001 environmental management systems; and IS0 9001
quality management systems. The Board Zero Harm Committee
oversees the development and implementation of Downer’s
occupational health and safety and environmental management
systems, the effectiveness of which is monitored through
extensive internal and third-party audit programs, with oversight
by both the Board Zero Harm and Audit and Risk Committees.
During FY16 the Group Zero Harm Framework was revised, and
divisional policies were consolidated into Group-wide policies for
health and safety and environment.
The following is a brief summary of Downer’s Zero Harm
performance during FY16. Downer’s 2016 Sustainability Report
provides more comprehensive information regarding the
Company’s non-financial, sustainability-related performance for
the year ended June 2016.
Health and safety
The health and safety of all who work with Downer is the
Company’s top priority. Downer believes that any injury is
unacceptable and preventable, and is committed to the
relentless pursuit of the goal of Zero Harm. However, despite the
Company’s mature safety culture and sustained efforts to keep
its people safe, a Downer employee died in November 2015 while
undertaking scaffolding work in Western Australia.
This tragic loss confirms the appropriateness of Downer’s
continued focus on understanding and managing the low-
likelihood, high-consequence risks – the ‘critical risks’ – that
have the potential to cause serious injury to its people. The
continuation of the development of Downer’s frontline team
leaders, revision of its Zero Harm management systems and
enhancement of its Critical Risk Management Program during
FY16 contributed to further improvement against the health
and safety indicators of Lost Time Injury Frequency Rate
(LTIFR)1 and Total Recordable Injury Frequency Rate (TRIFR)2.
LTIFR decreased from 0.873 in FY15 to 0.66, and TRIFR from
3.78 to 3.32. This represents a 24% decrease in injuries that
resulted in time lost and a 12% reduction in the number of
recordable injuries.
Downer received no fines or prosecutions in FY16 as a result of
breaches of occupational health and safety legislation.
LTIFR
TRIFR
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1.2
1.0
0.8
0.6
0.4
0.2
0.0
2012
2013
2014
2015
2016
12
10
8
6
4
2
0
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1
2
3
Lost time injuries (LTIs) are defined as injuries that cause the injured person (employee or contractor) 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 any injury that results, directly or indirectly, in the death of the person. The Lost Time Injury Frequency Rate (LTIFR) is
the number of LTIs per million hours worked.
TRIFR is the number of LTIs + medically treated injuries (MTIs) for employees and contractors per million hours worked.
This result has been adjusted from the LTIFR result of 0.86 published in the 2015 Annual Report. This variance was due to the escalation of some first aid cases to MTIs or
LTIs after the end of FY15.
98 Downer EDI Limited
Environment
Downer’s environmental sustainability performance is measured
against the key areas of risk management, compliance,
minimising environmental impact, and maximising resource
efficiency opportunities in both its own and its customers’
businesses. Downer’s primary focus during the year was on
managing its top critical environmental risks by embedding
critical risk controls into divisional management systems,
and conducting verification that the controls were in
place and effective.
During FY16 Downer met its Group-wide target of zero Level 54
or Level 65 environmental incidents. However, despite having
robust systems and processes in place, Downer had one
significant environmental incident (Level 4), where hydrated
lime dust was released to the air. Downer received one fine
for this and two further environmental fines totalling $19,538
(see the performance data summary in the 2016 Sustainability
Report for details).
As a contract service provider operating within carbon-
intensive industries, a key challenge for Downer is the effective
management of its carbon-related activities. Downer’s ability to
develop processes and technology to reduce its greenhouse
gas (GHG) emissions and overall energy consumption across
a wide range of business activities, such as mining and asphalt
manufacturing, enables the Company to assist its customers to
manage their environmental sustainability challenges.
As part of Downer’s continued efforts to reduce its GHG
emissions and improve its energy efficiency, 40 key projects
were implemented in FY16 that have the capacity to deliver
215 terajoules of annualised energy savings, equivalent
to the abatement of 35 kilotonnes of CO2e emissions
per year across scopes 1, 2 and 36.
Downer’s emissions profile reflects the geographical location
of its operations, with 75% of the total Scope 1 and Scope 2
GHG emissions generated by activities in Australia and 24% by
activities in New Zealand.
4
5
6
A Level 5 environmental incident is defined as any incident that causes significant impact or serious harm on the environment, where “material harm” has occurred and if
costs in aggregate exceed $50,000.
A Level 6 environmental incident is defined as an incident that results in catastrophic widespread impact on the environment, resulting in irreversible damage.
Scope 1 emissions are those produced directly by Downer Group activities.
Scope 2 emissions are indirect emissions, such as electricity consumption.
Scope 3 emissions are those that occur from sources not owned or controlled by Downer.
Annual Report 2016 99
Corporate governance
for the year ended 30 June 2016
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.
Before appointing a Director, the Board undertakes appropriate
checks and provides shareholders with all material information
which is relevant to the decision to elect or re-elect a Director.
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.
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 2016, Downer’s senior executives
participated in periodic performance evaluations where they
received feedback on progress against these targets.
The Company Secretary is responsible for supporting the
effectiveness of the Board and is directly accountable to the
Board, through the Chairman, on all matters to do with the proper
functioning of the Board.
Details of Downer’s Directors and the Executive
Leadership Team 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. This has been formalised
in the Downer Diversity and Inclusiveness (D&I) Policy which
outlines the company’s commitment to developing a diverse and
inclusive workforce. In 2016, Downer implemented a Group D&I
Plan. The purpose of this Plan is to provide a strategy to support
the commitments made in the Downer D&I Policy.
The Diversity and Inclusiveness Policy is available on the Downer
website at www.downergroup.com.
ASX diversity recommendations – diversity statement
This diversity statement outlines Downer’s performance
throughout 2016 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 diversity initiatives undertaken by Downer
throughout 2016; and
– An outline of Downer’s measurable diversity
objectives for 2017.
Gender representation metrics
As at 30 June 2016, the gender representation metrics
were as follows:
– Two of the six Non-executive Directors on the Downer Board
are women (with a third female Non-executive Director
appointed and due to commence in September 2016);
– Women currently make up 10% of Senior Executive1 roles;
– 13.2% of Manager2 roles are held by women; and
– Women constitute approximately 12% of Downer’s workforce.
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.
100 Downer EDI Limited
Looking back: 2016 measurable objectives
Objective
Outcome
Undertake a structural diversity review to ensure
there is a complete and accurate understanding
of Downer’s diversity footprint.
To continue to increase the number of female
employees and female managers within Downer
by ensuring that a female is shortlisted for
every management role. The target for FY16
was 14% of employees to be female and 9%
of managers to be female.
To ensure every salaried female within Downer
receives a performance and development
review to enable the organisation to identify
female talent and offer appropriate leadership
development programs and/or input into
succession planning.
Completion of the job grading structure across
Downer to enable a comprehensive gender pay
review in the future.
Increase the number of Indigenous employees
across the Group by participation in the
government’s Employment Parity Initiative.
Continue the association with Jawun in
Australia and Māori based leadership programs
in New Zealand.
Downer reports annually to the Workplace Gender Equality Agency (WGEA).
In June 2016, key data from the FY15/16 WGEA report was prepared at a
divisional and consolidated group level for the Executive Committee to better
understand the diversity which currently exists within Downer. In FY17, this data
will be promulgated to members of the Divisional Diversity Steering Committee
(DDSC) to inform divisional D&I Plans and facilitate continuous improvement in
WGEA responses.
Shortlisting requirements for management roles and other role categories have
been implemented across the Recruitment function. To further support an
increase in the female talent pool, Downer redesigned its advertising templates
and its careers page to incorporate inclusive language, diverse imagery and
gender focused case studies. The implementation of D&I Plans (refer to section
“Looking ahead”) are aimed at supporting a material increase in the number of
female employees over the medium term.
Downer redesigned its performance and development framework to ensure a
more effective approach to retaining and developing key talent. This framework
provides a more simplified approach towards performance management with
output used to focus on the development, acceleration and retention of high
potential female employees.
The gender remuneration gap analysis commenced in the last 12 months and
is currently well advanced (with the analysis for roles up to $200,000 being
completed and analysed by the Executive Committee and the Board). The review
will occur every six months.
Downer has engaged in a number of activities which support Aboriginal and
Torres Strait Islander employees and communities. This includes Jawun and
The Wall of Hands Appeal. This year, Downer provided a first draft of its ‘Reflect’
Reconciliation Action Plan (RAP) to Reconciliation Australia. This plan will provide
the foundation for Downer’s Reconciliation journey over the next 12 months.
In FY16, eight employees completed secondments at Cape York, the West
Kimberley and Inner Sydney as part of the Jawun program. By assisting
Aboriginal leaders, organisations and communities to achieve their own
development goals, Downer’s people have a unique and rewarding experience
while delivering lasting benefits to their host communities. During March 2015,
the inaugural Māori Leadership program was launched in New Zealand as a
means of developing and empowering Māori leaders.
Continue to focus on the ageing workforce by
optimising and retaining the aged workforce
by providing flexibility and retirement
planning options.
Downer has conducted an assessment of its ageing workforce and identified
suitable options for optimising and retaining this employee segment (which
includes flexibility). Flexibility is considered a key enabler for diversity across all
employee groups and as such, will continue to be a focus for FY17.
Annual Report 2016 101
Looking ahead: 2017 measurable objectives
– To ensure a coordinated and integrated approach to D&I
through the restructuring of the Group and Divisional
Diversity Steering Committees to ensure the effective
implementation of the D&I Plans.
– To launch Downer’s Performance Development
framework and use output to identify, grow and retain
high potential female employees in order to support the
following Group targets:
– 20% female workforce by 30 June 2020; and
– 12% female Senior Executives by 30 June 2020.
– To launch the Divisional D&I Plans and embed them in the
operations of the business units.
– To promote and communicate flexible work options (a key
enabler of Diversity) through the creation of a business case
for sign-off by the Executive Committee.
– To implement recommendations identified from the
gender pay review.
– To continue laying the foundation for Downer’s reconciliation
journey by receiving endorsement of Downer’s ‘Reflect’ RAP
from Reconciliation Australia.
– To continue the association with Jawun in Australia and
Māori based leadership programs in New Zealand.
Principle 2: Structure the Board to add value
Throughout the 2016 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), five other 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.
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.
102 Downer EDI Limited
Corporate governance – continuedfor the year ended 30 June 2016 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
Remuneration Committee
R M Harding
P S Garling
Disclosure Committee
J S Humphrey
IT Transformation Committee
J S Humphrey
Tender Risk Evaluation Committee
C G Thorne
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 17.
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 advice
from external consultants and specialists. The Nominations and
Corporate Governance Committee Charter is available on the
Downer website at www.downergroup.com.
Members
P S Garling
J S Humphrey
C G Thorne
S A Chaplain
G A Fenn
C G Thorne
S A Chaplain
J S Humphrey
R M Harding
J S Humphrey
G A Fenn
R M Harding
S A Chaplain
G A Fenn
C G Thorne
P S Garling
R M Harding
E A Howell
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.
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.
Given the breadth of Downer’s service offerings across a range
of markets, the Board seeks to ensure that it maintains an
appropriate range of technical skills across engineering, geology,
construction and scientific disciplines when considering the
appointment of a new Director. The Board has also identified
that the review of major tender bids and the successful delivery
of major projects also requires Directors with strong commercial
and legal acumen. It is for this reason that in undertaking the
selection process for a new director in FY16, the Board selected a
candidate with over 30 years’ experience in the legal profession.
Annual Report 2016 103
The charts below illustrate the balance achieved with the
current Board composition. The Company recognises the value
of diversity which has been a component of the appointment
Professional qualifications
process over the past few years.
From time to time, Downer engages external specialists to assist
with the selection process as necessary, and the Chairman,
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 FY16.
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;
– The respective rights, duties and responsibilities and roles of
the Board and senior executives; and
– Downer’s culture and values.
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.
Professional qualifications
Business and economics
Technical*
Humanities
Legal
0.0
1.0
2.0
3.0
4.0
5.0
*Comprises construction, engineering, metallurgy and science.
Industry experience
Professional Services*
Resources
Transport and infrastructure
0.0
1.0
2.0
3.0
4.0
5.0
*Includes banking, finance and legal.
Tenure
9+
6–9
3–6
0–3
0.0
1.0
2.0
3.0
4.0
Gender diversity
Gender diversity
2
5
Male
Female
104 Downer EDI Limited
Corporate governance – continuedfor the year ended 30 June 2016 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 applies 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 its 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.
Annual Report 2016 105
Principle 4: Safeguard integrity in
financial reporting
Principle 5: Make timely and
balanced disclosure
The Company’s Disclosure Policy sets out processes which
assist the Company to ensure that all investors have equal and
timely access to material information about the Company and
that Company announcements are factual and presented in
a clear and balanced way. A copy of the Disclosure Policy is
available on the Downer website at 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, openly and honestly
with shareholders;
– Giving shareholders ready access to balanced and
understandable information about the Company and its
governance; 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.
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 to it 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.
Information regarding the number of times the Audit and Risk
Committee convened in FY16, together with the individual
attendances of members at the meetings, is set out in the
Directors’ Report on page 17.
The Audit and Risk Committee Charter is available on the
Downer website at www.downergroup.com.
106 Downer EDI Limited
Corporate governance – continuedfor the year ended 30 June 2016 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.
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 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’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.
Downer has a Risk Management Framework in place to enable
business risks to be identified, evaluated and managed. The
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. The last comprehensive review of the Risk
Management Framework was completed in 2016. However, the
Board reviews the Group risk profile twice each year, undertakes
a facilitated risk workshop annually, and considers other risk
matters, such as business resilience, tender review processes,
risk appetite, and specific risk areas, on a regular basis, as well as
regular reports from senior management, the internal audit team,
and the external auditor.
Downer’s annual Sustainability Report provides a detailed
overview of Downer’s approach to managing its environmental
sustainability and social sustainability risks. The 2015
Sustainability Report is available on the Downer website at
www.downergroup.com.
Annual Report 2016 107
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 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 19.
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.
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 is structured so that it:
– 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 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 reached the value of the retirement benefit, the
applicable base fee reverted 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-term 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 19 and details of Downer shares beneficially owned by
Directors are provided in the Directors’ Report at page 4.
108 Downer EDI Limited
Corporate governance – continuedfor the year ended 30 June 2016 Information for Investors
for the year ended 30 June 2016
Downer shareholders
Share registry
Downer had 18,756 ordinary shareholders as at 30 June 2016.
The largest shareholder, HSBC Custody Nominees (Australia)
Limited, holds 27.09% of the 424,785,204 fully paid ordinary
shares issued at that date. Downer has 18,279 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.
Shareholders and investors seeking information about Downer
shareholdings or dividends should contact the Company’s
share registry, Computershare Investor Services Pty Ltd
(Computershare):
Level 5
115 Grenfell Street
Adelaide SA 5000
GPO Box 1903
Adelaide SA 5001
Tel: 1300 556 161 (within Australia)
+61 3 9415 4000 (outside Australia)
Fax: 1300 534 987 (within Australia)
+61 3 9473 2408 (outside Australia)
www.computershare.com
Shareholders must give their holder number (SRN/HIN) when
making inquiries. This number is recorded on issuer sponsored
and CHESS statements.
Updating your shareholder details
Shareholders can update their details (including bank accounts,
DRP elections, tax file 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 2016 109
Information for Investors – continued
for the year ended 30 June 2016
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.
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
Auditor
KPMG
Level 38, Tower 3
300 Barangaroo Avenue
Sydney NSW 2000
Australian securities exchange information as at 30 June 2016
Number of holders of equity securities:
Ordinary share capital
424,785,204 fully paid listed ordinary shares were held by 18,756 shareholders. All issued ordinary shares carry one vote per share.
Substantial shareholders
The following shareholders have notified that they are substantial shareholders of Downer as at 30 June 2016.
Shareholders
Dimensional Fund Advisors
T Rowe Price Associates, Inc
UBS AG and related bodies corporate
State Street Corporation
Vinva Investment Management
Commonwealth Bank of Australia
National Australia Bank Limited
LSV Asset Management
The Vanguard Group, Inc
Distribution of holders of quoted equity securities
Shareholder distribution of quoted equity securities as at 30 June 2016 is as follows.
Number of
shareholders
Shareholders
%
10,541
6,314
1,113
732
56
18,756
1,126
56.20
33.66
5.94
3.90
0.30
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
110 Downer EDI Limited
Ordinary
shares held
% of issued
shares
30,507,546
26,313,976
24,403,501
21,928,107
21,792,439
21,627,460
21,589,102
21,467,932
21,366,964
Ordinary
shares held
4,583,713
14,584,608
8,041,522
15,717,719
381,857,642
424,785,204
7.18
6.19
5.74
5.16
5.13
5.09
5.08
5.05
5.03
Shares
%
1.08
3.43
1.90
3.70
89.89
100.00
Twenty largest shareholders
Downer’s 20 largest shareholders of ordinary fully paid shares as at 30 June 2016 are as follows.
Shareholders
HSBC Custody Nominees (Australia) Limited
J P Morgan 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
CPU Share Plans Pty Ltd
RBC Investor Services Australia Nominees Pty Limited – PI Pooled A/C
Argo Investments Ltd
AMP Life Ltd
UBS Nominees Pty Ltd
Masfen Securities Limited
RBC Investor Services Australia Nominees Pty Ltd – PICREDIT
Mr Barry Sydney Patterson + Mrs Glenice Margaret Patterson
Yirrkala Stud Pty Ltd
HSBC Custody Nominees (Australia) Limited-GSCO ECA
Woodross Nominees Pty Ltd
CS Fourth Nominees Pty Ltd - HSBC Cust NOM AU LTD 11A/C
HSBC Custody Nominees (Australia) Limited
Share Direct Nominees Pty Ltd
Total for top 20 shareholders
On-market share buy-back
Shares held
115,046,869
105,866,140
57,292,409
52,748,760
15,649,161
6,769,222
5,508,068
2,569,561
2,392,527
1,652,578
1,330,000
1,171,647
1,013,979
891,642
712,686
703,863
650,000
584,381
551,903
533,648
373,639,044
% of issued
shares
27.09
24.92
13.49
12.42
3.68
1.59
1.30
0.60
0.56
0.39
0.31
0.28
0.24
0.21
0.17
0.17
0.15
0.14
0.13
0.13
87.97
On 5 August 2014, the Board resolved to undertake an ongoing share buy-back program that commenced on 20 August 2014 and
ended on 19 August 2015. The total number of shares acquired was 2,716,761.
The Board determined to continue the share buy-back program with a further ongoing share buy-back program that commenced on
4 September 2015. The total number of shares acquired as at 4 August 2016 is 7,898,010. The total number of shares to be purchased
under the buy-back will depend on share price levels and capital requirements. The share buy-back 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 2016 111
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112 Downer EDI Limited
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
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www.downergroup.com