Annual
Report
2017
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Relationships Creating Success
Contents
Directors’ Report
Page 2
Auditor’s signed reports
Page 46
Page 47
Auditor’s Independence Declaration
Independent Auditor’s Report
Financial Statements
Page 53
Page 54
Page 55
Page 56
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 57-58
Page 59 -67
Page 68-76
Page 77
Page 78-86
Page 87-96
Page 97-107
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
Reserves
E6
Dividends
F5
Related party
information
F6
Parent entity
disclosures
B1
Segment
information
C1
Reconciliation
of cash and
cash equivalents
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 108 Directors’ Declaration
Other information
Page 109 Sustainability Performance Summary 2017
Page 111
Page 119
Corporate Governance
Information for Investors
Annual Report 2017 1
Directors’ Report
for the year ended 30 June 2017
The Directors of Downer EDI Limited submit the Annual Financial
Report of the Company for the financial year ended 30 June 2017.
In compliance with the provisions of the Corporations Act 2001
(Cth), the Directors’ Report is set out below.
Board of Directors
R M HARDING (68)
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 (52)
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.
S A CHAPLAIN (59)
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. Ms Chaplain is
also Chairman of Canstar Pty Ltd, a financial services research
and ratings company and a Director of The Australian Ballet.
Her former Board roles include being a member of the Board of
Taxation and a Director of PanAust Limited and EFIC, Australia’s
export credit agency.
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.
She holds an honorary doctorate from Griffith University
for her service to banking and finance, and to the Gold
Coast community.
Ms Chaplain lives on the Gold Coast.
P S GARLING (63)
Independent Non‑executive Director since November 2011
Mr Garling has over 35 years’ experience in the infrastructure,
construction, development and investment sectors. He was
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 Limited and a Director of Charter
Hall Limited, Spotless Group Holdings Limited and the NSW
electricity distributor, Essential Energy. 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 Fenn lives in Sydney.
Mr Garling lives in Sydney.
2 Downer EDI Limited
T G HANDICOTT (54)
Independent Non‑executive Director since September 2016
Ms Handicott is a former corporate lawyer with over 30 years’
experience in mergers and acquisitions, capital markets and
corporate governance. She was a partner of national law firm
Corrs Chambers Westgarth for 22 years, serving as a member
of its National Board for seven years including four years
as National Chairman. She also has extensive experience in
governance of local and state government organisations.
Ms Handicott is a Director of PWR Holdings Limited, LGE
Holding Company Pty Ltd trading as Peak Services, a subsidiary
of the Local Government Association of Queensland that is
responsible for its commercial operations and Bangarra Dance
Theatre. Ms Handicott is also a Divisional Councillor of the
Queensland Division of the Australian Institute of Company
Directors and a member of the Queensland University of
Technology (QUT) Council and Sunshine Coast Council
Economic Futures Advisory Board.
Ms Handicott is a former Director of CS Energy Limited, former
member of the Takeovers Panel and Corporations and Markets
Advisory Committee and a former Associate Member of the
Australian Competition and Consumer Commission.
A Senior Fellow of Finsia and Member of the Australian Institute
of Company Directors and Chief Executive Women, Ms Handicott
holds a Bachelor of Laws (Hons) degree from the Queensland
University of Technology.
Ms Handicott lives in Brisbane.
E A HOWELL (71)
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
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.
C G THORNE (67)
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 with Rio Tinto. His experience spanned a range
of product groups and functional activities in Australia and
overseas. After serving in London as Group Mining Executive
from 1996 to 1998, Dr Thorne moved to Indonesia as President
Director of Kaltim Prima Coal and then returned to Australia
to manage Rio Tinto’s Australian coal business as Managing
Director of Rio Tinto Coal Australia and the publicly listed Coal
and Allied Industries. He was President of the Queensland
Resources Council in 2001-2003.
In 2006, Dr Thorne was appointed global head of Rio Tinto’s
technology, innovation and project engineering functions,
reporting to the Chief Executive. He was a member of Rio Tinto’s
Executive Committee and Investment Committee. He retired
from Rio Tinto in 2011.
Dr Thorne is a Director of Spotless Group Holdings Limited and
a former Director of Wesley Research Institute, JK Tech and
Queensland Energy Resources Limited. He is a Fellow of the
Australasian Institute of Mining and Metallurgy.
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.
Annual Report 2017 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
T G Handicott
E A Howell
C G Thorne
Number of Fully Paid
Ordinary Shares
Number of Fully Paid
Performance Rights
Number of Fully Paid
Performance Options
14,210
826,226
103,799
16,940
14,000
14,000
82,922
–
1,757,163
–
–
–
–
–
–
–
–
–
–
–
–
*
Performance rights granted to Mr Fenn are subject to performance and/or service period conditions over the period 2014 to 2019. Further details regarding the conditions
relating to these restricted shares and 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, 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; Utilities; Rail;
Engineering, Construction and Maintenance (EC&M); and Mining.
Downer employs about 20,000 people, mostly in Australia and
New Zealand but also in the Asia-Pacific region, South America
and Southern Africa.
On 21 March 2017, Downer announced an offer, through its wholly
owned subsidiary Downer EDI Services Pty Ltd, to acquire all
of the issued share capital of Spotless Group Holdings Limited
(Spotless) which it did not already own. Spotless employs over
30,000 people in Australia and New Zealand and provides
outsourced facility services, catering and laundry services,
technical and engineering services and refrigeration solutions to
its customers in various industries.
The acquisition of Spotless delivers on Downer’s strategic
objectives because it:
– continues Downer’s transformation towards a more
services-focused business with resilient earnings;
– enhances the Group’s contract portfolio, with long-term
contracts that provide high certainty over revenues;
– contributes a complementary, high quality
customer base; and
– creates an integrated services provider with a comprehensive
range of capabilities.
Divisional Activities
Downer reports its financial results under five service lines:
Transport; Utilities; Rail; EC&M; and Mining.
The Utilities service line includes both the Utilities and
Technology & Communications businesses.
4 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2017 On 27 June 2017, the Group’s ownership interest in Spotless
Group Holdings Limited (Spotless) exceeded 50%, requiring
the consolidation of Spotless’ financial statements from that
time. The Directors have concluded that the profit or loss
and cash flow impact attributable to Spotless for the three
days to 30 June 2017 is not material to the Downer Group.
Consequently, no revenue or earnings before interest and tax
(EBIT) contribution from Spotless is included in the service lines
outlined below.
A review of the operations and the performance of the five
service lines is as follows:
Transport
Transport 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 (FY17)
EBIT (FY17)
27.5%
33.3%
In September 2016, Downer acquired RPQ Group (RPQ).
The principal activities of RPQ include the supply of asphalt,
bitumen spray sealing, road milling and profiling, road
maintenance, foam bitumen stabilisation, mobile asphalt
production, mobile crushing and equipment hire.
Downer’s Road Services 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 transport infrastructure services
to its customers including earthworks, civil and rail track
construction, design, construction and commissioning of facilities
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.
Utilities
The Utilities service line provides complete lifecycle solutions
to customers in the power, gas, water, renewable energy and
communications sectors.
Total revenue1 (FY17)
EBIT (FY17)
Transport
19.4%
22.4%
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 may not add up precisely
to 100%.
Road Services
Downer offers one of the largest non-government owned road
infrastructure services businesses in Australia and New Zealand,
maintaining more than 33,000 kilometres of roads in Australia
and more than 25,000 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, spray sealing and asset management.
Utilities
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 may not add up precisely
to 100%.
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.
Downer designs and constructs steel lattice transmission towers,
designs and builds substations and connects tens of thousands
of new power and gas customers each year. It also maintains over
110,000 kilometres of electricity and gas networks across more
than 185,000 square kilometres.
Customers include United Energy, AusNet Services, Ausgrid,
Ergon Energy, Powerco, Wellington Electricity and Powerlink.
Annual Report 2017 5
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.
Rail
Downer provides total rail asset solutions including freight and
passenger build, operations and maintenance, component
overhauls and after-market services.
Total revenue1 (FY17)
EBIT (FY17)
Downer supports its customers across the full asset lifecycle
from the conceptual development of a project through design,
construction, commissioning and optimisation, providing
complete water lifecycle solutions for municipal and industrial
water users including pipe bursting and civil maintenance.
Downer also operates and maintains treatment, storage, pump
station and network assets.
In March 2017, Downer acquired ITS PipeTech Pty Ltd (ITS).
The principal activities of ITS include pipe bursting and
civil maintenance.
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.
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, wind turbine sites
and solar farms.
Downer offers the services required for the entire asset
lifecycle including procurement, assembly, construction
and commissioning.
Downer is currently working on the Clare and Ross River Solar
Farms in Queensland, while having completed the Ararat Wind
Farm Project (Victoria), and the Sunshine Coast Solar Farm
(Queensland) during the year.
Communications
Downer provides an end-to-end 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.
Customers include nbn™, Telstra, Chorus, Spark and Vodafone.
10.9%
8.1%
Rail
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 may not add up precisely
to 100%.
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 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 and relationships
with leading technology and knowledge providers to support its
growth objectives in the passenger and freight market. These
include Keolis, Electro-Motive Diesel (owned by Caterpillar), and
CRRC Changchun Railway Vehicles (CRRC).
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, the Gold
Coast light rail system in Queensland and a new integrated
public transport system for the city of Newcastle. Keolis Downer
also owns 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, Transport for NSW,
Queensland Rail, Public Transport Authority (WA), Metro Trains
Melbourne, Public Transport Victoria, Pacific National, Aurizon,
BHP Billiton, Genesee & Wyoming and SCT Logistics.
Downer is currently working on the Sydney Growth Trains (SGT)
project in New South Wales and the High Capacity Metro Trains
(HCMT) project in Victoria.
6 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2017 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.
Mining
Downer is one of Australia’s leading diversified mining contractors
serving its customers across more than 50 sites in Australia,
Papua New Guinea, South America and Southern Africa.
Total revenue1 (FY17)
EBIT (FY17)
Total revenue1 (FY17)
EBIT (FY17)
25.6%
14.0%
16.6%
22.3%
EC&M
Mining
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 may not add up precisely
to 100%.
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 may not add up precisely
to 100%.
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, Newmont, Rio Tinto, Roy Hill Iron Ore, Stanwell
Corporation and Yancoal Australia.
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.
In March 2017, Downer acquired the businesses of Hawkins.
The principal activities of Hawkins include construction,
infrastructure development and project management
throughout New Zealand.
Customers in Australia include Alcoa, Bechtel, BHP Billiton,
Chevron, Landcorp, Newcrest, Orica, Origin Energy, POSCO,
Powerlink Queensland, Rio Tinto, Santos, Transgrid, Wesfarmers
and Woodside Energy.
Key customers in New Zealand include Christchurch and
Auckland City Councils, Auckland University, Auckland and
Wellington Airports and the Ministry of Education.
Annual Report 2017 7
Spotless
Spotless operates in Australia and New Zealand and provides
outsourced facility services, catering and laundry services,
technical and engineering services, maintenance and asset
management services and refrigeration solutions to various
industries. Its customers include corporations and government
departments, agencies and authorities at the Federal, State and
Municipal level.
The financial results of Spotless will be reported as a separate
service line from 1 July 2017.
Group Financial Performance
For the 12 months ended 30 June 2017, Downer reported
increases in total revenue, earnings before interest and tax
(EBIT) and net profit after tax (NPAT).
As stated above, the Directors have concluded that the profit
or loss and cash flow impact attributable to Spotless for the
three days to 30 June 2017 is not material to the Downer Group,
and have commenced the consolidation of Spotless with effect
from 30 June 2017.
The consolidated profit or loss and consolidated cash flow of
the Group for the year ended 30 June 2017 does not include any
trading performance for Spotless.
Revenue and other income
Total revenue for the Group increased by $0.4 billion, or 5.7%,
to $7.8 billion.
Transport revenue increased 16.4% to $2.2 billion. This was
due to continuing strong performance on existing contracts,
improved contribution from Infrastructure Projects, including
Newcastle Light Rail, and the acquisition of RPQ.
Utilities revenue increased 19.1% to $1.5 billion, due to new
contracts in the renewable energy, power and gas, and water
sectors in Australia and New Zealand and strong contributions
from nbn™ contracts in Australia and the Chorus contract
in New Zealand.
Rail revenue increased 2.9% to $850.2 million driven by
the Sydney Growth Trains (SGT) and High Capacity Metro
Trains (HCMT) projects and the sale of locomotives.
These improvements were offset by the completion of freight
build manufacturing contracts.
EC&M revenue increased 6.2% to $2.0 billion due to increased
activities on the Wheatstone project and contribution from the
Hawkins acquisition, offset by significant projects completed in
the prior year not being fully replaced.
Mining revenue decreased 18.5% to $1.3 billion mainly as a
result of the completion of the Christmas Creek contract in
September 2016.
Unallocated includes intersegment sales elimination and $19.8
million other income and fair value gain on revaluation of the
initial 19.99% interest equivalent in Spotless.
Expenses
Total expenses increased by 6.7% which is in line with the
5.7% increase in total revenue.
Employee benefits expenses increased by 1.0% to $2.8 billion
and represent 39.6% of Downer’s cost base. This increase is
mainly due to higher activity across the Group and a more labour
intensive contract base compared to the prior period. In addition,
the Group Risk Management and business development
functions have increased commensurate with the additional
bidding and projects activities.
Subcontractor costs increased by 19.6% to $1.7 billion and
represent 24.8% of Downer’s cost base. The increase is as a
result of higher activities and the change in the subcontractor
mix on some contracts. The continued use of subcontracting
accords with the Group’s strategy to retain cost base variability.
Raw materials and consumables expense increased 15.5%
to $1.4 billion and represents 19.3% of Downer’s cost base.
The increase is the net impact of raw material requirements for
new projects (particularly in Utilities, Transport and Rail) offset
by lower requirements in Mining.
Plant and equipment costs decreased 13.3% to $502.8 million
and represents 7.2% of Downer’s cost base. The reduction
largely reflects the continued reduction in operating leased
assets coupled with increased utilisation of owned assets, more
efficient maintenance practices and scope reduction on some
Mining contracts.
Depreciation and amortisation decreased by 14.9% to
$220.2 million and represents 3.1% of Downer’s cost base.
This decrease is predominantly due to reduced activities in
the Mining business.
Other expenses, communication, travel, occupancy and
professional fees have increased by 16.7% to $424.0 million
and represent 6.0% of Downer’s cost base. Other expenses
include $15.2 million of transaction costs relating to Spotless and
$13.0 million of bid costs written-off.
8 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2017 Earnings
EBIT for the Group increased 0.3% to $277.8 million, with increased earnings in Transport and Rail offset by the impact of contract
completions not fully replaced in Mining and EC&M. Statutory Net Profit After Tax (NPAT) for the Group increased 0.5% to
$181.5 million. This included a pre-tax $19.8 million fair value gain on revaluation of the initial 19.99% investment in Spotless and other
income, offset by $15.2 million of Spotless transaction costs. Excluding the impact of the Spotless transaction, NPAT was $181.4 million
with no operating earnings from Spotless included in this result as it is considered not material to the Downer Group.
Details of the impact of the Spotless transaction on the Group’s EBIT and NPAT are set out below and also disclosed in Note B2(b)
in this Annual Report:
2017
$’m
Underlying results
Spotless transaction costs
Gains and other income related to Spotless
Statutory results
Earnings before
interest and tax
Net finance
(cost) /
income
Income tax
expense
Profit after
income tax
273.2
(15.2)
19.8
4.6
277.8
(28.5)
–
1.7
1.7
(26.8)
(63.3)
–
(6.2)
(6.2)
(69.5)
181.4
(15.2)
15.3
0.1
181.5
Transport EBIT increased 20.2% to $124.6 million due to strong performances in Road Services, including the successful integration of
RPQ, and in Infrastructure Projects.
Utilities EBIT increased 17.8% to $84.1 million driven by continued strong performance in Australia from renewable energy projects and
nbn™, and improved performance in New Zealand.
Rail EBIT increased $15.9 million to $30.3 million reflecting improved profitability across contracts, benefits from cost saving initiatives
following a restructure in the prior period, and improved performance by joint venture operations.
EC&M EBIT increased 8.5% to $52.3 million with continued strong performance on the Wheatstone project, improved results from the
resources related consultancies (QCC Resources and Mineral Technologies), and contributions from the Hawkins acquisition and new
contracts in New Zealand.
Mining EBIT decreased 35.8% to $83.4 million predominantly due to the completion of the Christmas Creek contract.
Corporate costs increased by $5.7 million, or 7.3%, to $83.5 million, due to consultancy costs and investment in the
IT Transformation program.
Net finance costs decreased by $6.2 million, or 18.8%, to $26.8 million due to a lower average net debt balance during the year following
amortisation of facilities in the normal course, higher monthly cash balances and higher yields on term deposits.
The effective tax rate of 27.7% is lower than the statutory rate of 30.0% due to non-assessable R&D incentives, non-taxable distributions
from joint ventures and lower overseas tax rates.
Annual Report 2017 9
Divisional Financial Performance
Transport
($m)
2,400
1,800
1,200
600
0
FY13
FY14
FY15
FY16
FY17
Revenue
EBIT margin
– Total revenue of $2.2 billion, up 16.4%;
– EBIT of $124.6 million, up 20.2%;
– EBIT margin of 5.8%, up 0.2 ppts;
– ROFE of 22.2%, up from 19.3%; and
– Work-in-hand of $6.3 billion.
Utilities
($m)
1,600
1,200
800
400
0
FY13
FY14
FY15
FY16
FY17
Revenue
EBIT margin
– Total revenue of $1.5 billion, up 19.1%;
– EBIT of $84.1 million, up 17.8%;
– EBIT margin of 5.5%, down 0.1 ppts;
– ROFE of 22.7%, up from 18.6%; and
– Work-in-hand of $3.6 billion.
(%)
6.0
5.0
4.0
3.0
2.0
1.0
0.0
(%)
6.0
5.0
4.0
3.0
2.0
1.0
0.0
10 Downer EDI Limited
(%)
5.0
4.0
3.0
2.0
1.0
0.0
(%)
6.0
5.0
4.0
3.0
2.0
1.0
0.0
(%)
10.0
8.0
6.0
4.0
2.0
0.0
Rail
($m)
1,600
1,200
800
400
0
FY13
FY14
FY15
FY16
FY17
Revenue
EBIT margin
– Total revenue of $850.2 million, up 2.9%;
– EBIT of $30.3 million, up 110.4%;
– EBIT margin of 3.6%, up from 1.7%;
– ROFE of 7.3%, up from 3.4%; and
– Work-in-hand of $8.0 billion.
Engineering, Construction and Maintenance (EC&M)
($m)
3,000
2,000
1,000
0
FY13
FY14
FY15
FY16
FY17
Revenue
EBIT margin
– Total revenue of $2.0 billion, up 6.2%;
– EBIT of $52.3 million, up 8.5%;
– EBIT margin of 2.6%, unchanged;
– ROFE of 22.9%, unchanged; and
– Work-in-hand of $2.6 billion.
Mining
($m)
3,000
2,000
1,000
0
FY13
FY14
FY15
FY16
FY17
Revenue
EBIT margin
– Total revenue of $1.3 billion, down 18.5%;
– EBIT of $83.4 million, down 35.8%;
– EBIT margin of 6.4%, down 1.7 ppts
– ROFE of 13.2%, down from 19.0%; and
– Work-in-hand of $2.0 billion.
Directors’ Report – continuedfor the year ended 30 June 2017 Group Financial Position
Funding, liquidity and capital are managed at Group level,
with Divisions focused on working capital and operating cash
flow management.
As previously mentioned, the Group obtained control of Spotless
from 27 June 2017 and the Directors have concluded that
Spotless’ profit or loss and cash flow impact for the three days to
30 June 2017 is not material to the Downer Group. Consequently,
the following commentary on operating and investing cash flow
does not include any contribution from Spotless, while debt and
bonding and the financial position commentary below is inclusive
of Spotless’ balance sheet contribution, given that the Spotless
balance sheet has been consolidated into the Downer Group.
Operating Cash Flow
Operating cash flow was strong at $441.6 million, though
down 1.4% from last year due to completion of contracts, and
higher taxes paid. Operating cash flow / EBITDA conversion
remained strong at 103.1%, showing a high correlation between
earnings and cash.
Investing Cash
Total investing cash flow was $995.8 million, up $790.3 million.
The increase was driven by the acquisitions of Spotless, Hawkins,
RPQ, ITS and AGIS in the current year for a combined total net
cash consideration of $779.3 million.
Excluding acquisitions, investing cash flow would have been
$216.5 million, $12.1 million higher than prior year, primarily due to
capital expenditure in Mining and the acquisition of an asphalt
plant in Western Australia.
Debt And Bonding
The Group’s performance bonding facilities totalled
$1,923.8 million at 30 June 2017. With $738.3 million
undrawn, there is sufficient capacity to support the ongoing
operations of the Group.
As at 30 June 2017, Downer had liquidity of $2,034.6 million
comprising cash balances of $844.6 million and undrawn
committed debt facilities of $1,190.0 million.
The Group continues to be rated BBB (Stable) by Fitch Ratings.
Balance Sheet
The net assets of Downer increased by 71.7% to $3.6 billion as a
result of the consolidation of Spotless’ balance sheet, following
the Group obtaining control of Spotless on 27 June 2017.
Consequently, the following commentary is inclusive of Spotless’
acquired assets and liabilities.
Cash and cash equivalents increased by $275.2 million, or 48.3%,
to $844.6 million. The increase reflects strong cash contributions
from operations, $66.0 million of Spotless cash at 30 June 2017,
and $279.2 million of unutilised funds from the capital raising of
$989.9 million to fund the Spotless takeover.
Net debt increased from $87.4 million at 30 June 2016 to
$620.2 million at 30 June 2017 primarily due to $787.5 million
net debt from Spotless. The strong cash and increased net
debt position resulted in 14.7% gearing (net debt to net debt
plus equity) at 30 June 2017, up from 4.0% in the prior year.
The present value of operating lease commitments for plant and
equipment also increased from $128.5 million at June 2016 to
$151.5 million, representing an off balance sheet gearing of 17.7%,
up from 9.4% in the prior year.
Trade and other receivables increased $689.7 million, of which
$486.1 million was attributable to the Spotless acquisition.
Excluding Spotless, trade debtor days (excluding WIP) for the
Group increased by 3.7 days, from 23.6 to 27.3 days. Trade debtor
days (including WIP) for the Group increased by 5.7 days, from
57.7 days at June 2016 to 63.4 days.
Inventories were $301.7 million at June 2017, including
$32.0 million attributable to Spotless. The decrease of
$25.5 million reflects a reduction in components and spare
parts as a result of project completions, tight inventory
management, and the sale of locomotives.
Current tax assets decreased by $0.8 million to $45.5 million due
to the timing of cash tax payments.
Interest in joint ventures and associates increased by
$6.4 million, as $17.9 million of distributions received were
offset by Downer’s share of net profits from joint ventures and
associates of $22.5 million with an additional $1.8 million from the
Spotless acquisition.
The net value of Property Plant and Equipment increased
by $306.9 million, principally due to $281.2 million following
the consolidation of Spotless, and $26.2 million from other
acquisitions, with capex spend in the year exceeding
depreciation in response to the change in market conditions.
Annual Report 2017 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 10 October 2017 to
shareholders on the register at 12 September 2017.
The Board also determined to continue to pay a fully imputed
dividend on the ROADS security, which having been reset on
15 June 2017 has a yield of 6.05% per annum payable quarterly
in arrears, with the next payment due on 15 September 2017.
As this dividend is fully imputed (the New Zealand equivalent of
being fully franked), the actual cash yield paid by Downer will be
4.36% per annum for the next 12 months.
Zero Harm
Downer’s Lost Time Injury Frequency Rate (LTIFR) reduced
from 0.66 to 0.55 while Total Recordable Injury Frequency Rate
(TRIFR) increased from 3.32 to 3.50 per million hours worked.
Downer Group Safety Performance
(12-month rolling frequency rates)
R
F
T
L
I
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
0.66
3.32
6
1
-
n
u
J
6
1
-
p
e
S
6
1
-
c
e
D
7
1
-
r
a
M
LTIFR
TRIFR
0.55
I
R
F
R
T
4.2
4.0
3.8
3.6
3.50
3.4
3.2
3.0
7
1
-
n
u
J
Intangible assets increased by $1.9 billion due to goodwill and
other acquired intangible assets following the acquisitions of
Spotless, Hawkins, RPQ, ITS and AGIS, as well as the Group’s
investment in IT systems.
Deferred tax assets increased by $59.4 million and relates to
Spotless tax losses and temporary differences for employee and
other provisions.
Trade and other payables increased by $768.0 million, including
a $393.2 million increase from the consolidation of Spotless.
This increase is primarily as a result of higher business activities
and includes $110.8 million in relation to Spotless share
acceptances unpaid at 30 June 2017. Excluding Spotless, trade
creditor days decreased by 9.0 days from 37.2 days at June
2016 to 28.2 days. Trade and other payables represents 46.3%
of Downer’s total liabilities.
Total drawn borrowings of $1,445.0 million represent 37.3% of
Downer’s total liabilities and has increased by $795.0 million
mainly as a result of $848.3 million debt that has been assumed
pursuant to the consolidation of Spotless, offset by repayments
of debt in the normal course.
Other financial liabilities of $45.5 million increased by
$29.7 million and represents 1.2% of Downer’s total liabilities.
The increase reflects $20.2 million of contingent consideration
payable through the business acquisitions of AGIS, RPQ and
ITS, further advances from JVs and a higher mark to market
revaluation on cross-currency and interest rate swaps.
Deferred tax liability decreased by $1.5 million to $56.2 million
and is primarily due to temporary differences in WIP and
accrued income.
Provisions of $523.4 million increased by $159.2 million
($162.7 million from the Spotless acquisition) and represents
13.5% of Downer’s total liabilities. Employee provisions (annual
leave and long service leave) made up 77.1% 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 $1.5 billion as a result of the
$993.0 million capital raising (net of equity raising costs and
tax), a $435.2 million non-controlling interest in Spotless and
$181.5 million net profit after tax. This was partially offset by
$110.6 million of dividend payments made during the year.
12 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2017 Group Business Strategies and Prospects for Future Financial Years
Downer’s strategy focuses on safety, driving improvement in existing businesses, investing in growth, and creating new positions.
Downer’s strategic objectives, prospects, and the risks that could adversely affect the achievement of these objectives, are set out in
the table below.
Strategic Objective
Prospects
Risks and risk management
Maintain
focus on Zero Harm
Improve value and
service for customers
and their customers
Position for
greater government
outsourcing
Leverage
opportunities that
will emerge from
greater urbanisation
in major cities
Zero Harm is embedded in Downer’s culture and
is fundamental to the Company’s future success.
It requires constant vigilance and focus at all levels
of the Downer business to ensure the Company
meets its desired objective of ensuring that all
staff, suppliers and subcontractors return home
each night incident and injury free.
Providing valuable and reliable products and
services to Downer’s customers, and their
customers, is at the very heart of Downer’s culture.
It enables Downer’s customers to focus more
on their core expertise whilst Downer delivers
non-core operational services.
Through ongoing analysis of markets, customers
and competitors, Downer is well positioned to
improve value and service for its customers and
their customers.
Following the acquisition of Spotless, Downer is
the largest and most diverse services contractor
in the Asia-Pacific region with over $10 billion in
annual revenues. This scale and breadth gives
Downer greater resilience to withstand economic
headwinds when they arise.
Downer is well positioned to pursue government
outsourcing opportunities in the Australian and
New Zealand markets now and into the future.
As cities become larger and more complex,
opportunities will emerge for Downer in
connecting, managing and monitoring
their core infrastructure. This will include
transport infrastructure, public transport,
utilities, telecommunications, and other
technology platforms.
Downer is well positioned to work with
governments and citizens to understand and
shape the infrastructure and networks that will
underpin the megacities of the future.
Downer has sought to mitigate risks by assessing,
understanding and mitigating the “critical risks” facing
Downer and implementing Cardinal Rules which
provide direction and guidance on these critical risks.
Relationships creating success continues to be
Downer’s core operating philosophy that drives
delivery of projects and services. It helps to ensure
investment, initiatives and activities are focused on
helping the Group’s customers to succeed. Risks to
be managed include:
– commoditisation of core products and services,
which affects margins;
– not keeping pace with changing customer
expectations for service improvements; and
– lack of focus on customer feedback channels.
Government outsourcing provides a high level of
opportunity for Downer as budgets tighten and
citizens desire more service from less spend. Risks
to be managed include:
– longer procurement contract durations reducing
opportunities to tender for new opportunities;
– commoditisation of long-term contracts; and
– introduction of foreign and technology
based competitors that bring a different
value proposition.
Greater urbanisation is likely to result in a
consolidation of competition, opportunities, and
capital. Risks to be managed include:
– intensification of competition as customers
converge into large single market
procurement channels;
– introduction of foreign and technology based
competitors that bring a different value
proposition; and
– greater investment in technology.
Annual Report 2017 13
Strategic Objective
Prospects
Risks and risk management
Create a position in
social infrastructure,
particularly in
the areas of
health and aged care
Orient Downer’s
portfolio
to growth markets
Embed operational
technology into core
service offerings
Greater life expectancy will result in greater
demand for services to aged people – not just
in health and aged care, but also transport,
logistics and amenity. This will create a wide range
of opportunities for Downer across a range of
service lines.
Downer is well positioned to participate in
these opportunities as this market is willing to
outsource non-core services and challenge the
status quo to continuously improve the quality of
services it provides.
Downer continues to enjoy wide reaching access
to substantial asset management, projects, and
services opportunities in its core geographies
of Australia and New Zealand. Whilst these
geographies will remain the core focus for
the foreseeable future, Downer continues to
investigate and pursue identified and evaluated
opportunities in Southern Africa, South America,
North America, Europe, and Asia.
Through the acquisition of Spotless, Downer has an
excellent foundation to build its value proposition
to customers across Australia and New Zealand.
For Downer to be truly successful, it will need to
work with customers and co-invest or co-create in
solutions across healthcare services and patient
management solutions that improve the core
user experience.
Downer continues to review the current shape of
its service offerings as well as the exportability of a
number of established and mature service offerings
which have reached leadership in the Group’s core
markets. Risks to be managed include:
– balancing growth objectives against sustainable
profit outcomes; and
– determining the optimal timing to export core
competencies to new growth markets or to
further diversify Downer’s offering.
Downer is focused on increasing the utilisation
of operational technology across all its service
lines to improve differentiation and competitive
advantage. This includes investing in partnerships
with global technology experts, co-creating
bespoke products and services to meet
customer needs, and investigating selective
M&A opportunities to improve the quality of the
Group’s service offering.
Downer has opportunities to invest in new
skills to manage the risks that will emerge from
technological advancements. These risks include:
– market disruption;
– cybersecurity and data hacks as more
assets and infrastructure networks are
managed remotely; and
– switching costs associated with technological
infrastructure and networks.
14 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2017
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
Transport
Utilities
Rail
Prospects
Downer’s response
The market for transport infrastructure and
services continues to exhibit good growth in
both Australia and New Zealand, as respective
governments invest in a range of projects to
reduce congestion, improve mobility, and provide
better linkages between communities.
The urban nature of this investment allows Downer
to leverage core resources into these opportunities
and build a strong pipeline of revenue.
Growth across power and gas utility markets is
multi-faceted with a good pipeline of prospects
in both Australia and New Zealand. In Australia,
growth will be driven by prospects in electricity
transmission and distribution, as well as significant
new capital projects in the renewable energy
market. In New Zealand, increasing demand from
a growing population is seeing higher levels of
activity across the water and power & gas sectors.
Activity in telecommunications markets continues
to be dynamic, with large capital builds in both
Australia and New Zealand coming to a close.
However, increasing demand for data services
will see a solid baseload of activity in this
sector remain.
The manufacture and associated servicing of
rail rolling stock continues to be a strong growth
market for Downer. Major procurement activities
have been undertaken in Queensland, NSW and
Victoria in recent years, with the resulting volume
of work continuing to permeate the market.
Looking forward, potential outsourcing and
franchising opportunities may further expand
Downer’s portfolio in public transport operations.
As a market leader in Australia and New Zealand,
Downer is well positioned to capitalise on future
transport opportunities. In particular, focus will be
upon the markets for road maintenance services,
road surfacing and bitumen supply, and rail
infrastructure delivery.
Downer continues to innovate across its core service
offerings, to ensure it brings to customers global
insights and competitively benchmarked solutions.
It also continues to selectively acquire scale where
this creates value for shareholders.
Downer has market leading positions in the electricity,
water, gas and telecommunications sectors in both
Australia and New Zealand.
Downer is strongly positioned to take advantage of
the growth opportunities available in these sectors,
with a demonstrable track record of excellence in
service delivery, and a greater focus on introducing
operational technology to improve the value we
bring to customers.
The business is focused on maximising its share of
the outsourced ‘poles and wires’ services market.
It is also turning its attention towards participating
in the market for the ‘Internet of Things’, such as
through the installation and monitoring of sensors
on critical infrastructure.
Downer’s rail asset management model is a clear
market leader which brings a strong focus on ‘return
on investment’ – i.e. increasing fleet availability and
reliability for customers’ customers.
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.
Annual Report 2017 15
Prospects
Downer’s response
Downer is the market leader in electrical and
instrumentation work, particularly in the Oil & Gas
sector, and is growing its structural mechanical
piping business. Downer is currently working on all
of the major Oil & Gas developments in Australia and
Papua New Guinea.
Outside of Oil & Gas, Downer continues to be a major
player in the delivery of resources related engineering,
construction and maintenance services with long and
enduring relationships with all of Australia’s major
mining and industrial customers.
This year Downer increased its presence in the
growing market for infrastructure and building in
New Zealand through the acquisition of Hawkins,
the country’s second-largest builder.
Mining continues to perform well despite the
constraints in the operating environment.
While greenfield iron ore and coal opportunities
are at their lowest point in a decade, green shoots
of growth have emerged in gold, lithium and
precious metals in Australia, Southern Africa and
South America.
The Mining division continues to profit from the
diversity of its operations. With an open cut,
underground, mining services, tyre management, drill
and blast, and engineering and technology offering,
Downer brings to market the largest end-to-end
capability in the world.
The acquisition of Spotless is now largely complete.
Downer is now a major force in both Australia and
New Zealand with market leading positions across
key sectors including: Defence; Health; Education;
Corrections; Commercial; Stadia and Open Space
Management; Leisure; and Resources.
EC&M comprises resources-related
infrastructure, infrastructure projects, and
non-residential building.
Resources-related infrastructure continues to
be impacted by a prolonged downturn and high
volatility in commodity prices, with investment
focus on sustaining capital projects rather than
new production infrastructure.
Good growth prospects in the commercial sector
are expected as business confidence remains
high in both Australia and New Zealand, while
investment into social infrastructure continues with
particular focus on health and education.
The market continues to be impacted by
depressed commodity prices, particularly across
bulk commodities, resulting in a prolonged focus
on cost reduction by mine owners. However,
opportunities for mining contractors remain with
an outlook of further growth in export volumes as
miners look to optimise unit costs.
Some mine owners are currently shifting their
operating models to maximise supply chain
benefits, which opens opportunities for contractors
to work collaboratively to drive productivity
improvements and reduce production costs.
The facilities management and services market
is undergoing consolidation, as operators look
to leverage scale across multiple service lines.
The proliferation of operational technology to
enable real-time performance monitoring is
shaping the future of outsourcing, leading to
bundling services and the provision of ‘anything
as a service’.
The Defence, Health, Education, Corrections,
and Commercial markets continue to grow with a
strong pipeline of opportunities in both Australia
and New Zealand.
Service line
EC&M
Mining
Spotless
16 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2017
Outlook
Environmental
With the acquisition of Spotless, the Downer Group is now well
positioned for expected growth in the transport infrastructure,
health, education, corrections, defence, utilities and other
government service markets across Australia and New Zealand.
The Group’s strong competitive position in all of its major
markets, coupled with market growth, is driving significant
opportunities across all businesses.
Excluding Spotless earnings and any costs or synergies
related to the acquisition, Downer is targeting NPAT of around
$190 million for the 2018 financial year, an increase of 5%.
In its Target’s Statement dated 27 April 2017, the Spotless
Board provided earnings guidance of between $85 million and
$100 million NPAT for the 2018 financial year1.
Once Downer completes its review of the Spotless business
planning, budgeting and target setting process, updated
guidance will be provided for the entire Downer Group,
including Spotless.
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.
Changes in state of affairs
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.
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.
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.
In addition, all Downer Divisions conduct regular environmental
audits by independent third parties.
The international environmental standard, ISO 14001, is used
as a benchmark in assessing, improving and maintaining the
environmental integrity of its business management systems.
The Company’s Divisions also adhere to environmental
management requirements established by customers in addition
to all applicable licence and regulatory requirements.
Dividends
In respect of the financial year ended 30 June 2017, the Board:
– declared a fully franked interim dividend of 12.0 cents per
share that was paid on 16 March 2017 to shareholders on the
register at 16 February 2017; and
– declared a fully franked final dividend of 12.0 cents per share,
payable on 10 October 2017 to shareholders on the register
at 12 September 2017.
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 2016 financial year,
the Board declared a fully franked final dividend of 12.0 cents per
share, that was paid on 15 September 2016 to shareholders on
the register at 18 August 2016.
1
For further information regarding the basis of preparation of this guidance,
including key assumptions and other discussion, see section 5.4 and section 7
of Spotless’ Target’s Statement dated 27 April 2017.
Annual Report 2017 17
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 2017 or 30 June 2016.
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 2017 financial
year and the number of meetings attended by each Director (while they were a Director or Board Committee member). During the year,
22 Board meetings, six Audit and Risk Committee meetings, three Remuneration Committee meetings, four Zero Harm Committee
meetings and two Nominations and Corporate Governance Committee meetings were held. In addition, 37 ad hoc meetings (attended
by various Directors) were held in relation to various matters including tender reviews, major projects, treasury matters and the Due
Diligence Committee for the Spotless takeover offer and Entitlement Offer.
Director
R M Harding
G A Fenn
S A Chaplain
P S Garling2
T G Handicott3
E A Howell
J S Humphrey4
C G Thorne5
Director
R M Harding
G A Fenn
S A Chaplain
P S Garling2
T G Handicott3
E A Howell
J S Humphrey4
C G Thorne5
Board
Audit and
Risk Committee
Remuneration
Committee
Held1
22
22
22
22
21
22
3
22
Attended
22
22
21
21
20
20
3
22
Held1
–
–
6
6
4
–
2
6
Attended
–
–
6
5
4
–
2
6
Held1
3
–
–
3
3
–
2
–
Attended
3
–
–
3
3
–
2
–
Zero Harm
Committee
Nominations and
Corporate Governance
Committee
Held1
–
4
4
–
–
4
–
4
Attended
–
3
4
–
–
4
–
3
Held1
2
–
2
–
–
–
2
–
Attended
2
–
2
–
–
–
2
–
These columns indicate the number of meetings held during the period each person listed was a Director or member of the Board or relevant Board Committee.
1
2 Mr Garling is also Chairman of the Rail Projects Committee.
3 Ms Handicott is also Chairman of the Disclosure Committee which meets on an unscheduled basis and was Chairman of the Due Diligence Committee for the Spotless
takeover offer and Entitlement Offer.
4 Mr Humphrey was also Chairman of the Disclosure Committee, Buy-back Committee and IT Transformation Committee which meet on an unscheduled basis.
5
Dr Thorne is also Chairman of the Tender Risk Evaluation Committee which meets on an unscheduled basis.
18 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2017 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
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 111 to 118
of this Annual Report.
Non-audit services
Downer is committed to audit independence. The Audit and
Risk Committee reviews the independence of the external
auditors on an annual basis. This process includes confirmation
from the auditors that, in their professional judgement, 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).
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 46 of this Annual Report.
During the year, details of the fees paid or payable for non-audit
services provided by the auditor of the parent entity, its related
practices and related audit firms were as follows:
Non-audit services
Tax services
Sustainability assurance
Due diligence and other
non-audit services
June 2017
$
June 2016
$
719,955
217,000
743,567
107,500
1,066,814
2,003,769
306,842
1,157,909
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.
Annual Report 2017 19
Remuneration Report – AUDITED
Chairman’s letter
Dear Shareholders,
Downer’s 2017 Remuneration Report provides information about
the remuneration of its most senior executives and explains how
performance has been linked to reward outcomes at Downer this
financial year.
Strong financial and safety performance
Downer has once again delivered strong financial and
safety performance in 2017 and has continued to deliver
on its promises:
– Total Revenue was $7,812.3 million, an increase of
5.7% from 2016;
– Net Profit After Tax was $181.5 million, an increase of
$11.5 million over guidance given at the start of the year;
– Conversion of EBITDA (earnings before interest, tax,
depreciation and amortisation) to cash continued to be
strong at 103.1%; and
– Lost Time Injury Frequency Rate was 0.55, a reduction
of 16.7% from 2016 and Total Recordable Injury
Frequency Rate was 3.50.
Downer’s Zero Harm performance is pleasing. Many of the
activities that Downer’s people perform every day are inherently
dangerous and ensuring they remain safe is of paramount
importance. Focus on Zero Harm is a key part of Downer’s
culture and the drive for continued improvement of systems
and performance makes Downer a Zero Harm leader and
provides a source of competitive advantage.
Downer’s work-in-hand is now $22.5 billion (excluding Spotless),
up 21% from 2016, which demonstrates the fact that Downer’s
businesses operate in a range of growth sectors and that
Downer’s people are seen as being committed to working closely
with customers to help them succeed using world leading
insights and solutions.
Downer’s strong performance in the areas highlighted above
is reflected in Downer’s Total Shareholder Return over the
three years to 30 June 2017, being 29.2% higher than the
ASX 100 median.
Key remuneration issues in 2017
Downer continued to invest in the future through strategic
acquisitions that enhance the geographic footprint of the
existing business, grow capability and create new market
positions. These include the acquisitions of AAA (asphalt plant
in Western Australia), AGIS Group, Hawkins, ITS and RPQ as
well as the takeover of Spotless which was funded through an
Entitlement Offer to shareholders.
The acquisition of a controlling interest in Spotless represents a
significant investment in growth and creates new positions for
Downer in adjacent sectors such as Defence, Health, Education
and Corrections. It is another example of Downer delivering on
its strategy to maximise long term shareholder value.
20 Downer EDI Limited
The impact of these major transactions on executive
remuneration can be significant. The Board’s overarching
concern is to ensure executives:
– Are accountable for delivery of the annual budget and
business plan; and
– Consider potential acquisition or divestment
opportunities without the influence of their impact on
remuneration outcomes.
For these and other reasons, where a transaction is both material
and unbudgeted, the Board’s policy is that it should remove the
impact of the transaction when calculating the key performance
indicators on which executive performance is measured.
This ensures that executives are ‘no better or worse off’ as a
result of the transaction.
In 2017, adjustments were made in respect of the Entitlement Offer
and AAA asphalt plant, Hawkins, ITS and Spotless transactions so
that executives were rewarded for performance against the targets
set at the beginning of the year. These adjustments comprised
the exclusion of items such as transaction costs as well as the
contribution of those businesses to the Group’s profit and cash
flow results. The adjustments resulted in the full achievement of
the Free Cash Flow measure but for other measures had no or an
immaterial impact on reward outcomes.
More information on the Board’s approach to major transactions
and their impact in 2017 can be found at sections 6.5 and 7.4 of
the Remuneration Report.
Link between Downer performance and reward outcomes
Downer’s remuneration framework for key senior employees
supports the achievement of Downer’s strategy and the creation
of alignment between senior executives and shareholders. As set
out in this Remuneration Report, Downer’s remuneration strategy
continues to provide:
– A significant proportion of remuneration being at risk linked
to clear, objective measures;
– A profitability gateway as a precondition to any short term
incentive entitlement;
– For deferral of 50% of short term incentive payments over a
further two year period; and
– The delivery of a significant proportion of pay in equity.
We trust that this overview and the accompanying detailed
analysis are helpful when forming your own views on Downer’s
remuneration arrangements.
R M Harding
Chairman
T G Handicott
Remuneration Committee Chairman
Directors’ Report – continuedfor the year ended 30 June 2017 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 2017. 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. Related party information; and
11. 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 2016
Short-term incentive (STI) plan
– The Safety measures have been further refined, building upon previous improvements to
move with and support growth in organisational maturity and ensure continual stretch and
ongoing Zero Harm improvement through:
– Requiring the implementation of critical control verification reporting and action plans;
– Implementation of critical control verification programs; and
– Targeting high potential incidents for Action Close Outs.
– The Environmental measure has been focused on sustainable development by requiring
review of targets for greenhouse gas emission reduction and energy efficiency as well as the
achievement of energy efficiency targets.
– The People measure has been enhanced, reflecting continued organisational development.
It now requires the achievement of a set level of employee engagement, measured through
a Company-wide employee engagement survey.
Annual Report 2017 21
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
Role
R M Harding
G A Fenn
S A Chaplain
P S Garling
T G Handicott
E A Howell
J S Humphrey
C G Thorne
Chairman, Independent Non-executive Director
Managing Director and Chief Executive Officer
Independent Non-executive Director
Independent Non-executive Director
Independent Non-executive Director, from 21 September 2016
Independent Non-executive Director
Independent Non-executive Director, to 3 November 2016
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
S L Killeen
M J Miller
D J Overall
B C Petersen
Role
Chief Executive Officer – New Zealand, to 16 January 2017
Chief Executive Officer – Infrastructure Services
Chief Financial Officer
Chief Executive Officer – New Zealand, from 16 January 2017
Chief Executive Officer – Rail
Chief Executive Officer – Mining
Chief Executive Officer – Engineering, Construction & Maintenance
22 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2017 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 as well as relative TSR and earnings per share measures directly related to
shareholder value;
– Maintain a guideline minimum shareholding requirement for the Managing Director;
– Exclude the short-term impact of unbudgeted and opportunistic acquisitions and divestments
from performance assessment to encourage agility and responsiveness;
– 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.
Annual Report 2017 23
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 investing in
innovation, research and development and community and
indigenous partnerships;
– Creating new strategic positions through enhanced value
add services that improve propositions for customers and
exporting established core competencies into new overseas
markets with current customers of the Company;
– Reducing risk and enhancing the Company’s capability
to withstand threats, take advantage of opportunities and
reduce cyclical volatility;
– Obtaining better utilisation of assets and improved margins
through simplifying and driving efficiency;
– Identifying opportunities to manage the Downer portfolio
through partnering, acquisition and divestment 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 for NPAT, Free Cash
Flow (FFO) and People measures to encourage cross-
divisional collaboration;
– Incorporating performance metrics that focus on cash flow to
reduce working capital and debt exposure;
– Setting NPAT, EBIT and FFO STI performance and gateway
requirements based on effective application of funds
employed to run the business for better capital efficiency;
– Employing FFO as the cash measure for the STI to provide
more emphasis on control of capital expenditure;
– Excluding the short term impacts of opportunistic and
unbudgeted acquisitions and divestments on incentive
outcomes to encourage flexibility, responsiveness and
growth consistent with strategy;
– 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 to maintain
the Company’s position as a Zero Harm leader and employer
and service provider of choice, thereby delivering a
competitive advantage; and
– Encouraging engagement with and the development
and retention of its people to help maintain a sustainable
supply of talent.
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 further Zero Harm gateways to be
achieved before calculating any reward for safety or
environmental performance;
– Applying challenging financial and non-financial measures to
assess performance;
– Ensuring that these measures focus management
on strategic business objectives that create
shareholder value; and
– Delivering a significant proportion of payment in equity for
alignment with shareholder interests.
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;
– Engagement with Downer’s people; and
– “Zero Harm” measures of safety and environmental
sustainability.
Remuneration for all executives varies with performance on
these key measures.
24 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2017 The following graph shows the Company’s performance compared to the median performance of the ASX100 over the three year
period to 30 June 2017.
Downer EDI TSR compared to S&P/ASX 100 median*
)
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
250
200
150
100
50
0
Jun
2014
Sep
2014
Dec
2014
Mar
2015
Jun
2015
Sep
2015
Dec
2015
Mar
2016
Jun
2016
Sep
2016
Dec
2016
Mar
2017
Jun
2017
* S&P/ASX 100 companies as at 30/06/2014
Downer EDI TSR
S&P/ASX 100 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
204.0
216.0
210.2
180.6
181.5
m
$
’
250
200
150
100
50
0
344.3
304.6
242.3
203.0
Free cash flow (i)
400
300
m
$
’
200
159.7
100
0
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
(i) Adjusted for material unbudgeted transactions.
Basic earnings per share (ii)
43.0
45.5
43.9
38.0
35.8
e
r
a
h
s
r
e
p
s
t
n
e
C
50
40
30
20
10
0
1.08
0.87
0.70
LTIFR
TRIFR
0.66
0.55
Safety
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
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
(ii) Historical basic earnings per share were restated as a result of 169.9 million
shares issued from the capital raising made as part of the Spotless takeover
offer announced on 21 March 2017. The weighted average number of shares
(WANOS) to calculate EPS was adjusted by an adjustment factor of 0.943.
12
10
8
6
4
2
0
s
r
u
o
h
0
0
0
0
0
0
,
1
,
r
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I
e
b
a
d
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o
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e
R
l
a
t
o
T
Annual Report 2017 25
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 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
26 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2017 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 2017 financial year or in the past four years, other than M J Ferguson, S L
Killeen and M J Miller on their appointment to KMP roles, all having been internal appointments.
6.3 Short-term incentive
6.3.1 STI tabular summary
The following table outlines the major features of the 2017 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;
– 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; and
– 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 2016 to 30 June 2017.
Performance assessed
August 2017, 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 2017 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.
Annual Report 2017 27
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 2017.
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. Positive and negative impacts from material but unbudgeted and opportunistic transactions
are excluded from gateway assessment.
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 cash or 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 generally 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. However, the Board retains the discretion to vest deferred awards, in the form of shares or cash, having
regard to an executive’s individual circumstances and existing level of equity ownership.
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.
28 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2017 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 employee engagement.
NPAT and EBIT include joint ventures and associates and include, inter alia, changes in accounting policy.
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 2017, the Board introduced the Zero Harm Leadership measure and targeted the Action Close Outs safety measure on high
potential incidents and further developed the Safety Critical Risk and Environmental Sustainable Development measures to ensure
Downer continues to focus on effective risk controls and visible leadership.
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
Zero Harm Leadership
Environmental
Sustainable development
Achieve a defined TRIFR target 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.
High potential incident Action Close Outs, critical control verification reporting and action
plans and the implementation of critical control verification programs.
Performance of a minimum number of critical risk observations by senior executives within
the relevant area of control by the senior executives of that area and in other areas of Downer
by the executive.
Review of targets for greenhouse gas reduction and energy efficiency and the achievement of
energy efficiency targets for the area of control.
Should a workplace fatality or serious environmental incident occur, the relevant safety or environmental portion of the STI is foregone.
Annual Report 2017 29
For 2017, the Board introduced a new People measure requiring the achievement of a set level of employee engagement, based on a
Group-wide employee engagement survey.
Weightings applied to the 2017 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%
(3% Group,
7% division)
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 2017 LTI plan.
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 period
1 July 2016 to 30 June 2019.
Performance assessed
September 2019.
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 2019.
Performance rights vest
1 July 2020.
Form of award and payment
Performance rights.
30 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2017 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 2019.
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
Above 50th and below
75th percentile
0%
30%
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 2019.
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 2019.
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. The number of rights held may be adjusted pro-rata, consistent with ASX
adjustment factors, for any capital re-structures.
If the rights vest, executives can exercise them to receive shares that are normally acquired on-market.
Annual Report 2017 31
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.
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.
The 2017 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 2017 LTI grants will be measured over the three-year period to 30 June 2019.
The proportion of performance rights that can vest will be calculated in September 2019, but executives will be required to remain in
service until 30 June 2020 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.
32 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2017 6.4.3 Performance requirements
One tranche of performance rights in the 2017 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.
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 2017 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
2016. 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 2019. The EPS measure is based on AASB 133
Earnings per Share.
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.
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 2019.
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 2019.
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 2017 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.
At the end of
three years
– Calculate average annual performance
for each component; and
– Calculate award based on performance
against the vesting range.
At the end of
four years
Consider the continued service condition
and determine vesting.
Annual Report 2017 33
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.
6.5 Treatment of major transactions
Downer has delivered significant shareholder value through a
long history of strategic mergers, acquisitions and divestments.
On each occasion, the Board considers the impact of these
transactions. Where a transaction is both material and
unbudgeted, the Board considers whether it is appropriate
to adjust for its impact on the key performance indicators on
which executive performance is measured. The objective of any
adjustment is to ensure that opportunities to add value through
an opportunistic divestment or acquisition should not be
fettered by consideration of the impact on incentive payments.
That is, executives should be ‘no better or worse off’ as a result
of the transaction. No adjustments are made for market reactions
to a transaction as the Board believes that management is
accountable for those outcomes.
This Board considers this approach to be appropriate as it:
– Ensures that executives and the Board consider these
transactions solely based on the best interests of Downer;
– Means executives remain accountable for transaction
execution and post-transaction performance from the
next budget cycle;
– Ensures that executives complete opportunistic transactions
that are in the long-term interest of shareholders;
– Is consistent with the Board’s long-term view when
considering the value of major transactions to Downer’s
shareholders; and
– Ensures Downer remains agile and responsive in managing
its portfolio by pursuing opportunities as and when
they emerge rather than be constrained by the annual
budget process.
In assessing Zero Harm performance of executives, the results of
acquired businesses are excluded for a period of twelve months
post-acquisition to ensure that management is accountable for
the objectives set in the annual business planning process and
in recognition that an integration period during which Downer’s
Zero Harm framework (including systems, processes, definitions
and measurement and reporting methods) is implemented
through the acquired business is appropriate.
34 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2017 7. Details of executive remuneration
7.1 Remuneration received in relation to the 2017 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 2017 financial year, comprising fixed remuneration, cash STIs
relating to 2017, deferred STIs payable in 2017 in respect of prior years and the value of LTI grants that vested during the 2017 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 2017 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
$
2,083,050
601,252
1,026,576
687,500
302,791
675,000
1,354,308
850,000
7,580,477
964,100
–
495,550
271,153
66,129
232,444
568,277
315,913
2,913,566
722,350
–
425,500
–
–
–
598,063
31,597
1,777,510
Other
Benefits
$
–
–
–
–
–
–
1,248,000
–
1,248,000
Total
payments
$
3,769,500
601,252
1,947,626
958,653
368,920
907,444
3,768,648
1,197,510
13,519,553
Equity
that vested
during 20173
$
Total
remuneration
received
$
–
–
–
–
–
–
–
–
–
3,769,500
601,252
1,947,626
958,653
368,920
907,444
3,768,648
1,197,510
13,519,553
G A Fenn2,4
C W Bruyn
S Cinerari2,4
M J Ferguson2
S L Killeen2
M J Miller2
D J Overall2,4,6
B C Petersen2,5
1
2
3
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 2017 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.
Represents the value of performance rights granted in previous years that vested during the year, calculated as the number of performance rights that vested multiplied by
the closing market prices of Downer shares on the vesting date.
4 Deferred Bonus represents the deferred cash bonus amount to be paid in August 2017, being the second deferred component of the 2015 award and the first deferred
5
component of the 2016 award, being 25% of each award.
Deferred Bonus represents the deferred cash bonus amount to be paid in August 2017, being the first deferred component of the 2016 award (being 25% of the total
2016 award).
6 D J Overall: Other benefit represents the actual cash retention benefit paid in May 2017, being 12 months’ fixed remuneration.
Annual Report 2017 35
7.2 Remuneration of executive key management personnel required under the Corporations Act 2001 (Cth)
2017
Short-term
employee benefits
Post-employment
benefits
Cash Bonus
paid or
payable in
respect
of current
year
$
964,100
–
495,550
271,153
66,129
232,444
568,277
315,913
2,913,566
Deferred
Bonus paid
or payable4
$
803,667
(100,821)
467,313
112,980
28,639
96,852
584,940
157,961
2,151,531
Salary
and fees
$
1,775,384
583,278
980,384
659,616
289,648
638,762
1,326,197
810,235
7,063,504
Non-
monetary
$
Super-
annuation
$
Other
benefits
$
Subtotal
$
Share-based
payment
transac-
tions3
$
Total
$
288,050
17,974
19,916
8,268
2,351
16,622
8,495
20,149
381,825
19,616
–
26,276
19,616
10,792
19,616
19,616
19,616
135,148
–
–
–
–
–
–
395,708
–
3,850,817
500,431
1,989,439
1,071,633
397,559
1,004,296
2,903,233
1,323,874
395,708 13,041,282
1,656,713
(232,346)
593,437
119,473
–
111,507
496,208
184,604
5,507,530
268,085
2,582,876
1,191,106
397,559
1,115,803
3,399,441
1,508,478
2,929,596 15,970,878
G A Fenn2
C W Bruyn1
S Cinerari2
M J Ferguson2
S L Killeen1,2
M J Miller2
D J Overall2,5
B C Petersen2
1
2
3
Amounts represent the payments relating to the period during which the individuals were KMP.
Cash Bonus paid or payable in respect of current year represents cash payments in relation to the 2017 financial year. These comprise the 50% cash component of
the award.
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 section 8.2. Vesting of the majority of securities remains
subject to significant performance and service conditions as outlined in section 6.4.
4 Deferred Bonus represents the value of deferred components attributable to the 2017 financial year based on amortisation of deferred components over the period from
the commencement of the relevant performance year to the end of financial year to which payment of the relevant deferred component relates and the reversal for forfeited
deferred components.
D J Overall: Other benefits represents the accrual of the cash retention benefit paid on 21 May 2017 ($395,708), being 12 months’ fixed remuneration.
5
2016
Short-term
employee benefits
Post-employment
benefits
Cash Bonus
paid or
payable in
respect of
current year3
$
644,700
–
476,000
35,670
631,806
–
–
595,213
63,194
2,446,583
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
Deferred
Bonus paid
or payable4
$
735,192
126,027
354,583
–
261,285
–
–
594,700
26,331
2,098,118
G A Fenn2
C W Bruyn2
S Cinerari2
M J Ferguson1,3,8
K J Fletcher7
M J Miller3
L A Nucifora1
D J Overall2,6
B C Petersen1,2
Non-
monetary
$
Super-
annuation
$
Other
benefits
$
Subtotal
$
Share-
based
payment
transac-
tions5
$
Total
$
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
– 3,393,292
952,199
–
1,887,190
–
148,765
–
1,881,897
–
570,000
–
418,736
–
445,627 2,960,495
443,692
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
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 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. 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 paid 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 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. 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.
36 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2017 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 2017 that are performance and
non-performance related and the proportion of STIs that were earned during the year ended 30 June 2017 due to the achievement of
the relevant performance targets.
G A Fenn1
S Cinerari1
M J Ferguson
S L Killeen
M J Miller
D J Overall1
B C Petersen
Proportion of
2017 remuneration
2017
Short-term incentive
Performance
Related
%
Non-
performance
Related
%
Paid
%
Forfeited
%
62
60
36
18
34
39
37
38
40
64
82
66
61
63
96
99
96
52
89
91
99
4
1
4
48
11
9
1
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 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
Division
Percentage of the element achieved1 Corporate
Division
Group
NPAT
Divisional
EBIT
Group
FFO
Divisional
FFO
30.0
7.5
88.0
88.0
22.5
76.4
30.0
7.5
100.0
100.0
22.5
77.5
Zero
Harm
30.0
30.0
100.0
91.0
People
10.0
10.0
100.0
100.0
1
Performance includes the results for each element, even if the NPAT or EBIT gateway was not achieved.
Annual Report 2017 37
The following table sets out the performance achieved by each KMP across each element of the scorecard.
Corporate scorecard – G A Fenn and M J Ferguson
Element
Measure
Threshold
Target
Maximum
Zero Harm
People
Financial
Safety
Environmental
Employee engagement
Profit (NPAT)
FFO
Infrastructure Services scorecard – S Cinerari
•
•
•
•
•
Element
Measure
Threshold
Target
Maximum
Threshold
Target
Maximum
Zero Harm
People
Financial
Safety
Environmental
Employee engagement
Profit (NPAT/EBIT)
FFO
New Zealand scorecard – S L Killeen
Element
Measure
Threshold
Zero Harm
People
Financial
Safety
Environmental
Employee engagement
Profit (NPAT/EBIT)
FFO
Rail scorecard – M J Miller
Element
Measure
Zero Harm
People
Financial
Safety
Environmental
Employee engagement
Profit (NPAT/EBIT)
FFO
Mining scorecard – D J Overall
•
•
•
•
•
•
•
•
Maximum
•
Target
•
•
•
•
•
•
•
Maximum
•
•
•
•
Element
Measure
Threshold
Target
Zero Harm
People
Financial
Safety
Environmental
Employee engagement
Profit (NPAT/EBIT)
FFO
Engineering, Construction & Maintenance scorecard – B C Petersen
Element
Measure
Threshold
Target
Maximum
Zero Harm
People
Financial
Safety
Environmental
Employee engagement
Profit (NPAT/EBIT)
FFO
For 2017, the IPM applied to each member of the KMP remained at 1.
38 Downer EDI Limited
•
•
•
•
•
Directors’ Report – continuedfor the year ended 30 June 2017 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,
D J Overall
Relevant
LTI measure
2014 plan
Performance
outcome
% LTI tranche
that vested
TSR tranche – percentile ranking of
Downer’s TSR relative to the constituents
of the ASX100 over a three-year period.
Actual performance ranked at
the 37th percentile.
0% became provisionally qualified.
The performance rights
were forfeited.
EPS tranche – compound annual
earnings per share growth against
absolute targets over a three-year period.
Actual performance was -5.95%. 0% became provisionally qualified.
The performance rights
were forfeited.
7.4 Major transactions
7.4.1 Major transactions in 2017
In 2017 Downer continued to optimise its portfolio in keeping with its strategy of creating new market positions to deliver long-term
shareholder value through partnering, acquisition and divestment.
Downer undertook six major acquisitions during 2017 as well as an Entitlement Offer. These acquisitions were Spotless, Hawkins,
ITS Pipetech, AAA asphalt plant, RPQ and AGIS Group.
7.4.2 Adjustments made to incentive calculations in relation to major transactions
In accordance with its policy, the Board considered the impact of each major transaction on incentive outcomes.
The acquisitions of RPQ and AGIS Group were included in the 2017 budget and as such no adjustments were made for
those transactions.
The Board determined that the following adjustments be made to KPI calculations for the impact of the Entitlement Offer, takeover offer
for Spotless and the acquisitions of Hawkins, ITS and AAA asphalt plant. The adjustments mean that executives are ‘no better or worse
off’ as a result of the transactions so that performance is measured against delivery of the Company’s budget and business plan.
Measure
Adjustment
Impact on STI
Impact on LTI
An additional 0.5% of the
NPAT measure was earned.
An additional 0.5% of rights
in the NPAT tranche met the
performance condition.
NPAT
Net increase of $0.8 million comprised of:
– Exclusion of transaction costs of $18.4 million;
– Exclusion of the gain on revaluation of the initial
investment in Spotless ($19.1 million) and other
income ($0.7 million);
– Exclusion of net interest income of $0.5 million
(being interest earned on the investment of funds
raised for the Spotless transaction less interest
paid on acquisition funding);
– Exclusion of operating earnings of $4.6 million
generated by those businesses in FY17; and
– Income tax effect on adjustments of $7.3 million.
Annual Report 2017 39
Measure
Adjustment
Impact on STI
Impact on LTI
FFO
Net increase of $757.2 million comprised of:
– Exclusion of transaction costs of $13.7 million;
– Exclusion of net interest income of $1.1 million
An increase from nil to
100% of the FFO measure
was earned.
An increase from nil to
100% of rights in the
FFO tranche met the
performance condition.
(being interest earned on the investment of funds
raised for the Spotless transaction less interest
paid on acquisition funding);
– Exclusion of payments made to acquire
those businesses (net of cash acquired) of
$746.7 million; and
– Exclusion of net cash flows generated by those
businesses of $2.1 million.
Zero Harm
The Zero Harm performance of acquired businesses
has been excluded.
EPS
TSR
– The use of NPAT adjusted as set out above; and
– Exclusion of shares issued under the Entitlement
Offer from the weighted average number of
shares calculation.
No adjustments were made to data sourced from
the Australian Securities Exchange (ASX) for the
calculation in relation to any major transaction.
However, it is noted that ASX adjusts historical
data for the bonus element of all new share issues
(Adjustment Factor). In this case the Adjustment
Factor is 0.943 and was applied to share prices and
dividend rates prior to the capital raising.
This also applies to all companies in the peer group.
Not applicable.
Not applicable as
acquired businesses
historical performance
has been measured on a
different basis.
Not applicable.
No change.
Not applicable.
Not applicable.
Grant quantum Consistent with the ASX Listing Rules for the
Not applicable.
adjustment of the quantity of rights and options on
issue at the time of new share issues, the quantity of
unlapsed rights granted to executives were adjusted by
the ASX Adjustment Factor.
Details of rights granted can
be found at section 8.2.
7.4.3 Future periods
The takeover offer for Spotless continued in FY18. The impact on 2018 performance is included in the 2018 budget and accordingly no
adjustments are expected in respect of FY18.
7.5 Variance from policy
There were no variances from policy during the year.
40 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2017 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 2016
Net
change
Balance at
30 June 2017
Balance at
1 July 2016
Net
change
Balance at
30 June 2017
No.
626,492
75,708
–
–
–
108,460
–
No.
199,734
(65,301)
–
–
–
(108,460)
–
No.
826,226
10,407
–
–
–
–
–
No.
1,426,257
489,557
–
–
–
510,373
59,450
No.
330,906
136,864
94,411
–
88,116
27,613
110,566
No.
1,757,163
626,421
94,411
–
88,116
537,986
170,016
G A Fenn
S Cinerari
M J Ferguson
S L Killeen
M J Miller
D J Overall
B C Petersen
8.2 Options and rights
No performance options were granted or exercised during the 2017 financial year.
As outlined in section 6.4.1, the LTI plan for the 2017 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 2017 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.
2014 Plan
2015 Plan
2016 Plan
2017 Plan
Number
of per-
formance
rights1
243,576
76,726
–
–
–
113,993
–
Vested
%
Forfeited
%
–
–
–
–
–
–
–
100
100
–
–
–
100
–
Number
of per-
formance
rights2
541,920
170,705
–
–
–
253,619
–
Vested
%
Forfeited
%
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Number
of per-
formance
rights3
711,717
266,894
–
–
–
166,542
63,017
Vested
%
Forfeited
%
Number
of per-
formance
rights4
Vested
%
Forfeited
%
–
–
–
–
–
–
–
–
–
–
–
–
–
–
503,526
188,822
94,411
–
88,116
117,825
106,999
–
–
–
–
–
–
–
–
–
–
–
–
–
–
G A Fenn
S Cinerari
M J Ferguson
S L Killeen
M J Miller
D J Overall
B C Petersen
1
2
3
Grant date 2 June 2015. The fair value of performance rights granted was $4.45 per right for the EPS tranche and $1.77 per right for the TSR tranche.
Grant date 2 June 2015. The fair value of performance rights granted was $4.23 per right for the EPS and Scorecard tranches and $1.70 per right for the TSR tranche.
These quantities include the additional performance rights arising from application of the ASX Adjustment Factor to the quantity of unlapsed rights as a result of the
Entitlement Offer.
Grant date 30 June 2016. The fair value of performance rights granted was $3.24 per right for the EPS and Scorecard tranches and $0.97 per right for the TSR tranche.
These quantities include the additional performance rights arising from application of the ASX Adjustment Factor to the quantity of unlapsed rights as a result of the
Entitlement Offer.
4 Grant date 21 June 2017. The fair value of performance rights granted was $5.29 per right for the EPS and Scorecard tranches and $4.61 per right for the TSR tranche.
Annual Report 2017 41
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
S Cinerari
M J Ferguson
S L Killeen
M J Miller
D J Overall
B C Petersen
Maximum number of shares
for the vesting year
2019
541,920
170,705
–
–
–
253,619
–
2020
711,717
266,894
–
–
–
166,542
63,017
2021
503,526
188,822
94,411
–
88,116
117,825
106,999
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
S Cinerari
M J Ferguson
S L Killeen
M J Miller
D J Overall
B C Petersen
2018
1,756,032
593,734
119,473
–
111,507
542,691
184,604
2019
1,192,878
509,306
119,473
–
111,507
279,134
184,605
2020
637,191
238,946
119,473
–
111,507
149,103
135,403
8.3 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 KMP 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.
42 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2017 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:
a)
b) By providing 12 months’ written notice.
When notice is required, Downer can make a payment in lieu of notice of all or part of any notice period
(calculated based on Mr Fenn’s fixed annual remuneration).
If Mr Fenn resigns because ill health prevents him from continuing his duties, he will receive a payment in
recognition of his past services equivalent to 12 months’ fixed remuneration. At the discretion of the Board, his
shares under the LTI plan may also vest.
If Downer terminates Mr Fenn’s employment on account of redundancy, in addition to the notice (or payment in
lieu of notice) required to be given by Downer, Mr Fenn will receive a payment in recognition of his past services
equivalent to 12 months’ fixed remuneration.
If Mr Fenn resigns he will be subject to a six-month post-employment restraint in certain areas where the Downer
Group operates, where he is restricted from working for competitive businesses.
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 2017 43
10. Related party information
10.1 Transactions with other related parties
Transactions entered into during the year with Directors of Downer EDI Limited and the Group are within normal employee, customer
or supplier relationships on terms and conditions no more favourable than dealings in the same circumstances on an arm’s length
basis and include:
– the receipt of dividends from Downer EDI Limited;
– participation in the Long Term Incentive Plan;
– terms and conditions of employment; and
– reimbursement of expenses.
A number of Directors of the Company hold directorships in other entities. Several of these entities transacted with the Group on terms
and conditions no more favourable than those available on an arm’s length basis.
11. Description of Non-executive Director remuneration
11.1 Non-executive Director remuneration policy
Downer’s Non-executive Director remuneration policy is to provide fair remuneration that is sufficient to attract and retain Directors
with the experience, knowledge, skills and judgement to steward the Company.
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 2018 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 & Risk Committee; and $15,000 for the chair of each of the Zero Harm Committee,
Remuneration Committee, Rail Projects Committee and Tender Risk Evaluation Committee.
Under his original terms of appointment in 2001, John Humphrey was eligible for certain retirement benefits. Consistent with the
ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations, the right to these retirement benefits
was frozen and 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.
44 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2017 11.2 Non-executive Directors’ remuneration
The table below sets out the remuneration paid to Non-executive Directors for the 2017 and 2016 financial years.
Short-term benefits
Post-employment benefits
Board fee
$
Chair fee
$
Total fees
$
Superannuation
$
Termination
benefits
$
375,000
375,000
150,000
150,000
150,000
150,000
114,454
–
150,000
150,000
51,359
150,000
150,000
150,000
–
–
35,000
35,000
15,000
15,000
11,250
–
11,250
15,000
–
–
18,750
15,000
375,000
375,000
185,000
185,000
165,000
165,000
125,704
–
161,250
165,000
51,359
150,000
168,750
165,000
35,625
35,000
17,575
17,575
15,675
15,675
11,942
–
15,319
15,675
8,466
14,250
16,031
15,675
–
–
–
–
–
–
–
–
–
–
185,000
–
–
–
Year
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
Total
$
410,625
410,000
202,575
202,575
180,675
180,675
137,646
–
176,569
180,675
244,825
164,250
184,781
180,675
R M Harding
S A Chaplain
P S Garling
T G Handicott
E A Howell
J S Humphrey
C G Thorne
11.3 Equity held by Non-executive Directors
The table below sets out the equity in Downer held by Non-executive Directors for the 2017 and 2016 financial years.
2017
2016
Balance at
1 July 2016
Net
change
Balance at
30 June 2017
Balance at
1 July 2015
Net
change
Balance at
30 June 2016
R M Harding
S A Chaplain
P S Garling
E A Howell
T G Handicott
C G Thorne
10,150
74,142
12,100
10,000
–
59,230
4,060
29,657
4,840
4,000
14,000
23,692
14,210
103,799
16,940
14,000
14,000
82,922
10,150
64,142
12,100
10,000
–
59,230
–
10,000
–
–
–
–
10,150
74,142
12,100
10,000
–
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, 29 August 2017
Annual Report 2017 45
Auditor’s Independence Declaration
46 Downer EDI Limited
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. 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 2017 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 John Teer Partner Sydney 29 August 2017 Independent Auditor’s Report
for the year ended 30 June 2017
Annual Report 2017 47
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. INDEPENDENT AUDITOR’S REPORT To the Members of Downer EDI Limited REPORT ON THE FINANCIAL REPORT Opinion We have audited the Financial Report of Downer EDI Limited (the Company). In our opinion, the accompanying Financial Report of the Company is in accordance with the Corporations Act 2001, including: • giving a true and fair view of the Group’s financial position as at 30 June 2017 and of its financial performance for the year ended on that date; and • complying with Australian Accounting Standards and the Corporations Regulations 2001. The Financial Report comprises: • Consolidated Statement of financial position as at 30 June 2017 • Consolidated Statement of profit or loss and other comprehensive income, Consolidated Statement of changes in equity, and Consolidated Statement of cash flows for the year then ended • Notes including a summary of significant accounting policies • Directors’ Declaration. The Group consists of the Company and the entities it controlled at the year-end or from time to time during the financial year. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the Financial Report section of our report. We are independent of the Group in accordance with the Corporations Act 2001 and the 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 fulfilled our other ethical responsibilities in accordance with the Code. Key audit matters The Key audit matters we identified are: • Recognition of revenue • Value of goodwill • Acquisition of controlled entities Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the Financial Report of the current period. These matters were addressed in the context of our audit of the Financial Report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key audit matter How our audit addressed the key audit matter Recognition of revenue Refer to Note B2 ‘Revenue and other income’. ($7,287.4m). A substantial amount of the Group’s revenue relates to revenue from the rendering of 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 predominantly 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 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: • We evaluated the Group’s process regarding accounting for contract revenues. We tested controls such as: - the authorisation of monthly project valuations, which involves management assessing key contract KPIs, including cashflows; - management’s assessment of significant changes in work in progress balances; - management’s 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 identified by the Group risk and legal team, as prescribed in the Group’s risk management process; • We undertook a sample of site visits (to both contract sites and commercial offices) across the Group’s major divisions and Independent Auditor’s Report – continued
for the year ended 30 June 2017
48 Downer EDI Limited
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. 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. 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 the Group when assessing the revenue recognition based on the estimates developed for current and forecast contract performance. For the sample selected, where relevant: - we read the contract terms and conditions to evaluate whether the individual characteristics of each contract were reflected in the estimate; - we assessed the estimation of costs to complete by checking 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 major project specialists to evaluate the claim elements for risk of non-recovery. Our major projects specialists have significant experience and credentials to advise on project management matters; 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’ ($2,607.3m). 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. Some of 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 in use models. Given these changes, the value of goodwill was a key audit matter. Our procedures included: • We evaluated the Group’s goodwill impairment assessment process and tested controls such as the review and approval of forecasts by management; • We assessed the Group’s determination of the Group’s CGUs or groups of 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; • We obtained the Group’s value in use models and checked amounts to a combination of the FY18 budget and the FY19-FY20 business plan. Annual Report 2017 49
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. 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 or groups of CGUs; • Budgeted future revenue and costs; • Discount rates; • Terminal growth rate; and • The outcome of tenders. The Group has identified the Mining 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 their recoverable amount. • 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 comparing the key market based assumptions to external analyst reports, published industry growth rates and industry reports. We compared 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 the Group’s discount rates based on its business 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. Acquisition of controlled entities Refer to F2 ‘Acquisition of businesses’ ($779.3m).During the year the Group purchased controlling interests in a number of businesses/entities. These acquisitions have been accounted for as business combinations and in a number of cases the acquisition accounting remains provisional at year end. Accounting for the purchase of controlling interests is a Key Audit Matter due to the: • Aggregated size of the acquisitions; • Complexity of the acquisition process, specifically for Spotless Group Holdings Limited (Spotless), and the resultant large volume of documentation requiring our assessment; • Early status of the acquisition accounting for certain of the transactions, which remain provisional at year end. This increases the possible range of outcomes for the auditor to consider and is impacted by the reduced precision of audit evidence; and Our procedures included: • We read the Bidders Statement and Sale and Purchase Agreements (as applicable) to understand key terms and conditions; • We evaluated the methodology used for the acquisition accounting against accounting standard requirements and common industry practice for the determination of fair value; • We challenged key assumptions in the Group’s intangible valuation models by comparing these inputs to market data, historic and current entity records, and strategic plans; • Working with our valuation specialists, we challenged the discount rate assumptions used in the purchase price allocation by comparing the rates used by the Group against external market reports; • We compared fair value adjustments for working capital to signed agreements; Independent Auditor’s Report – continued
for the year ended 30 June 2017
50 Downer EDI Limited
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. • Significance of the estimation required to determine the fair values of acquired assets and liabilities under the accounting standards, for those transactions where the acquisition accounting has been finalised. We focused on assessing the basis for the estimations against the allowed criteria in the accounting standards to determine fair value and the documentation available from the Group to date. For those acquisitions where the purchase accounting has been completed the key inputs to the valuations were forecast assumptions relating to revenue, operating costs, the impact of contributory assets, the fair value of contingent consideration and discount rates. • For contingent consideration (where applicable) we challenged the Group’s assumptions of forecast future performance by comparing inputs to strategic plans and historic growth rates, comparing the model used to the sale and purchase agreement and assessing the mathematical accuracy of the model used; • We assessed the accounting treatment of post-acquisition payments to vendors against the Sale and Purchase Agreement and criteria contained in the relevant accounting standards; • We compared the acquired company’s accounting policies against the Group’s policies; and We assessed the adequacy of the Group’s disclosures in respect of the acquisitions against the requirements of accounting standards and our knowledge of the transactions. Other Information Other Information is financial and non-financial information in Downer EDI Limited’s annual reporting which is provided in addition to the Financial Report and the Auditor's Report. The Directors are responsible for the Other Information. Our opinion on the Financial Report does not cover the Other Information and, accordingly, we do not express an audit opinion or any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinions. In connection with our audit of the Financial Report, our responsibility is to read the Other Information. In doing so, we consider whether the Other Information is materially inconsistent with the Financial Report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the work we have performed on the Other Information that we obtained prior to the date of this Auditor’s Report we have nothing to report. Responsibilities of the Directors for the Financial Report The Directors are responsible for: • preparing the Financial Report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 • implementing necessary internal control to enable the preparation of a Financial Report that gives a true and fair view and is free from material misstatement, whether due to fraud or error • assessing the Group’s ability to continue as a going concern. This includes disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the Financial Report Our objective is: • to obtain reasonable assurance about whether the Financial Report as a whole is free from material misstatement, whether due to fraud or error; and • to issue an Auditor’s Report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error. They are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this Financial Report. A further description of our responsibilities for the audit of the Financial Report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_files/ar2.pdf. This description forms part of our Auditor’s Report. Annual Report 2017 51
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. REPORT ON THE REMUNERATION REPORT Opinion In our opinion, the Remuneration Report of Downer EDI Limited for the year ended 30 June 2017, complies with Section 300A of the Corporations Act 2001. Directors’ responsibilities The Directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with Section 300A of the Corporations Act 2001. Our responsibilities We have audited the Remuneration Report included in pages 20 to 45 of the Directors’ report for the year ended 30 June 2017.Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. KPMG John Teer Cameron Slapp Partner Partner Sydney Sydney 29 August 2017 29 August 2017 Financial Statements
Page 53
Page 54
Page 55
Page 56
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 57-58
Page 59 -67
Page 68-76
Page 77
Page 78-86
Page 87-96
Page 97-107
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
Reserves
E6
Dividends
F5
Related party
information
F6
Parent entity
disclosures
B1
Segment
information
C1
Reconciliation
of cash and
cash equivalents
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 108 Directors’ Declaration
52 Downer EDI Limited
Consolidated Statement of Profit or Loss and Other Comprehensive Income
for the year ended 30 June 2017
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
Profit for the year is attributable to:
– Non-controlling interest
– Members of the parent entity
Profit for the year
Other comprehensive income
Items that may be reclassified subsequently to profit or loss
– Exchange differences arising on translation of foreign operations
– Net loss 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
– Change in fair value of available-for-sale assets
– Available-for-sale reserve transferred to profit or loss
Other comprehensive (loss) / income for the year (net of tax)
Other comprehensive income for the year is attributable to:
– Non-controlling interest
– Members of the parent entity
Other comprehensive (loss) / income for the year
Total comprehensive income for the year
Earnings per share (cents)(i)
– Basic earnings per share
– Diluted earnings per share
Note
B2(a)
B2(a)
D1
C6,C7
F1(a)
B4(a)
2017
$’m
7,267.1
20.3
7,287.4
(2,787.3)
(1,740.8)
(1,357.0)
(502.8)
(220.2)
(424.0)
(7,032.1)
22.5
277.8
14.4
(41.2)
(26.8)
251.0
(69.5)
181.5
–
181.5
181.5
0.4
(1.9)
(2.6)
0.9
18.3
(19.1)
(4.0)
–
(4.0)
(4.0)
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)
17.7
276.9
7.2
(40.2)
(33.0)
243.9
(63.3)
180.6
–
180.6
180.6
9.4
(2.5)
(0.8)
1.0
–
–
7.1
–
7.1
7.1
177.5
187.7
B3
B3
35.8
35.0
Restated (i)
38.0
35.9
(i) 2016 Earnings per share calculation has been restated to allow for the impact of the capital raising announced on 21 March 2017. Refer to Note B3.
The consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying
notes on pages 57 to 107.
Annual Report 2017 53
Consolidated Statement of Financial Position
as at 30 June 2017
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
Parent interests
Non-controlling interest
Total equity
Note
C1(b)
C2
G3
C4
F1(a)
C6
C7
G3
B4(b)
C5
E1
G3
D1
C8
E1
G3
D1
C8
B4(b)
E4
E5
30 June
2017
$’m
30 June
2016
$’m
844.6
1,725.7
12.5
301.7
45.5
49.5
2,979.5
105.6
88.0
1,295.2
2,878.9
17.1
59.4
31.7
4,475.9
7,455.4
1,761.0
863.2
23.8
365.4
68.0
7.2
3,088.6
30.6
581.8
21.7
38.2
51.8
56.2
780.3
3,868.9
3,586.5
2,421.8
(10.9)
740.4
3,151.3
435.2
3,586.5
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
–
2,088.5
The consolidated statement of financial position should be read in conjunction with the accompanying notes on pages 57 to 107.
54 Downer EDI Limited
Consolidated Statement of Changes in Equity
for the year ended 30 June 2017
2017
$’m
Balance at 1 July 2016
Profit after income tax
Other comprehensive income for the year
(net of tax)
Total comprehensive income for the year
Capital raising
(net of transaction costs and tax) (i)
Acquisition of business (ii)
Vested executive incentive share
transactions
Share-based employee benefits expense
Income tax relating to share-based
transactions during the year
Payment of dividends(iii)
Balance at 30 June 2017
Issued capital
Reserves
Retained
earnings
Attributable
to owners of
the parent
Non-
controlling
interest
1,427.8
–
–
–
993.0
–
1.0
–
–
–
2,421.8
(8.8)
–
(4.0)
(4.0)
–
–
(1.0)
5.6
(2.7)
–
(10.9)
669.5
181.5
–
181.5
–
–
–
–
–
(110.6)
740.4
2,088.5
181.5
(4.0)
177.5
993.0
–
–
5.6
(2.7)
(110.6)
3,151.3
–
–
–
–
–
435.2
–
–
–
–
435.2
(i) Relates to capital raising for the Spotless takeover bid. Refer to Note E4.
(ii) Non-controlling interest as a result of Spotless acquisition. Refer to Note F2.
(iii) Payment of dividends relates to 2016 final dividend, 2017 interim dividend and ROADS dividends paid during the financial year.
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
Retained
earnings
Attributable
to owners of
the parent
Non-
controlling
interest
Reserves
(15.8)
–
7.1
7.1
–
(5.2)
4.9
0.2
–
(8.8)
602.0
180.6
–
180.6
–
–
–
2,035.3
180.6
7.1
187.7
(26.5)
–
4.9
–
(113.1)
669.5
0.2
(113.1)
2,088.5
–
–
–
–
–
–
–
–
–
–
Total
2,088.5
181.5
(4.0)
177.5
993.0
435.2
–
5.6
(2.7)
(110.6)
3,586.5
Total
2,035.3
180.6
7.1
187.7
(26.5)
–
4.9
0.2
(113.1)
2,088.5
(i) Payment of dividends relates to 2015 final dividend, 2016 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 57 to 107.
Annual Report 2017 55
Consolidated Statement of Cash Flows
for the year ended 30 June 2017
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
Net proceeds from sale of property, plant and equipment
Payments for property, plant and equipment
Payments for intangible assets
Payments for acquisition of Spotless
Payments for businesses acquired
Receipts from investments
Advances from / (to) joint ventures
Proceeds from sale of businesses
Net cash used in investing activities
Cash flows from financing activities
Net proceeds from capital raising
Group on-market share buy-back
Proceeds from borrowings
Repayments of borrowings
Dividends paid
Net cash inflow from / (used in) financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Effect of exchange rate changes
Cash and cash equivalents at the end of the year
Note
F1(a)
C1(a)
F2
F2
E4
E4
2017
$’m
2016
$’m
7,957.7
17.9
(7,462.0)
11.4
(34.4)
(49.0)
441.6
23.2
(203.6)
(37.9)
(636.1)
(143.2)
0.6
1.2
–
(995.8)
989.9
–
321.2
(370.0)
(110.6)
830.5
276.3
569.4
(1.1)
844.6
7,615.0
18.6
(7,123.4)
6.8
(33.3)
(35.9)
447.8
20.4
(185.7)
(45.4)
–
(1.1)
0.6
(1.5)
7.2
(205.5)
–
(26.5)
173.8
(80.0)
(113.1)
(45.8)
196.5
372.2
0.7
569.4
The consolidated statement of cash flows should be read in conjunction with the accompanying notes on pages 57 to 107.
56 Downer EDI Limited
Notes to the consolidated financial statements
for the year ended 30 June 2017
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 a general purpose
financial statement 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 29 August 2017.
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 a historical cost
basis, except for the revaluation of certain financial instruments.
Cost is based on the fair values of the consideration given in
exchange for assets. All amounts are presented in Australian
dollars, unless otherwise noted.
The accounting policies and methods of computation in the
preparation of the Financial Report are consistent with those
adopted and disclosed in Downer’s Annual Report for the
financial year ended 30 June 2016, except in relation to the
relevant amendments and their effects on the current period or
prior periods as described in Note G1.
From 27 June 2017 the Group’s ownership interest in Spotless
Group Holdings Limited (Spotless) exceeded 50%, resulting
in the Group obtaining control. As a consequence of control
being achieved in close proximity to the financial year end,
the Directors have concluded that Spotless’ profit or loss and
cash flow impact for the three days to 30 June 2017 is not
material to the Downer Group, and therefore have commenced
the consolidation of Spotless with effect from 30 June 2017.
As a result, the consolidated profit or loss and consolidated
cash flow of the Group for the year ended 30 June 2017 do not
include any trading performance for Spotless.
For the purposes of the 30 June 2017 financial report, Downer
holds a relevant interest of 65.7% (Refer to Note F2).
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
considered when 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
Useful lives and residual values
Impairment of assets
Provisions
Annual leave and long service leave
Accounting for acquisition of businesses
B2
B4
B4
C2
C6
C7
C8
D1
F2
62
66
66
69
71
73
75
77
93
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 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 2017 57
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 liabilities 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
Reporting date
Equity
Reserves
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 or control of an acquiree is obtained, 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.
58 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2017 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
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.
B4. Taxation
B5. Remuneration of auditors
B6. Subsequent events
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.
During the period, and as a consequence of realigning business
portfolios due to the Spotless transaction, the Group CEO
is now assessing the performance of the Technology and
Communications and Utilities Services operating segments
together and therefore, the Group has combined these reportable
segments into a single segment: Utilities.
The reportable segments identified within the Group are outlined below:
Service line
Segment description
Transport
Utilities
Comprises the Group’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.
Comprises the Group’s power, gas, water, renewable energy and telecommunications businesses. This includes:
planning, designing, constructing, operating, maintaining, managing and decommissioning power and gas network
assets; providing complete water lifecycle solutions for municipal and industrial water users including pipeline
bursting and civil maintenance; and design, build and maintenance services for wind farms, wind turbine sites
and solar farms; as well as 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 solutions.
Rail
Engineering,
Construction
and Maintenance
(EC&M)
Provides total rail asset solutions including passenger and freight build, operations and maintenance, component
overhauls and after-market services.
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
Spotless
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.
Spotless operates in Australia and New Zealand and provides outsourced facility services, catering and laundry
services, technical and engineering services, maintenance and asset management services and refrigeration
solutions to various industries. The customers include corporations and government departments, agencies and
authorities at the Federal, State and Municipal level.
Annual Report 2017 59
B1. Segment information – continued
2017
$’m
Transport
Utilities
Spotless
Rail
EC&M
Mining
Un-
allocated
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
Depreciation and amortisation
Total reported segment
results (EBIT)
Net finance costs
Total profit before tax
Acquisition of segment assets
Segment assets
Segment liabilities
Carrying value of equity
accounted investees
2,091.1
–
2,091.1
1,517.3
–
1,517.3
62.3
–
2,153.4
1,517.3
8.5
40.6
124.6
–
21.6
84.1
–
–
–
–
–
–
–
–
467.1
–
467.1
1,974.2
–
1,974.2
1,250.8
–
1,250.8
19.8
(32.9)
(13.1)
Total
7,320.3
(32.9)
7,287.4
383.1
30.1
49.4
–
524.9
850.2
2,004.3
1,300.2
(13.1)
7,812.3
11.7
10.9
(0.6)
15.3
2.9
116.4
–
15.4
22.5
220.2
30.3
52.3
83.4
(96.9)
277.8
(26.8)
251.0
114.9
1,080.3
391.5
56.5
748.0
405.8
1,998.4
2,621.4
1,406.5
51.9
572.1
141.3
95.5
719.1
413.4
102.2
836.3
264.5
37.0
878.2
845.9
2,456.4
7,455.4
3,868.9
10.0
–
1.8
64.5
5.3
6.4
–
88.0
2016
$’m
Transport
Utilities
Spotless
Rail
EC&M
Mining
Un-
allocated
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
Depreciation and amortisation
Total reported segment
results (EBIT)
Net finance costs
Total profit before tax
Acquisition of segment assets
Segment assets
Segment liabilities
Carrying value of equity
accounted investees
1,786.7
–
1,786.7
1,274.3
–
1,274.3
62.8
–
1,849.5
1,274.3
6.8
39.7
103.7
–
19.3
71.4
42.2
957.2
328.9
25.8
641.6
257.8
7.6
–
–
–
–
–
–
–
–
–
–
–
–
–
421.8
–
421.8
1,856.7
–
1,856.7
1,548.9
–
1,548.9
4.5
(42.9)
(38.4)
Total
6,892.9
(42.9)
6,850.0
404.4
30.4
46.3
–
543.9
826.2
1,887.1
1,595.2
(38.4)
7,393.9
6.3
10.8
14.4
0.5
18.2
4.1
153.6
–
17.1
17.7
258.7
48.2
130.0
(90.8)
276.9
8.6
604.1
132.1
20.5
596.8
326.0
116.3
872.3
318.2
54.3
528.3
748.8
(33.0)
243.9
267.7
4,200.3
2,111.8
58.7
5.9
9.4
–
81.6
(i) This is a non-statutory disclosure as it relates to Downer’s share of revenue from equity accounted joint ventures and associates.
60 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2017 B1. Segment information – continued
Reconciliation of segment net operating profit to net profit after tax:
Segment net operating profit
Unallocated:
Spotless transaction costs (i)
Fair value gain on available-for-sale asset (ii)
Other income on available-for-sale asset (ii)
Bid costs written off (iii) (iv)
Settlement of contractual claims
Corporate costs
Total unallocated
Earnings before interest and tax
Net finance costs
Profit before income tax
Income tax expense
Profit after income tax
Note
B2(b)
B2(b)
B2(b)
B2(b)
B4(a)
Segment results
2017
$’m
374.7
(15.2)
19.1
0.7
(13.0)
(5.0)
(83.5)
(96.9)
277.8
(26.8)
251.0
(69.5)
181.5
2016
$’m
367.7
–
–
–
(13.0)
–
(77.8)
(90.8)
276.9
(33.0)
243.9
(63.3)
180.6
(i) Relates to costs incurred as a result of the Spotless take over offer. Refer to Note F2.
(ii)
(iii) Downer was a member of the Constellation Rail consortium. On 18 August 2016, the consortium was advised that it had not been successful in its bid to deliver and maintain
Relates to other income and revaluation of initial 19.99% investment in Spotless at $1.15 per share.
the New Intercity Fleet (NIF) for Transport for NSW. Accordingly, an amount of $10.0 million, referable to Downer’s share of pre-tax bid costs, has been expensed.
Downer was also a member of the Creative Learning consortium. On 17 January 2017, the consortium was advised that it had not been successful in its bid to design,
construct and maintain the NZ Schools PPP project for the Ministry of Education. Accordingly, an amount of $3.0 million, referable to Downer’s share of pre-tax bid costs,
has been expensed.
(iv) 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 had been expensed in 2016.
By geographic location(ii)
Australia
New Zealand and Pacific
Asia
Africa
South America
Other
Total
Total revenue(i)
Segment assets
Acquisition of
segment assets
2017
$’m
2016
$’m
2017
$’m
2016
$’m
2017
$’m
5,704.8
1,538.7
–
29.2
12.6
2.1
7,287.4
5,502.7
1,303.3
1.3
25.4
14.3
3.0
6,850.0
6,709.0
686.9
7.5
36.4
13.4
2.2
7,455.4
3,607.3
546.0
6.7
21.3
16.5
2.5
4,200.3
2,351.9
101.9
–
1.2
1.4
–
2,456.4
2016
$’m
238.2
20.5
–
4.9
4.1
–
267.7
(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
or services.
(ii) Revenue and assets are allocated based on geographical location of the legal entity.
Annual Report 2017 61
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.
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.
B2. Profit from ordinary activities
a) Revenue and other income
Sales revenue
Rendering of services
Construction contracts
Sale of goods
Other revenue
Total revenue from
ordinary activities
Fair value gain on
available-for-sale asset (i)
Other income on
available-for-sale asset (i)
Other
Other income
Total revenue and other income
Share of sales revenue from
joint ventures and associates (ii)
Total revenue including
joint ventures and associates
and other income (ii)
2017
$’m
2016
$’m
5,773.5
1,250.9
220.1
22.6
5,895.3
713.8
205.3
31.8
7,267.1
6,846.2
19.1
–
0.7
0.5
20.3
7,287.4
–
3.8
3.8
6,850.0
524.9
543.9
7,812.3
7,393.9
(i) Relates to other income and revaluation of initial 19.99% investment in Spotless
at $1.15 per share. Refer to Note B2(b).
(ii) 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.
62 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2017 B2. Profit from ordinary activities – continued
b) Individually significant items
The following material items forming part of the unallocated segment are relevant to an understanding of the Group’s
financial performance:
Spotless transaction
2017
$’m
Spotless transaction costs (i)
Fair value gain on available-for-sale asset (ii)
Other income on available-for-sale asset (ii)
Net finance income on Spotless takeover bid and capital raising (iii)
Earnings before
interest and tax
Net finance
income
Income tax
expense
Profit after
income tax
(15.2)
19.1
0.7
–
4.6
–
–
–
1.7
1.7
–
(5.5)
(0.2)
(0.5)
(6.2)
(15.2)
13.6
0.5
1.2
0.1
(i) Transaction costs incurred in relation to the takeover of Spotless (refer to Note F2). The expenses are classified as “Other expenses from ordinary activities” on the
statement of profit or loss for the year ended 30 June 2017.
(ii) Referable to the other income and revaluation of the initial 19.99% interest equivalent in Spotless (economic interest of 4.99% pursuant to a cash settled total return
equity swap and 15.0% shareholding acquired immediately prior to the takeover bid) based on the offer share price of $1.15. The fair value gain is transferred from the
available-for-sale reserve to profit or loss on obtaining control and is classified as “Other income” on the statement of profit or loss for the year ended 30 June 2017.
(iii) Net interest income from the capital raising proceeds received in relation to the Spotless acquisition. The net interest income is classified as part of “Net finance costs”
on the statement of profit or loss for the year ended 30 June 2017.
Bid costs written off
New Intercity Fleet rail project (iv)
NZ Schools PPP project (v)
Canberra light rail project (vi)
2017
$’m
(10.0)
(3.0)
–
(13.0)
2016
$’m
–
–
(13.0)
(13.0)
(iv) Downer was a member of the Constellation Rail consortium. On 18 August 2016, the consortium was advised that it had not been successful in its bid to deliver and maintain
the New Intercity Fleet (NIF) for Transport for NSW. Accordingly, an amount of $10.0 million, referable to Downer’s share of pre-tax bid costs, has been expensed and
classified as “Other expenses from ordinary activities” on the statement of profit or loss for the year ended 30 June 2017.
(v) Downer was a member of the Creative Learning consortium. On 17 January 2017, the consortium was advised that it had not been successful in its bid to design, construct
and maintain the NZ Schools PPP project for the Ministry of Education. Accordingly, an amount of $3.0 million, referable to Downer’s share of pre-tax bid costs, has been
expensed and classified as “Other expenses from ordinary activities” on the statement of profit or loss for the year ended 30 June 2017.
(vi) 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 and classified
as “Other expenses from ordinary activities” on the statement of profit or loss for the year ended 30 June 2016.
Annual Report 2017 63
B4. Taxation
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:
2017
$’m
2016
$’m
Profit before income tax
Tax using the Company’s
statutory tax rate
Effect of tax rates in foreign
jurisdictions
Non-deductible expenses
Profits and franked
distributions from joint
ventures and associates
Non-taxable government grant
Other items
(Over) / under provision of
income tax in previous year
Total income tax expense
Current tax expense
Deferred tax expense
251.0
243.9
75.3
(1.3)
6.2
(5.1)
(2.6)
(0.8)
(2.2)
69.5
68.7
0.8
73.2
(1.2)
0.8
(5.6)
(3.0)
(0.7)
(0.2)
63.3
24.9
38.4
The tax rate used in the above reconciliation is the corporate tax
rate of 30% payable by Australian corporate entities on taxable
profits under Australian tax law. There has been no change in the
corporate tax rate when compared with the previous year.
B3. Earnings per share
Basic earnings per share
The calculation of basic earnings per share (EPS) is based
on the profit attributable to ordinary shareholders and the
weighted-average number of ordinary shares outstanding.
Profit attributable to members of
the parent entity ($’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)
Basic earnings per share
(cents per share)
2017
Restated (i)
2016
181.5
(8.6)
180.6
(9.6)
172.9
171.0
483.6
450.4
35.8
38.0
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.
2017
Restated (i)
2016
Profit attributable to members of
the parent entity ($’m)
181.5
180.6
Weighted average number of
ordinary shares
– Weighted average number
of ordinary shares (WANOS)
on issue (m’s)(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)
483.6
450.4
35.3
518.9
53.3
503.7
35.0
35.9
(i) Basic and diluted EPS calculation for FY16 were restated as a result of
169.9 million shares issued from the capital raising made as part of the Spotless
takeover offer announced on 21 March 2017. Under the entitlement offer, two
new shares for each five outstanding shares were issued at a discounted price
of $5.95 per share. As a result of the new shares issued, the weighted average
number of ordinary shares (WANOS) to calculate EPS needs to be adjusted by
a theoretical ex-rights price (TERP) factor. The adjustment factor of 0.943 was
utilised to restate WANOS for the basic and diluted EPS calculations.
(ii) For diluted EPS, 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 $190.5 million
(2016: $190.7 million), divided by the average market price of the Company’s
ordinary shares for the period 1 July 2016 to 30 June 2017 discounted by 2.5%
according to the ROADS contract terms, which was $5.40 (2016: $3.58).
64 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2017 B4. Taxation – continued
b) Movement in deferred tax balances
2017
$’m
Trade and other
receivables
Inventories
Joint ventures and
associates
Property, plant and
equipment
Intangible assets
Income tax losses
Trade and other
payables
Provisions
Other
Tax assets /
(liabilities) before
set-off
Set-off of DTA
against DTL
Net tax assets /
(liabilities)
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)
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
(121.0)
(3.7)
(1.3)
(21.7)
(18.2)
–
8.4
99.6
0.2
3.6
(6.2)
0.2
(7.2)
1.8
–
11.5
1.0
(5.5)
–
–
–
–
–
–
–
–
6.0
(57.7)
(0.8)
6.0
–
–
–
–
–
–
–
–
–
–
1.1
0.1
–
12.9
(24.6)
25.1
0.9
56.6
(16.4)
(116.3)
(9.8)
(1.1)
(16.0)
(41.0)
25.1
20.8
157.2
(15.7)
–
–
–
–
–
25.1
20.8
157.2
–
(116.3)
(9.8)
(1.1)
(16.0)
(41.0)
–
–
–
(15.7)
55.7
3.2
203.1
(199.9)
–
(143.7)
143.7
3.2
59.4
(56.2)
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)
Annual Report 2017 65
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 recognised for tax losses
and 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.
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 the 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,
for entities treated as a group for tax purposes, and the
Company/Group intends to settle its current tax assets and
liabilities on a net basis.
66 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2017 B5. Remuneration of auditors
B6. Subsequent events
Other than the Group’s ownership interest in Spotless
increasing from 60.8% at 30 June 2017 to 87.8% at 7.00 pm on
28 August 2017, 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.
Audit or review of financial reports:
Auditor of the Group – KPMG
– Australia
– Overseas
Other audit services (i)
Non-audit services – KPMG
Tax services
Sustainability assurance
Due diligence and other
non-audit services
Other non-audit services (i)
2017
$
2016
$
2,546,000
667,000
3,213,000
2,505,000
524,000
3,029,000
1,600,000
4,813,000
–
3,029,000
719,955
217,000
743,567
107,500
1,066,814
2,003,769
–
2,003,769
306,842
1,157,909
–
1,157,909
(i)
Audit fees were paid by Spotless Group Holdings Limited for the full year audit,
which includes the period prior to Downer taking control of Spotless. No non-
audit services have been performed by Ernst & Young during the period of the
financial year in which Downer controlled Spotless.
Annual Report 2017 67
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 and cash equivalents
C2. Trade and other receivables
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
C1. Reconciliation of cash and cash equivalents
a) 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 loss / (gain) on sale of property, plant and equipment
Loss on disposal of businesses
Research and development incentives
Foreign exchange gain
Movement in current tax balances
Movement in deferred tax balances
Share-based employee benefits expense
Fair value gain on available-for-sale asset
Bid costs written off
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 financial liabilities
Current provisions
Non-current trade and other payables
Non-current financial liabilities
Non-current provisions
Net cash generated by operating activities
68 Downer EDI Limited
Note
C6,C7
D1
B1
B1
2017
$’m
181.5
(4.6)
220.2
3.0
1.2
–
(8.5)
(0.5)
19.7
0.8
5.6
(19.1)
13.0
2.7
233.5
(159.8)
38.7
0.2
(5.1)
(0.4)
160.7
3.3
(4.8)
(10.2)
16.9
(12.9)
26.6
441.6
2016
$’m
180.6
0.9
258.7
2.6
(3.0)
2.3
(10.0)
(0.3)
(11.0)
38.4
4.9
–
13.0
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
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2017 b) Cash and cash equivalents
For the purpose of the statement of cash flows, cash and cash
equivalents comprises:
Cash (i)
Short-term deposits
2017
$’m
784.5
60.1
844.6
2016
$’m
430.0
139.4
569.4
(i)
In accordance with the Business Sale Agreement, the completion payment
for the assets of Cabrini Health Limited ($20.0 million) was held on trust for
Spotless (restricted cash) and released to Cabrini Health Limited on 1 July 2017.
C2. Trade and other receivables
Note
2017
$’m
2016
$’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
760.8
441.4
(7.1)
753.7
(3.7)
437.7
C3
908.3
63.7
1,725.7
678.8
74.9
7.1
760.8
635.9
50.7
1,124.3
360.3
77.4
3.7
441.4
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 to amounts due from customers under contracts.
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.
Annual Report 2017 69
Current
Raw materials
Work in progress
Finished goods
Components and spare parts
2017
$’m
187.8
0.1
66.5
47.3
301.7
2016
$’m
208.0
0.5
88.7
30.0
327.2
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
2017
$’m
2016
$’m
Current
Trade payables
Amounts due to customers
under contracts and
rendering of services
Amounts owing in
relation to Spotless
shares acceptance
Accruals
Other
C3
F2
527.6
358.9
288.2
163.3
110.8
732.8
101.6
1,761.0
–
414.8
73.9
1,010.9
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.
C3. Rendering of services and
construction contracts
C4. Inventories
Note
2017
$’m
2016
$’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
7,361.4
7,121.0
(6,741.3)
620.1
(6,648.4)
472.6
C2
C5
908.3
635.9
(288.2)
620.1
(163.3)
472.6
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.
70 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2017 C6. Property, plant and equipment
2017
$’m
Carrying amount as at 1 July 2016
Additions
Disposals at net book value
Acquisition of businesses (i)
Depreciation expense
Reclassifications at net book value
Reclassified as intangible assets (ii)
Net foreign currency exchange differences at net book value
Closing net book value as at 30 June 2017
Cost
Accumulated depreciation
2016
Carrying amount as at 1 July 2015
Additions
Disposals at net book value
Acquisition of businesses
Disposals of business at net book value
Depreciation expense
Reclassifications at net book value
Reclassified as intangible assets (ii)
Net foreign currency exchange differences at net book value
Closing net book value as at 30 June 2016
Cost
Accumulated depreciation
Plant,
equipment
and
leasehold
improve-
ments
Freehold
land and
buildings
Equipment
under
finance
lease
Laundries
rental stock
68.5
7.4
(0.1)
57.4
(4.7)
1.0
–
(0.1)
129.4
160.9
(31.5)
59.1
13.6
–
–
–
(4.7)
–
–
0.5
68.5
95.5
(27.0)
859.9
212.7
(17.6)
212.5
(182.3)
18.7
(7.2)
(3.2)
1,093.5
2,387.7
(1,294.2)
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)
59.9
2.2
(0.2)
–
(6.2)
(19.7)
–
(1.2)
34.8
75.2
(40.4)
82.9
14.0
(0.5)
–
–
(12.1)
(24.4)
–
–
59.9
109.8
(49.9)
–
–
–
37.5
–
–
–
–
37.5
37.5
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
988.3
222.3
(17.9)
307.4
(193.2)
–
(7.2)
(4.5)
1,295.2
2,661.3
(1,366.1)
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)
(i) The values recognised are based on the fair value of assets acquired from the business acquisitions made during the year ended 30 June 2017, for which the accounting on
certain transactions remains provisional. Refer to Note F2.
(ii) 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
Plant and equipment – mining, power and gas
Plant and equipment – other
Equipment under finance lease
Laundries rental stock
Useful life
n/a
20-50 years
Life of lease
Working hours
3-25 years
5-15 years
18 months-5 years
Depreciation method
No depreciation
Straight-line
Straight-line
Based on hours of use
Straight-line
Straight-line – lease term
Straight-line
Key estimate and judgement: Useful lives and residual values
The estimation of the useful lives and residual values of assets has been based on historical experience as well as manufacturers’
warranties (for plant and equipment), lease terms (for leased equipment and leasehold improvements) and turnover policies.
In addition, the condition of the assets is assessed at least once per year and considered against the remaining useful life.
Adjustments to useful lives and residual values are made when considered necessary.
Annual Report 2017 71
C7. Intangible assets
2017
$’m
Carrying amount as at 1 July 2016
Additions
Acquisition of businesses (i)
Disposal at net book value
Reclassifications at net book value (ii)
Amortisation expense
Net foreign currency exchange differences
at net book value
Closing net book value as at 30 June 2017
Cost
Accumulated amortisation and impairment
2016
Carrying amount as at 1 July 2015
Additions
Acquisition of businesses
Reclassifications at net book value (ii)
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
Goodwill
805.3
–
1,799.2
–
–
–
2.8
2,607.3
2,683.3
(76.0)
781.7
–
20.5
–
–
3.1
805.3
881.3
(76.0)
Customer
contracts
and
relationships
Brand
names on
acquisition
Intellectual
property on
acquisition
Intellectual
property,
software
and system
development
37.1
–
8.8
–
–
(7.2)
–
38.7
58.9
(20.2)
43.5
–
–
–
(6.4)
–
37.1
50.1
(13.0)
–
–
4.7
–
–
(0.2)
–
4.5
4.7
(0.2)
–
–
–
–
–
–
–
–
–
–
–
7.8
–
–
–
–
7.8
7.8
–
–
–
–
–
–
–
–
–
–
127.5
38.5
67.7
(0.7)
7.2
(19.6)
–
220.6
359.2
(138.6)
93.8
49.1
–
1.2
(17.8)
1.2
127.5
255.3
(127.8)
Total
969.9
38.5
1,888.2
(0.7)
7.2
(27.0)
2.8
2,878.9
3,113.9
(235.0)
919.0
49.1
20.5
1.2
(24.2)
4.3
969.9
1,186.7
(216.8)
(i) The values recognised are based on the fair value of assets acquired from the business acquisitions made during the year ended 30 June 2017, for which the accounting on
certain transactions remains provisional. Refer to Note F2.
(ii) 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 on acquisition
Customer contracts and relationships acquired as part of
a business combination are recognised separately from
goodwill and are carried at fair value at date of acquisition
less accumulated amortisation and any accumulated
impairment losses.
Brand names on acquisition
Brand names acquired as part of a business combination are
recognised separately from goodwill and are carried at fair value
at date of acquisition less accumulated amortisation and any
accumulated impairment losses.
72 Downer EDI Limited
Intellectual property on acquisition
Intellectual property acquired as part of a business combination
is recognised separately from goodwill and is carried at fair value
at date of acquisition 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.
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2017 C7. Intangible assets – continued
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
Software and system development
Brand names
Customer contracts and relationships
Intellectual property acquired
Other intangible assets (other than indefinite
useful life intangible assets)
Useful Life
5-15 years
20 years
5-20 years
15-20 years
20 years
Transport (i)
Utilities (i)
Rail
EC&M (i)
Mining
Spotless (ii)
Carrying value of
consolidated goodwill
2017
$’m
251.0
319.9
69.5
239.2
76.4
1,651.3
2,607.3
2016
$’m
215.7
289.3
69.5
154.4
76.4
–
805.3
The estimated useful life and amortisation method are reviewed
at the end of each annual reporting period.
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 (group of units) 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:
(i)
Included in this amount is the goodwill for certain acquisitions
made during the year ended 30 June 2017, for which the accounting
remains provisional.
(ii) The determination of the fair value of individual assets and liabilities acquired
from Spotless including goodwill, remains provisional due to the proximity of the
acquisition date to the end of the financial year. The measurement period may
extend to 12 months from date of acquisition as allowed by AASB 3 Business
Combinations. Refer to Note F2.
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.
Recoverable amount testing – key assumptions
The recoverable amount of the Spotless CGU is assessed
as the fair value of the assets acquired less costs to sell.
Fair value has been determined by reference to the takeover
offer. There has been no events subsequent to the takeover
offer that would result in an impairment. For the remaining
CGUs, the table below shows the key assumptions utilised in
the “value in use” calculations.
Budgeted
EBITDA(i)
Long-term
growth rate
Discount
rate
5.3%
1.4%
17.1%
9.4%
4.5%
2.5%
2.5%
2.5%
2.5%
2.5%
10.3%
10.3%
10.6%
10.3%
11.0%
Transport
Utilities
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 CGUs
business plan.
Annual Report 2017 73
C7. Intangible assets – continued
Recoverable amount testing – key assumptions
– continued
(i) Projected cash flows
The Group determines the recoverable amount based on a
“value in use” calculation, using three year cash flow projections
based on the FY18 budget for the year ending 30 June 2018
and the business plan for the subsequent financial years ending
30 June 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 is expected to benefit from an increase in activity
in the transport infrastructure sector;
– Utilities is expected to benefit from an increase in activity
across the electricity, water and renewables sectors partially
offset by the potential reduction in revenue from its existing
significant telecommunication contracts;
– Rail is expected to benefit from the two new major projects
(High Capacity Metro Trains and Sydney Growth Trains).
In addition, closer integration with strategic partners
is expected to continue to contribute to revenue and
EBITDA growth; and
– 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.
(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 10.3% and 11.0% 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.
74 Downer EDI Limited
(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 amounts.
The valuation of the Rail CGU assumes the execution of the two
new major projects secured during FY17 (High Capacity Metro
Trains and Sydney Growth Trains), increased efficiencies in its
operations and improvement in the financial performance of its
business. A number of scenarios, including the impact of macro-
economic risks, have been analysed. Based on the modelling
and analysis performed, the recoverable amount is expected to
be greater than the carrying value and no reasonably possible
change in key assumptions would cause the carrying value of the
Rail CGU to exceed its recoverable amount.
For the Mining CGU, the recoverable amount currently exceeds
its carrying value by $57.1 million. The valuation of the Mining
CGU assumes contract extensions from existing customers
and growth opportunities in open cut and underground mining.
The timing of the cash flows arising from these opportunities
may be affected by macro-economic risks, including volatile
commodity prices, increased competition which may impact
the contract margins and insourcing by key customers for
mining services contracts. In the event that these risks
ultimately eventuate (including the loss of currently tendered
opportunities) and cannot be mitigated, the Mining CGU carrying
value may exceed its recoverable amount.
For the Mining CGU, a reasonably possible unfavourable change
in four-year compound annual EBITDA growth rate, long-term
growth rate and discount rate assumptions in isolation and, in the
absence of any mitigating factors or unchanged circumstances,
would result in the carrying value of the Mining CGU exceeding
its recoverable amount. Under this downside sensitivity scenario,
the approximate change in the estimated recoverable amount for
the Mining CGU is as follows:
Individual changes in key
assumptions that would
result in nil headroom
Decrease in four-year compound
annual EBITDA growth rate
Decrease in long-term growth rate
Increase in the post-tax discount rate
(2.1%)
(1.1%)
0.9%
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2017 C8. Provisions
2017
$’m
At 1 July 2016
Additional provisions recognised
Unused provision reversed
Utilisation of provision
Acquisition of businesses
Net foreign currency exchange differences
At 30 June 2017
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.
Decommissioning
and restoration
Warranties
and
contract
claims
Onerous
contracts
and other
14.4
1.7
(2.4)
(0.7)
25.2
–
38.2
16.2
22.0
22.2
11.0
(4.9)
(12.5)
1.6
–
17.4
16.9
0.5
45.8
7.7
(1.4)
(21.8)
33.9
–
64.2
34.9
29.3
Total
82.4
20.4
(8.7)
(35.0)
60.7
–
119.8
68.0
51.8
(iii) Onerous contracts and other
Provisions primarily include amounts recognised in relation
to onerous customer and 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.
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) Onerous contracts and other
These provisions have been calculated based on
management’s best estimate of discounted net cash
outflows required to fulfil the contracts. The status of
these contracts and the adequacy of provisions are
assessed at each reporting date.
The return condition provision is estimated based on the
costs associated with returning leased assets to the lessor
in a certain condition.
Annual Report 2017 75
C9. Contingent liabilities
Bonding
Note
2017
$’m
2016
$’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
1,185.5
722.0
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, contingent
liability may exist for any amounts that ultimately become
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.
76 Downer EDI Limited
v) Several New Zealand entities in the Group have been named
as co-defendants in four “leaky building” claims. The leaky
building claims where Group entities are co-defendants
generally relate to water damage arising 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 $70 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) 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 date scheduled for June 2018.
TR has initiated a counter-claim as part of the arbitration.
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) 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.
ix) On 25 May 2017, Alison Court, as applicant, filed a
representative proceeding (which has a litigation funder) in
the Federal Court of Australia on behalf of shareholders who
acquired Spotless shares from 25 August 2015 to 1 December
2015. The applicant under this proceeding alleges that
Spotless engaged in misleading or deceptive conduct and/
or breached its continuous disclosure obligations in relation
to Spotless financial results for the financial year ended
30 June 2015 and in its conduct following the release of
those financial results until Spotless issued its trading
update of 2 December 2015. The applicant seeks damages,
declarations, interest and costs. Spotless is vigorously
defending the proceeding. No provision has been recognised
at 30 June 2017 in respect of the representative proceedings.
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2017 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
2017
$’m
2016
$’m
365.4
38.2
403.6
254.2
27.6
281.8
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.
Employee benefits expense:
– Defined contribution plans
– Shared-based employee
benefits expense
– Employee benefits
– Redundancy costs
Total
2017
$’m
2016
$’m
170.5
148.4
5.6
2,601.6
9.6
2,787.3
4.9
2,580.8
24.5
2,758.6
D2. Key management personnel compensation
2017
$
2016
$
Short-term employee benefits
Post-employment benefits
Share-based payments
Total
13,742,489
836,489
2,929,596
17,508,574
13,279,618
695,498
2,460,150
16,435,266
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 is
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 during
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 2017 and 30 June 2016.
Annual Report 2017 77
E
Capital structure and financing
This section provides information relating to the Group’s capital structure and its exposure to financial risks, 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. Reserves
E6. Dividends
Note
E3(d)
E3(e)
2017
$’m
2016
$’m
20.4
0.4
–
20.8
836.4
13.3
(7.3)
842.4
863.2
13.1
0.5
5.8
19.4
15.1
13.3
(2.3)
26.1
45.5
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)
– Deferred finance charges
Total current borrowings
78 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2017 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
Note
E3(d)
E3(e)
2017
$’m
2016
$’m
14.8
0.2
15.0
2.1
139.1
30.0
–
150.0
250.0
(4.4)
566.8
581.8
1,445.0
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
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)
2017
$’m
1,409.2
1,466.0
2016
$’m
616.1
687.4
(i) Exclude finance lease, hire purchase and supplier finance liabilities.
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.
E2. Financing facilities
At 30 June 2017, the Group had the following facilities that were
unutilised at balance date:
Syndicated bank bridge loan facility
Syndicated bank loan facilities
Bilateral bank loan facilities
Total unutilised bank loan facilities
Syndicated and bilateral bank and
bilateral insurance bonding facilities
Total unutilised bonding facilities
2017
$’m
500.0
500.0
190.0
1,190.0
738.3
738.3
2016
$’m
–
400.0
125.0
525.0
614.5
614.5
Unutilised bank loans
Syndicated loan facilities
The syndicated bank bridge loan facility of $500.0 million is
non-revolving, unsecured, matures in March 2019 (subject to
Downer exercising its two six-month extension options at each of
March 2018 and September 2018) and is to be specifically used
to acquire shares in Spotless Group Holdings Limited and other
related purposes.
The syndicated loan facilities, totalling $500.0 million, are
unsecured and are split into the following tranches:
– $200.0 million maturing in April 2019;
– $100.0 million maturing in December 2020; and
– $200.0 million maturing in April 2021.
Bilateral bank loans facilities
These unutilised facilities are unsecured and due for renewal in
multiple tranches in calendar years 2018 to 2019.
Utilised bank loans
Included in the aggregate amount of $836.4 million is
$830.9 million which relates to bank loans of Spotless Group
Holdings Limited which are classified as current pursuant to the
“Change of Control Review Event” contained in Spotless’ loan
facility documentation which gave lenders rights (under certain
circumstances) to require prepayment of all amounts owing.
Subsequent to 30 June 2017, all lenders provided a waiver under
this Review Event until such date that Downer acquires 90%
or more of the issued share capital of Spotless. At that point,
Downer will undertake the process to compulsorily acquire 100%
of Spotless which will enable it to commence the refinancing of
all of the Spotless related debt under the Downer credit platform.
Annual Report 2017 79
E2. Financing facilities – continued
Downer has developed a detailed strategy in consultation with
its main financiers to refinance this debt under its credit platform
through a diverse combination of bank loans and debt capital
markets issues.
At the point of securing a 100% interest in Spotless and
thereafter acceding relevant Spotless subsidiaries to Downer’s
debt facility guarantor pool, Downer would also be in a position
to provide direct funding to Spotless if required, through a
combination of its own operating cash flow and committed
available debt facilities and / or by utilising the standby bridge
loan facility put in place for purposes of the initial Spotless bid.
In the event Downer’s interest in Spotless remains below 90%,
then Spotless will continue to fund itself on a stand-alone
basis by accessing its existing facilities and will refinance these
facilities in the normal course as and when they fall due.
In addition, a $50.0 million revolving cash advance facility limit
relating to Spotless, which was in place at 30 June 2017, was
reduced to $40.0 million with an effective date of 1 July 2017.
This facility was drawn to $35.0 million at 30 June 2017.
Subsequent to 30 June 2017, Spotless has also amended
and extended the maturity date of two $75.0 million revolving
cash advance facilities from 11 July 2018 to 1 September 2018
(aggregate $70.0 million drawn at 30 June 2017).
Utilised 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 through cross-currency
interest rate swaps.
Utilised AUD notes
AUD unsecured private placement notes are on issue for a total
amount of $30.0 million with a maturity date of July 2025.
Utilised 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; current
balance $13.3 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 are subject to certain Group guarantees.
80 Downer EDI Limited
Utilised Finance lease/Hire purchase/Supplier
finance facilities
The Group has certain secured facilities of these types which
are for an aggregate amount of $35.8 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 2017.
Spotless Group Holdings Limited has financial covenants related
to leverage and interest service coverage. These are reviewed
by their Board of Directors on a six-monthly basis. No financial
covenants were breached during the financial year.
Bonding
The Group has $1,923.8 million of bank guarantee and
insurance bond facilities to support its contracting activities.
$1,046.5 million of these facilities are provided to the Group
on a committed basis and $877.3 million on an uncommitted
basis. Included in these facilities is a syndicated $210.0 million
committed revolving bank guarantee facility relating to a specific
passenger rail contract and of which $27.3 million is utilised and
$182.7 million is unutilised.
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. $1,185.5 million (refer to
Note C9) of these facilities were utilised as at 30 June 2017 with
$738.3 million unutilised. These facilities have varying maturity
dates between calendar years 2017 and 2020.
The underlying risk being assumed by the relevant financier
under all bonds is Group 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.
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2017 E2. Financing facilities – continued
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.
Note
2017
$’m
2016
$’m
E3. Commitments
a) Capital expenditure commitments
Plant and equipment and other
Within one year
Between one and five years
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) Catering rights
Catering rights relates to exclusive secured catering rights arrangement with customers.
Within one year
Between one and five years
Greater than five years
d) 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
E1
E1
74.2
14.0
88.2
79.0
201.9
157.1
438.0
71.8
91.9
6.9
170.6
28.7
92.8
9.1
130.6
21.5
15.3
36.8
(1.6)
35.2
20.4
14.8
35.2
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
Annual Report 2017 81
E3. Commitments – continued
e) 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
f) Operating lease expenses
Operating lease expenses relating to land and building
Operating lease expenses relating to plant and equipment
Total operating lease expenses
Note
2017
$’m
2016
$’m
E1
E1
0.4
0.2
0.6
–
0.6
0.4
0.2
0.6
70.2
92.9
163.1
0.6
0.6
1.2
(0.1)
1.1
0.5
0.6
1.1
66.8
105.6
172.4
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.
(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.
82 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2017 E4. Issued capital
Ordinary shares
594,702,512 ordinary shares (2016: 424,785,204)
Unvested executive incentive shares
4,257,373 ordinary shares (2016: 4,453,456)
200,000,000 Redeemable Optionally Adjustable
Distributing Securities (ROADS) (2016: 200,000,000)
a) Fully paid ordinary share capital
Fully paid ordinary shares carry one vote per share and carry the right to dividends.
2017
$’m
2016
$’m
2,263.2
1,270.2
(20.0)
(21.0)
178.6
2,421.8
178.6
1,427.8
Fully paid ordinary share capital
Balance at the beginning of the financial year
Group on-market share buy-back
Capital raising (i)
Capital raising costs net of tax
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 (ii)
Balance at the end of the financial year
2017
m’s
$’m
2016
m’s
424.8
–
169.9
–
594.7
4.5
(0.2)
4.3
1,270.2
–
1,011.0
(18.0)
2,263.2
(21.0)
1.0
(20.0)
432.7
(7.9)
–
–
424.8
5.3
(0.8)
4.5
$’m
1,296.7
(26.5)
–
–
1,270.2
(26.2)
5.2
(21.0)
(i) Relates to 169.9 million shares issued from capital raising as part of the Spotless takeover offer where two new shares for every five outstanding shares were issued at a
discounted price of $5.95 per share.
(ii) Represents 196,083 vested shares for a value of $955,174, referable to the 2nd deferred component of the 2014 STI award and 1st deferred component of the 2015 STI.
June 2016 figures referable to the first deferred component of the 2014 STI award totalling 842,537 vested shares for a value of $5,155,989.
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 2017 83
E4. Issued capital – continued
c) Redeemable Optionally Adjustable Distributing
Securities (ROADS)
Balance at the beginning and at the end of the financial year
2017
m’s
$’m
2016
m’s
$’m
200.0
178.6
200.0
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 2017 is 6.05% per annum (2016: 6.29% per annum) which is equivalent to the
one year swap rate on 15 June 2017 plus the Step-up margin of 4.05% per annum.
Share options and performance rights
During the financial year 1,608,887 performance rights (2016: 2,130,318) 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.
84 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2017
E5. Reserves
2017
$’m
Balance at 1 July 2016
Foreign currency translation difference
Change in fair value of cash flow hedges (net of tax)
Change in fair value of available-for-sale assets
Available-for-sale reserve transferred to profit or loss
Total comprehensive income for the year
Vested executive incentive share transactions
Share-based employee benefits expense
Income tax relating to share-based transactions
during the year
Balance at 30 June 2017
2016
Balance at 1 July 2015
Foreign currency translation difference
Change in fair value of cash flow hedges (net of tax)
Total comprehensive income for the year
Vested executive incentive share transactions
Share-based employee benefits expense
Income tax relating to share-based transactions
during the year
Balance at 30 June 2016
Foreign
currency
translation
reserve
Employee
benefits
reserve
Available-
for-sale
revaluation
reserve
Hedge
reserve
(2.6)
–
(3.6)
–
–
(3.6)
–
–
–
(6.2)
(0.3)
–
(2.3)
(2.3)
–
–
–
(2.6)
(18.4)
0.4
–
–
–
0.4
–
–
–
(18.0)
(27.8)
9.4
–
9.4
–
–
–
(18.4)
12.2
–
–
–
–
–
(1.0)
5.6
(2.7)
14.1
12.3
–
–
–
(5.2)
4.9
0.2
12.2
–
–
–
18.3
(19.1)
(0.8)
–
–
–
(0.8)
–
–
–
–
–
–
–
–
Total
(8.8)
0.4
(3.6)
18.3
(19.1)
(4.0)
(1.0)
5.6
(2.7)
(10.9)
(15.8)
9.4
(2.3)
7.1
(5.2)
4.9
0.2
(8.8)
Hedge reserve
The hedge reserve comprises the effective portion of the cumulative net change in the fair value cash flow hedging instruments
relating to future transactions.
Foreign currency translation reserve
The foreign currency translation reserve comprises foreign exchange differences arising from the translation of the financial statements
of operations where their functional currency is different to the presentation currency of the Group.
Employee benefit reserve
The employee benefit reserve is used to recognise the fair value of share-based payments issued to employees over the vesting period,
and to recognise the value attributable to the share-based payments during the reporting period.
Available-for-sale revaluation reserve
The fair value reserve includes the cumulative net movement above cost of the fair value of available-for-sale investment until the
asset is realised or impaired or control of an acquiree is obtained at which time the cumulative gain or loss previously recognised in the
available-for-sale revaluation reserve is included in the profit or loss.
Annual Report 2017 85
E6. Dividends
a) Ordinary shares
Dividend per share (in Australian cents)
Franking percentage
Cost (in $’m)
Dividend record date
Payment date
2017
Final
2017
Interim
2016
Final
2016
Interim
12.0
100%
71.4
12/09/2017
10/10/2017
12.0
100%
51.0
16/02/2017
16/03/2017
12.0
100%
51.0
18/08/2016
15/09/2016
12.0
100%
51.7
18/02/2016
17/03/2016
Recognition and measurement
Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the entity,
before or at the end of the financial year but not distributed at balance date.
The final 2017 dividend has not been declared at the reporting date and therefore is not reflected in the consolidated
financial statements.
Total
4.28
100%
8.6
Total
4.81
100%
9.6
b) Redeemable Optionally Adjustable Distributing Securities (ROADS)
2017
Quarter 1
Quarter 2
Quarter 3
Quarter 4
Dividend per ROADS (in Australian cents)
New Zealand imputation credit percentage
Cost (in A$’m)
Payment date
1.08
100%
2.1
15/09/2016
1.09
100%
2.2
15/12/2016
1.03
100%
2.1
15/03/2017
1.08
100%
2.2
15/06/2017
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
c) Franking credits
The franking account balance as at 30 June 2017 is nil (2016: nil).
86 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2017 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
Acquisition of controlling interest
Acquisition of businesses
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
Interest in associates at the end of the financial year
Interest in joint ventures and associates
Note
F2
2017
$’m
17.3
15.8
(15.9)
–
1.8
–
19.0
64.3
6.7
(2.0)
69.0
88.0
2016
$’m
13.3
14.4
(9.6)
(1.1)
–
0.3
17.3
70.0
3.3
(9.0)
64.3
81.6
Annual Report 2017 87
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
Ownership interest
Country of
operation
2017
%
2016
%
Asphalt plant
Construction of bitumen storage facility
Bitumen importer
Catering for functions at Eden Park
Joint ventures
Allied Asphalt Limited
Bitumen Importers Australia Joint Venture
Bitumen Importers Australia Pty Ltd
Eden Park Catering Limited (i)
EDI Rail-Bombardier Transportation Pty Ltd Sale and maintenance of railway rolling stock
Emulco Limited
Isaac Asphalt Limited
RTL Mining and Earthworks Pty Ltd
VEC Shaw Joint Venture
ZFS Functions (Pty) Ltd (i)
Emulsion plant
Manufacture and supply of asphalt
Contract mining, civil works and plant hire
Road construction
Catering for functions at Federation Square
New Zealand
Australia
Australia
New Zealand
Australia
New Zealand
New Zealand
Australia
Australia
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
50
50
50
50
50
50
50
44
50
50
27
49
49
50
50
50
–
50
50
50
44
50
–
27
49
49
(i) Spotless joint ventures acquired as part of the Spotless Group Holdings Limited acquisition. 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
the 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.
88 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2017 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
2017
%
2016
%
BPL Downer Joint Venture
CDJV Construction Pty Ltd
China Hawkins Construction JV
Clough Downer Joint Venture
CMC and Downer Joint Venture
Concrete Paving Recycling Pty Ltd
Dampier Highway Joint Venture
Downer-Carey Mining JV
Downer Clough Joint Venture
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
Downer York Joint Venture
Hatch Downer JV
HCMT Supplier JV
John Holland EDI Joint Venture
John Holland Pty Ltd & Downer Utilities
Australia Pty Ltd Partnership
Karlayura ReGen Joint Venture
Landloch ReGen Joint Venture
Building construction
Employment of labour force deployed in
Clough Downer
Building Construction
Gas compression facilities and pipelines
Road construction
Road maintenance
Highway construction and design
Management of run of mine and ore
rehandling services
Ammonium nitrate production
Construction
Design and construction of rail works
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
Singapore
Australia
New Zealand
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
New Zealand
Australia
Australia
New Zealand
Tramline extension
Australia
Design and construction of solvent extraction plant Australia
Australia
Rail build supplier
Research reactor
Australia
Operation of water recycling plant at Mackay
Australia
Road construction
Rehabilitation works, earthworks and plant
monitoring and maintenance
Design and construction of pipes and structures
Road construction
Road construction
LD&C Joint Venture
Leighton Works Joint Venture
Macdow Downer Joint Venture
(Russley Road)
Macdow Downer Joint Venture (CSM2)
Macdow Downer Joint Venture (Connectus) Rail construction
Organic Water Joint Venture
Road construction
Synergy Joint Venture
Thiess Downer EDI Works
Design, construction and operation
of water recycling plant
Road and pavement construction
Construction of coast to coast railway
Australia
Australia
Australia
New Zealand
New Zealand
New Zealand
New Zealand
Australia
Australia
Australia
50
50
50
50
50
49
50
46
50
50
50
90
50
60
50
50
50
50
50
40
50
50
(iii)
37.5
50
50
50
50
50
33
25
50
50
–
50
50
–
50
46
50
50
50
90
50
60
50
50
–
50
–
40
50
50
(iii)
37.5
50
50
–
–
50
33
25
Annual Report 2017 89
F1. Joint arrangements and associate entities – continued
b) Interest in joint operations – continued
Name of joint operation
Thiess VEC Joint Venture
Utilita Water Solutions
Waanyi ReGen JV
Wiri Train Depot Joint Venture
York Civil Pty Ltd and Downer EDI
Engineering Pty Ltd Joint Venture (iv)
Principal activity
Highway construction
Plant maintenance
Rehab contract services
Construction of the Wiri train depot
Construction of water pump station
Ownership interest
Country of
operation
Australia
Australia
Australia
New Zealand
Australia
2017
%
50
50
50
50
–
2016
%
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 2017 following completion of the contract.
F2. Acquisition of businesses
2017
The goodwill arising from acquisitions made during the financial year ended 30 June 2017 is as follows:
Cash
Consideration payable
Contingent consideration
Available-for-sale investment fair value gain
Non-controlling interest at fair value
Less: Net identifiable (liabilities) / assets acquired
Goodwill arising from acquisitions
(i) Other includes the acquisition of Hawkins, ITS PipeTech, RPQ and AGIS.
Note
C5
Spotless
$’m
Other (i)
$’m
Total
$’m
702.1
110.8
–
19.1
435.2
1,267.2
(384.1)
1,651.3
148.0
–
20.2
–
–
168.2
20.3
147.9
850.1
110.8
20.2
19.1
435.2
1,435.4
(363.8)
1,799.2
90 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2017 F2. Acquisition of businesses – continued
2017 – continued
The provisional value of assets and liabilities recognised as a result of the acquisitions made in the financial year ended
30 June 2017 is as follows:
Cash and other cash equivalents
Trade and other receivables
Inventories
Other current assets
Equity accounted investments
Property, plant and equipment
Intangibles
Non-current trade and other receivables
Net deferred tax asset / (liability)
Other non-current assets
Current tax receivable
Intercompany amounts receivable by the Group on acquisition
Trade and other payables
Provisions
Borrowings
Financial liabilities
Current tax payable
Non–current trade and other payables
Effects of foreign exchange translation
Net identifiable (liabilities) / assets acquired
Note
Spotless
$’m
Other (i)
$’m
Total
$’m
F1
C6
C7
B4
66.0
412.7
32.0
11.3
1.8
281.2
65.9
73.4
59.4
25.8
–
–
(381.6)
(162.7)
(848.3)
(2.3)
(7.2)
(11.5)
–
(384.1)
5.4
63.7
3.0
0.2
–
26.2
23.1
–
(3.7)
–
0.1
1.5
(86.2)
(13.6)
–
–
–
–
0.6
20.3
71.4
476.4
35.0
11.5
1.8
307.4
89.0
73.4
55.7
25.8
0.1
1.5
(467.8)
(176.3)
(848.3)
(2.3)
(7.2)
(11.5)
0.6
(363.8)
The total net cash outflow as a result of the acquisitions made during the financial year ended 30 June 2017 is as follows:
Gross purchase consideration (ii)
Less: Net cash acquired
Less: Contingent consideration
Total cash consideration
Spotless (iii)
$’m
702.1
(66.0)
–
636.1
Other (i)
$’m
168.8
(5.4)
(20.2)
143.2
Total
$’m
870.9
(71.4)
(20.2)
779.3
(i) Other includes the acquisition of Hawkins, ITS PipeTech, RPQ and AGIS.
(ii)
(iii) If the acquisition had taken place effective 1 July 2016, with 100% control being achieved, Spotless would have contributed additional revenue of $3,006.3 million and loss
Included in Other is the $0.6 million final deferred consideration payment made for Scarrif Pipelines which was acquired on 1 July 2013.
after tax of $347.4 million.
The valuation techniques used for measuring the fair value of material assets acquired were as follows:
Asset acquired
Valuation technique
Trade and other receivables
Cost technique – considers the expected economic benefits receivable when due.
Property, plant and equipment
Market comparison technique and cost technique: the valuation model considers quoted market
prices for similar items when available and depreciated replacement cost when appropriate.
Intangible assets
Multi-period excess earnings method: considers the present value of net cash flows expected to
be generated by the customer contracts and relationships, intellectual property and brand names,
excluding any cash flows related to contributory assets. For the valuation of certain brand names,
discounted cash flow under the relief from royalty valuation methodology has been utilised.
Trade and other payables
Cost technique – considers the expected economic outflow of resources when due.
Borrowings
Provisions
Cost technique – considers the expected economic outflow of resources when due.
Cost technique – considers the probable economic outflow of resources when the obligation arises.
Annual Report 2017 91
F2. Acquisition of businesses – continued
2017 – continued
Spotless
Spotless operates in Australia and New Zealand and provides
outsourced facility services, catering and laundry services,
technical and engineering services, maintenance and asset
management services and refrigeration solutions to various
industries. The acquisition of Spotless enhances the Group’s
contract portfolio, with long-term contracts that provide high
certainty over revenues; contributes a complementary, high
quality customer base and makes Downer an integrated services
provider with a comprehensive range of capabilities.
On 20 March 2017, the Group acquired an interest equivalent to
19.99% in the issued capital of Spotless Group Holdings Limited
(Spotless) which comprised the following:
– 15% shareholding at a weighted average of $1.146
per share; and
– An economic interest equivalent to 4.99% accumulated via
total return cash-settled equity swap, at a weighted average
reference price of $0.815 per share.
On obtaining the initial shareholding the Group announced an
offer for the remaining shares pursuant to a takeover at a price of
$1.15 per share.
On 27 June 2017, the Group obtained an interest stake in
Spotless of 50.3%, which gave the Group control over Spotless.
The acquisition of an interest exceeding 50% triggered an
automatic two weeks extension to the Offer period to 11 July
2017. During the automatic extension period, the Group obtained
an additional 15.4% interest in Spotless, taking total ownership to
65.7%. Consequently, a Non-Controlling Interest (NCI) of 34.3%
has been recognised as at 30 June 2017.
The Group has elected to recognise the NCI at fair value, which
has been assessed to be the offer share price on the date of
control ($1.15 per share). This resulted in a minority interest of
$435.2 million being recognised at 30 June 2017.
On consolidation, the investment in Spotless and pre-acquisition
equity balances have been eliminated with a preliminary
recognition of goodwill of $1,651.3 million. Due to the proximity
of the acquisition to the financial year end, the accounting of
the Spotless acquisition will remain provisionally determined
at 30 June 2017 with the determination of the fair value of the
acquired identifiable assets and liabilities to be finalised in
FY18, as the measurement period allowed by AASB 3 Business
Combinations is up to 12 months from the date of acquisition.
92 Downer EDI Limited
The following table summarises the NCI in relation to the
Spotless acquisition:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Net assets
NCI percentage
Net assets attributable to NCI
$’m
522.0
2,158.8
(1,359.0)
(54.6)
1,267.2
34.343%
435.2
Hawkins
On 31 March 2017, the Group acquired the businesses of
Hawkins, for a gross consideration of $55.4 million. The principal
activities of Hawkins include construction, infrastructure
development and project management throughout New Zealand.
The Hawkins acquisition will complement existing engineering,
construction and maintenance capabilities in New Zealand.
The total cash outflow for this acquisition was $52.6 million
which comprised gross consideration of $55.4 million net of
$2.8 million cash balances acquired. The purchase consideration
was paid in two separate payments in March and June 2017.
At the date of acquisition, the net asset value of Hawkins was
($16.3) million due to negative working capital of the business,
resulting in $71.7 million of goodwill being recognised. The Group
has reported a provisional purchase price allocation with
the identification of intangible assets on acquisition not yet
completed due to the proximity of the transaction to year end.
ITS PipeTech
On 31 March 2017, the Group acquired 100% of ITS PipeTech Pty
Ltd (ITS), for a gross consideration of $45.0 million. The principal
activities of ITS include pipe bursting, civil maintenance and
robotics. ITS complements, grows and broadens existing pipeline
capabilities in the Utilities business.
The total cash outflow for this acquisition was $41.1 million
which comprised gross consideration of $45.0 million, net of
$0.6 million cash balances acquired and $3.3 million contingent
consideration. The contingent consideration is payable based
on achievement of financial targets over the periods through
to 30 June 2020.
At the date of acquisition, the net asset value of ITS was
$14.3 million inclusive of $9.4 million of acquired intangibles,
$1.6 million of customer contracts and $7.8 million of intellectual
property, resulting in $30.7 million of goodwill being recognised.
The Group has reported a provisional purchase price allocation
as the final determination of the fair value of acquired identifiable
assets and liabilities has not yet been finalised.
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2017 F2. Acquisition of businesses – continued
2017 – continued
RPQ Group
On 30 September 2016, the Group acquired 100% of RPQ Group
(RPQ) for a gross consideration of $51.1 million. The principal
activities of RPQ include the supply of asphalt, bitumen spray
sealing, road milling and profiling, road maintenance, foam
bitumen stabilisation, mobile asphalt production, mobile crushing
and equipment hire. The RPQ acquisition increases the Group’s
capabilities in the Transport business.
The total cash outflow for this acquisition was $42.8 million
which comprised gross consideration of $51.1 million, net of
$0.8m cash balances acquired and $7.5 million contingent
consideration. The contingent consideration comprises two
seperate conditions being to cover claims relating to warranties
and indemnities from pre-acquisition activities and a restraint for
the manufacture of certain products.
At the date of acquisition, the net asset value of RPQ was
$15.8 million inclusive of $5.0 million of acquired intangibles,
$2.0 million of customer contracts and $3.0 million of brand
names, resulting in $35.3 million of goodwill being recognised.
AGIS
On 1 July 2016, the Group acquired 100% of AGIS Group
Pty Limited (AGIS) for a gross consideration of $16.7 million.
AGIS provides project management, systems engineering and
integration, and capability development advice to a range of
government agencies including the Department of Defence,
Australian Defence Forces and the Department of Foreign Affairs
and Trade. The AGIS acquisition expands the Group’s footprint in
the Defence sector.
Total cash outflow for this acquisition was $6.1 million,
which comprised gross consideration of $16.7 million, net of
$1.2 million cash balances acquired and $9.4 million contingent
consideration. The contingent consideration is payable based
on earnout metrics being met over the next three years. At the
date of acquisition, the net asset value of AGIS was $6.5 million
inclusive of $6.9 million of acquired intangibles, $5.2 million of
customer contracts and $1.7 million of brand names, resulting in
$10.2 million of goodwill being recognised.
Goodwill from Acquisitions
The goodwill resulting from the above acquisitions represents
the future market development, expected revenue growth
opportunities, technical talent and expertise, and the benefits
of expected synergies. 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 from these acquisitions is expected to be
deductible for tax purposes.
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).
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.
(i) Acquisition achieved in stages
Where a business combination is achieved in stages, the Group’s
previously held equity interest in the acquiree is remeasured to
fair value at the acquisition date (i.e. the date when the Group
attains control) and the resulting gain or loss, if any, is recognised
in profit or loss. Amounts arising from interests in the acquiree
prior to the acquisition date that have previously been recognised
in other comprehensive income are reclassified to profit or loss
where such treatment would be appropriate if that interest were
disposed of or control of the acquiree obtained.
(ii) Contingent consideration
The subsequent accounting for changes in the fair value of
contingent consideration that do not qualify as measurement
period adjustments depends on how the contingent consideration
is classified. Contingent consideration that is classified as
equity is not remeasured at subsequent reporting dates and its
subsequent settlement is accounted for within equity.
Contingent consideration that is classified as an asset or
liability is remeasured at subsequent reporting dates with the
corresponding gain or loss being recognised in profit or loss.
(iii) Non-controlling interest
The Group can elect, on an acquisition by acquisition basis,
to recognise non-controlling interests in an acquired entity
either at fair value or at the non-controlling interest’s share of
the acquired entity’s net identifiable assets / (liabilities).
Key estimate and judgement: Accounting
for acquisition of businesses
Accounting for acquisition of businesses requires judgement
and estimates in determining the fair value of acquired assets
and liabilities. The relevant accounting standard allows the
fair value of assets acquired to be refined for a window of a
year after the acquisition date and judgement is required to
ensure that the adjustments made reflect new information
obtained about facts and circumstances that existed as of
the acquisition date. The adjustments made on fair value of
assets are retrospective in nature and have an impact on
goodwill recognised on acquisition.
Annual Report 2017 93
F3. Disposal of subsidiary
2017
The Group did not dispose any business during the period ended 30 June 2017.
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
incurred a $2.3 million loss as a result of this transaction.
F4. Controlled entities
The controlled entities of the Group listed below were wholly owned during the current and prior year, unless otherwise stated:
Australia
AGIS Group Pty Ltd (iii)
ASPIC Infrastructure Pty Ltd (iii)
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 Investments Holdings Pty Ltd (v)
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
Downer Victoria PPP Maintenance Pty Ltd (v)
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)
ITS PipeTech Pty Ltd (iii)
LNK Group Pty Ltd (v)
Locomotive Demand Power Pty Ltd
Lowan (Management) Pty. Ltd.
Maclab Services Pty Ltd (iii)
Mineral Technologies (Holdings) Pty Ltd
Mineral Technologies Pty Ltd
New South Wales Spray Seal Pty Ltd (iii)
94 Downer EDI Limited
Australia – continued
Otraco International Pty Ltd
Otracom Pty Ltd
Primary Producers Improvers Pty Ltd
QCC Resources Pty Ltd (iv)
Rail Services Victoria Pty Ltd
REJV Services Pty Ltd
Reussi Pty Ltd (ii)
Roche Bros. Superannuation Pty. Ltd.
Roche Services Pty Ltd
RPC Roads Pty Ltd
RPQ Pty Ltd (iii)
RPQ Asphalt Pty Ltd (iii)
RPQ North Coast Pty Ltd (iii)
RPQ Services Pty Ltd (iii)
RPQ Spray Seal Pty Ltd (iii)
SACH Infrastructure Pty Ltd
Snowden Holdings Pty Ltd
Snowden Mining Industry Consultants Pty Ltd
Snowden Technologies Pty Ltd
Southern Asphalters Pty Ltd
Trico Asphalt Pty Ltd (iii)
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 PNG Limited (v)
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 New Zealand Projects 3 Limited (v)
Downer Utilities Alliance New Zealand Limited
Downer Utilities New Zealand Limited
Downer Utilities PNG Limited
Green Vision Recycling Limited
Hawkins 2017 Limited (iii)
Hawkins Project 1 Limited (iii)
ITS Pipetech (Fiji) Limited (iii)
Richter Drilling (PNG) Limited
Roche Mining (PNG) Limited (iv)
Techtel Training & Development Limited
Underground Locators Limited
Waste Solutions Limited
Works Finance (NZ) Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2017 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
Asia
Chan Lian Construction Pte Ltd
ChangChun Ao Hua Technical Consulting Co Ltd (v)
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 (iv)
MD Mineral Technologies Private Limited
PT Duffill Watts Indonesia
PT Otraco Indonesia
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
Spotless (vi)
AE Smith & Son Proprietary Ltd (vii)
AE Smith & Son (SEQ) Pty Ltd
AE Smith & Son (NQ) Pty Ltd
AE Smith Building Technologies Pty Ltd
AE Smith Service Holdings Pty Ltd
AE Smith Service Pty Ltd
AE Smith Service (SEQ) Pty Ltd
Aladdin Group Services Pty Limited (vii)
Aladdin Holdings Pty Limited (vii)
Spotless (vi) – continued
Aladdin Laundry Pty Limited (vii)
Aladdin Linen Supply Pty Limited (vii)
Asset Services (Aust) Pty Ltd (vii)
Berkeley Challenge Pty Limited (vii)
Berkeley Challenge (Management) Pty Limited (vii)
Berkeleys Franchise Services Pty Ltd (vii)
Berkeley Railcar Services Pty Ltd (vii)
Bonnyrigg Management Pty Ltd (vii)
Cleandomain Proprietary Limited (vii)
Cleanevent Australia Pty Ltd (vii)
Cleanevent Holdings Pty Ltd (vii)
Cleanevent International Pty Ltd (vii)
Cleanevent Technology Pty Ltd (vii)
Emerald ESP Pty Ltd
Ensign Services (Aust) Pty Ltd (vii)
Errolon Pty Ltd (vii)
Fieldforce Services Pty Ltd (vii)
Infrastructure Constructions Pty Ltd (vii)
International Linen Service Pty Ltd (vii)
Monteon Pty Ltd (vii)
Nationwide Venue Management Pty Ltd (vii)
Nuvogroup (Australia) Pty Ltd (vii)
NG-Serv Pty Ltd (vii)
Pacific Industrial Services BidCo Pty Limited (vii)
Pacific Industrial Services FinCo Pty Limited (vii)
Riley Shelley Services Pty Ltd (vii)
Skilltech Consulting Services Pty Ltd (vii)
Skilltech Metering Solutions Pty Ltd (vii)
Sports Venue Services Pty Ltd (vii)
Spotless Defence Services Pty Ltd (vii)
Spotless Facility Services Pty Ltd (vii)
Spotless Financing Pty Limited (vii)
Spotless Group Holdings Limited
Spotless Group Limited (vii)
Spotless Investment Holdings Pty Ltd (vii)
Spotless Management Services Pty Ltd (vii)
Spotless Property Cleaning Services Pty Ltd (vii)
Spotless Securities Plan (Pty) Ltd (vii)
Spotless Services Australia Limited (vii)
Spotless Services International Pty Ltd (vii)
Spotless Services Limited (vii)
Spotless Facility Services (NZ) Limited
Spotless Holdings (NZ) Limited
Spotless Treasury Pty Ltd (vii)
SSL Asset Services (Management) Pty Ltd (vii)
SSL Facilities Management Real Estate Services Pty Ltd (vii)
SSL Security Services Pty Ltd (vii)
Taylors Two Two Seven Pty Ltd (vii)
Trenchless Group Pty Ltd (vii)
UAM Pty Ltd (vii)
Utility Services Group Holdings Pty Ltd (vii)
Utility Services Group Limited (vii)
(i) 70% ownership interest.
(ii) Entity currently undergoing liquidation.
(iii) Entity acquired during the financial year ended 30 June 2017.
(iv) Entity liquidated during the financial year ended 30 June 2017.
(v) Entity incorporated during the financial year ended 30 June 2017.
(vi) Entity acquired as part of the Spotless Group Holdings Limited acquisition. The ownership interest equals to the ownership interest in Spotless described in Note F2.
(vii) These Spotless wholly-owned entities all form part of the tax consolidated group of which Spotless Group Holdings Limited is the head entity.
Annual Report 2017 95
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.
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
2017
$’m
2016
$’m
1,108.8
1,305.2
2,414.0
29.9
6.4
36.3
2,377.7
2,243.2
120.4
14.1
2,377.7
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
117.6
117.6
172.2
172.2
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 2017 (2016: nil) other than those disclosed in Note C9.
The parent entity does not have any commitments for acquisition of property, plant and equipment as at 30 June 2017 (2016: nil).
96 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2017 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 2016, as follows:
– AASB 2014-3 Amendments to Australian Accounting
Standards – Accounting for Acquisitions of Interests in
Joint Operations;
– AASB 2015-1 Amendments to Australian Accounting
Standards – Annual Improvements to Australian Accounting
Standards 2012-2014 Cycle;
– AASB 2015-2 Amendments to Australian Accounting
Standards – Disclosure Initiative: Amendments
to AASB 101; and
– AASB 2015-9 Amendments to Australian Accounting
Standards – Scope and Application Paragraphs.
Adoption of these standards has not resulted in any material
changes to the Group’s financial statements.
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
AASB 9 addresses the classification, measurement and
derecognition of financial assets and financial liabilities
and introduces new rules for hedge accounting and a new
impairment model for financial assets. The standard is not
applicable until 1 July 2018.
The Group expects existing hedge relationships would appear
to qualify as continuing hedge relationships upon adoption of
the new standard and does not expect the standard to have a
significant impact on the recognition or measurement of the
Group’s financial instruments.
The new impairment model requires the recognition of
impairment provisions based on expected credit losses rather
than only incurred credit losses. Whilst the Group has yet to
finalise its detailed assessment of the impact of AASB 9 and its
interaction with AASB 15 it may result in earlier recognition of
credit loss provisions.
The new standard also introduces expanded disclosure
requirements and changes in presentation. These are expected
to change the nature and extent of the Group’s disclosure about
its financial instruments particularly in the year of adoption of
the new standard.
AASB 15 – Revenue from Contracts with Customers
AASB 15 changes the way revenue is recognised and provides
for a significant increase in the disclosure requirements for
the business. 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. This means that revenue will be recognised when
control of goods or services is transferred rather than on transfer
of risks and rewards.
The standard is only expected to impact those contracts that
are ongoing at the date of adoption. The Group is in the process
of assessing the full impact of the application of AASB 15, which
involves carrying out a review of all existing major contracts
to ensure the impact and effect of the new standard is fully
understood in advance of the effective date. As at 30 June 2017,
a high level impact assessment has been performed across the
Group along with detailed contract reviews on a sample of key
contracts across the divisions. The Group has also performed
project assessments across new long-term service contracts.
AASB 15 will become mandatory for reporting periods beginning
on or after 1 July 2018. The Group does not intend to early
adopt this standard before its mandatory effective date and
therefore AASB 15 will be applied for the first time in the 2019
Financial Report.
Annual Report 2017 97
G1. New accounting standards – continued
While a detailed assessment is yet to be concluded, the Group
expects the following impacts:
– AASB 15 has a higher threshold of probability and therefore
revenue is to be recognised only when it is highly probable
that a significant reversal will not occur. It is expected this
will impact the timing/quantum of project variances, variable
and incentive based payments, and claims recognised as
part of “amounts due from customers under contract and
rendering of services”.
– AASB 15 requires only incremental costs of obtaining a
contract to be capitalised and then expensed over the
contract period.
– Implementation may require some development of current
reporting systems and processes.
The new standard also introduces expanded disclosure
requirements and changes in presentation, particularly in
relation to key judgements and future revenue expected to be
generated. These are expected to change the nature and extent
of the Group’s disclosure about its revenue from contracts with
customers and associated assets, particularly in the year of
adoption of the new standard.
AASB 15 needs to be implemented either fully retrospectively,
which would require restatement of comparatives, or using the
cumulative effect method, which would not require a restatement
of comparatives, upon the effective date of 1 July 2018. AASB 15
contains a number of practical expedients for the full retrospective
approach including the option to omit the restatement impact
of completed contracts that begin and end within the same
annual reporting period and / or completed at the beginning of
the earliest period presented. The transaction price at the date
of contract completion may also be used, rather than estimating
variable consideration amounts in each comparative period.
Contract modifications presented in the earliest reporting period
may not be required to be separately evaluated. The Group is in
the process of assessing the available options for transition.
AASB 16 – Leases
AASB 16 will replace the current leasing standard AASB 117, and
contains significant changes to the accounting treatment of
leases around how to recognise, measure and disclose leases.
The new standard provides a single lessee accounting model,
requiring lessees to recognise assets and liabilities for all leases,
with the exception of short-term (less than 12 months) and
low value leases. AASB 16 applies to annual reporting periods
beginning on or after 1 July 2019.
As at reporting date, the Group has non-cancellable operating
lease commitments of $608.6 million (refer to Note E3
Commitments). The Group manages its owned and leased assets
to ensure there is an appropriate level of equipment to meet its
current obligations and to tender for new work. The decision as
to whether to lease or purchase an asset is dependent on the
finance available at the time and the residual risk of ownership
following the anticipated completion of the project.
98 Downer EDI Limited
To date, management has focused on the identification of
the provisions of the standard which will most impact the
Group and is in the process of determining whether any
additional arrangements in excess of the current portfolio
will be considered as a lease, together with a review of the
lease contracts and financial reporting systems in place.
As such, the Group has not quantified yet the effect of the
new standard; however the following impacts are expected on
implementation date:
– Total assets and total liabilities will increase, due to the
recognition of a “Right of Use Asset” and a “Lease Liability”
grossing up the assets and liabilities in the Consolidated
Statement of Financial Position;
– Interest expense will increase due to the effective interest
rate implicit in the lease, where the interest expense
component is higher on early years on the lease;
– Depreciation charge will increase as the right of use assets
is recognised;
– Lease rental expenses will decrease due to the recognition of
interest and depreciation noted above; and
– Operating cash flows will be higher as repayment of the
principle portion of all lease liabilities will be classified as
financing activities.
AASB 16 needs to be implemented retrospectively, either with
the restatement of comparatives or with the cumulative impact
of application recognised as at 1 July 2019 under the modified
retrospective approach. AASB 16 contains a number of practical
expedients, one of which permits the classification of existing
contracts as leases under current accounting standards to
be carried over to AASB 16. Under the modified retrospective
approach, on a lease-by-lease basis, the right of use of an asset
may be deemed to be equivalent to the liability at transition or
calculated retrospectively as at inception of the lease. The Group
is in the process of assessing the available options for transition.
Other
The following new or amended standards are not expected
to have a significant impact on the Group’s consolidated
financial statements:
– AASB 2016-1 Amendments to Australian Accounting
Standards – Recognition of Deferred Tax Assets for
Unrealised Losses;
– AASB 2016-2 Amendments to Australian Accounting
Standards – Disclosure Initiative: Amendments to AASB 107;
– AASB 2016-5 Amendments to Australian Accounting
Standards – Classification and Measurement of Share-based
Payment Transactions;
– AASB 2014-10 Amendments to Australian Accounting
Standards: Sale or Contribution of Assets Between an
Investor and its Associate or Joint Venture; and
– IFRIC23 Uncertainties over Income Tax Treatments.
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2017 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:
Financial
assets(i)
2017
$’m
2016
$’m
Financial
liabilities(i)
2016
$’m
2017
$’m
1.9
0.6
0.1
2.6
4.8
1.2
0.7
6.7
11.8
0.3
1.0
13.1
11.7
–
–
11.7
US dollar (USD)
New Zealand dollar (NZD)
Euro (EUR)
(i) The above table shows foreign currency financial assets and liabilities in
Australian dollar equivalent.
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, to maintain an Investment Grade
credit rating and to ensure ongoing access to funding.
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.
The Group may enter into a variety of derivative financial
instruments to manage its exposures including:
i) Forward foreign exchange contracts to hedge the exchange
rate risk arising from cross-border trade flows, foreign
income and debt service obligations;
ii) Cross-currency interest rate swaps to manage the 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 Consolidated
Statement of Financial Position.
Annual Report 2017 99
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 NZD
Less than 3 months
3 to 6 months
Later than 6 months
Weighted average
exchange rate
2017
2016
0.7165
0.7529
0.7492
0.7165
0.7328
0.7304
0.7294
0.7351
0.7628
0.7109
–
–
0.6818
0.6790
0.6735
0.6325
0.6191
–
1.0542
1.0547
1.0558
–
–
–
Foreign currency
Contract value
Fair value
2017
FC’m
2016
FC’m
2017
$’m
2016
$’m
2017
$’m
2016
$’m
30.3
4.1
81.8
116.2
1.5
4.9
1.0
7.4
30.9
0.4
0.4
31.7
4.1
11.4
28.8
44.3
7.2
10.5
0.3
18.0
0.8
–
–
0.8
6.4
2.1
–
8.5
–
–
–
–
42.3
5.5
109.2
157.0
2.1
6.7
1.3
10.1
45.3
0.6
0.6
46.5
3.9
10.8
27.2
41.9
10.0
14.3
0.5
24.8
1.2
–
–
1.2
10.1
3.3
–
13.4
–
–
–
–
(1.4)
(0.1)
(2.3)
(3.8)
0.1
0.3
–
0.4
0.7
0.1
–
0.8
–
(0.1)
(0.1)
(0.2)
(0.4)
(0.2)
–
(0.6)
0.1
–
–
0.1
(0.7)
(0.2)
–
(0.9)
–
–
–
–
100 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2017 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)
2017
%
2016
%
Weighted average
exchange rate
2017
2016
7.8
5.9
7.8
5.9
0.7168
0.7739
0.7168
0.7739
Outstanding
contracts
Buy USD / Sell AUD
1 to 5 years
5 years or more
Contract value
Fair value
2017
$’m
9.8
129.2
139.0
2016
$’m
9.8
129.2
139.0
2017
$’m
2016
$’m
(0.9)
(4.7)
(5.6)
(0.5)
2.8
2.3
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 the United States dollar (USD), Euro (EUR) and New Zealand dollar (NZD).
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
NZD impact
– 15% rate change
+ 15% rate change
Profit/(loss)(i)
Equity(ii)
2017
$’m
2016
$’m
(1.7)
1.3
(0.2)
0.1
–
–
(1.2)
0.9
0.1
(0.1)
–
–
2017
$’m
24.9
(18.4)
7.1
(7.1)
(6.9)
5.1
2016
$’m
4.1
(3.0)
1.4
(1.4)
–
–
(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.
(ii) This is as a result of the changes in the value of forward foreign exchange contracts designated as cash flow hedges.
Annual Report 2017 101
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
Cash and cash equivalents
Total cash flow exposure
Fixed interest rates – fair value exposure
Bank loans (i)
USD notes (i)
AUD notes
AUD medium term notes (2009-1) (i) (ii)
AUD medium term notes (2013-1) (iii)
AUD medium term notes (2015-1) (iii)
Supplier finance
Finance lease and hire purchase
Total fair value exposure
Weighted average
interest rate
(including credit margin)
2017
%
3.3
1.7
4.0
6.0
5.8
7.2
6.0
4.7
–
4.2
2016
%
3.8
2.1
–
6.0
5.8
7.2
6.0
4.7
4.9
5.2
Liability/(asset)
2017
$’m
2016
$’m
733.7
(844.6)
(110.9)
107.0
144.7
30.0
13.6
150.0
250.0
–
35.8
731.1
23.7
(569.4)
(545.7)
–
141.7
30.0
27.5
150.0
250.0
5.8
28.1
633.1
(i) The values of the interest rate and cross-currency swaps have been included in the debt amounts.
(ii) The underlying medium term notes were issued on a floating rate basis and fixed through interest rate swaps.
(iii) Weighted average interest rate is shown on a yield-to-maturity basis.
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.
The table above relates to amounts that are drawn. The Group has a number of undrawn facilities, which if utilised would be on a
floating rate basis.
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 value 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
Less than 1 year
1 to 2 years
NZD interest rate swaps
Less than 1 year
102 Downer EDI Limited
Weighted average
interest rate
Notional
principal amount
2017
%
2016
%
3.8
5.2
4.7
–
5.2
–
2017
$’m
81.8
13.3
25.2
120.3
2016
$’m
–
26.6
–
26.6
Fair value
2017
$’m
(1.6)
(0.2)
(0.7)
(2.5)
2016
$’m
–
(0.8)
–
(0.8)
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2017 G2. Capital and financial risk management – continued
d) Interest rate risk management – continued
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 100 basis points on profit and equity across the yield curve of the
relevant currencies (2016: 50 and 75 basis points on profit and equity respectively). 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, in addition to those
at the AA- level.
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 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 responsibility, which has been built on an appropriate risk management framework under the Group’s
Treasury policy.
The Group manages liquidity risk by maintaining adequate cash reserves and committed undrawn debt facilities, by monitoring forecast
and actual cash flows and by matching the maturity profiles of financial assets and liabilities. Included in Note E2 is a summary of
committed undrawn bank loan facilities.
Annual Report 2017 103
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.
Less than
1 year
1 to 2
years
2 to 3
years
3 to 4
years
4 to 5
years
More than
5 years
Total
2016
Trade payables
1,434.0
187.0
358.9
–
$’m
2017
Trade payables
Finance lease and hire purchase 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 (ii)
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 (ii)
Total
(i) Bond basis.
(ii)
Includes assets and liabilities.
104 Downer EDI Limited
527.6
21.2
836.6
6.5
1.7
13.7
8.6
11.3
878.4
(6.5)
8.4
2.2
2.7
6.8
–
9.0
2.1
6.5
1.7
–
154.3
11.3
175.9
(6.5)
8.4
–
0.2
2.1
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
–
4.9
–
15.4
1.7
–
–
11.3
28.4
(15.3)
17.8
–
–
2.5
35.8
–
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
–
1.0
–
6.0
1.7
–
–
11.3
19.0
(5.9)
7.6
–
–
1.7
21.7
–
0.1
–
15.8
1.7
–
–
11.3
28.8
(15.9)
17.8
–
–
1.9
30.8
–
–
–
6.0
1.7
–
–
261.3
269.0
(5.9)
7.7
–
–
1.8
–
–
–
151.0
36.1
–
–
–
187.1
(150.8)
155.8
–
–
5.0
270.8
192.1
–
–
–
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
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2017 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 remains in equity
until the forecast transaction occurs.
Annual Report 2017 105
G3. Other financial assets and liabilities
2017
$’m
At amortised cost:
Other financial assets
Advances to / 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
Contingent consideration
Total
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
Financial assets
Financial liabilities
Current Non-current
Current Non-current
9.8
1.5
11.3
1.2
–
1.2
–
–
–
12.5
13.4
–
13.4
–
–
–
3.7
–
3.7
17.1
–
13.2
13.2
3.8
3.5
7.3
–
3.3
3.3
23.8
–
–
–
0.2
4.6
4.8
–
16.9
16.9
21.7
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
Reconciliation of Level 3 fair value measurements of financial assets
Level 3 investments decreased by $1.4 million from prior year (2016: $1.1 million decrease) mostly due to revaluation and
return on investment.
106 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2017 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.
Contingent Consideration
Calculated on the amounts expected to be
paid based on the probability of contingent
events and targets being achieved,
determined by reference to forecasts
of future performance of the acquired
businesses discounted using the market
rates prevailing at financial year end.
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.
Assumptions are made with regard
to future expected earnings and
discount rates on certain of the
contingent arrangements.
Annual Report 2017 107
Directors’ Declaration
for the year ended 30 June 2017
In the opinion of the Directors’ of Downer EDI Limited:
(a) The financial statements and notes set out on pages 53 to 107 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, 29 August 2017
108 Downer EDI Limited
Sustainability Performance Summary 2017
Downer’s philosophy:
Downer exists to create and sustain the modern environment by
building trusted relationships with its public and private sector
customers. Downer recognises that sustainability is vital for
securing long-term environmental, economic and social viability
and understands its role in contributing to a sustainable future
for communities to prosper.
Sustainability at Downer means being a valued contributor to the
communities in which it operates, being a responsible employer
and minimising the impact the business has on the environment.
Downer’s approach to sustainability is intrinsically linked to
its business strategy because the sustainability of Downer’s
activities is fundamental to the Company’s future success.
Importantly, Zero Harm is embedded in Downer’s culture. Zero
Harm means sustaining a work environment that not only
supports the health and safety of people, but also minimises
the impact that Downer’s operations have on the environment,
including through the maximisation of resource efficiency.
As a service provider, Downer’s contribution to sustainability is
also achieved by providing its customers with industry leading
solutions that drive efficiency thereby reducing the impact that
customer operations have on the environment.
Downer works closely with the local communities in which
it operates, implementing a range of strategies focusing on
social responsibility, local and indigenous employment, cultural
heritage management and stakeholder engagement.
In relation to its own workforce, Downer believes its people are
its greatest asset. Downer supports and fosters diversity and
inclusiveness in the workplace and provides programs that focus
on skills development and career pathways.
Governance and Risk Management:
Downer uses a company-wide Risk Management Framework
and divisional integrated management systems to identify
and manage sustainability issues and opportunities. Downer
has been certified (as a minimum) to the following standards:
AS/NZS 401 or OHSAS 18001 (for occupational health and safety
management systems); ISO 14001 environmental management
systems; and IS0 9001 quality management systems.
The Board’s Zero Harm Committee oversees the development
and implementation of Downer’s workplace health and safety
and environmental management systems. The effectiveness
of these systems is monitored through extensive internal and
third-party audit programs, with oversight by both the Board
Zero Harm and Board Audit and Risk Committees. Other aspects
of Downer’s approach to Sustainability are overseen by the
Group Diversity Committee and other relevant corporate
governance forums.
Downer’s Zero Harm performance during FY17 is summarised
below. More comprehensive information is provided in Downer’s
2017 Sustainability Report which will be available on the
Downer website.
Health and safety
Health and safety is Downer’s top priority. Downer believes
that any injury is unacceptable and preventable and Downer
is committed to the pursuit of Zero Harm to its employees,
contractors, and those who are directly affected by the
Company’s operations. This goal is supported by the strong
leadership of Downer’s senior managers who are actively
engaged in enabling and empowering Downer’s people to
maintain safe working environments for themselves and the
community. Downer has a mature safety culture which fosters
sustained efforts by everyone in its workplaces to work together
to keep each other safe.
Downer’s strategic plan for critical risk management continues to
be the key focus of its Zero Harm program. Downer continues to
understand and manage the low-likelihood, high-consequence
risks – the ‘critical risks’ – that have the potential to cause
serious injury to people. Implementation of the plan in FY17
focused on the ongoing evaluation and assurance of the critical
controls by multiple layers of management and frontline leaders.
Downer has focused on the development of its frontline leaders,
and during FY17 continued to implement its Group-wide Zero
Harm Management System Framework’s performance criteria.
Downer continues to show strong performance against the
health and safety lag indicators with Lost Time Injury Frequency
Rate (LTIFR)1 below 1 and the Total Recordable Injury Frequency
Rate (TRIFR)2 below 4. During FY17, LTIFR decreased from 0.66
in FY16 to 0.55 representing a 16.7% decrease in injuries that
resulted in time lost. TRIFR increased slightly from 3.32 in FY16
to 3.50. There were no fatalities.
1
2
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.
Annual Report 2017 109
Sustainability Performance Summary 2017 – continued
Downer received no fines or recorded convictions in FY17 as a
result of breaches of occupational health and safety legislation.
LTIFR
TRIFR
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
2010 2011
2012
2013
2014
2015
2016
2017
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
Environmental Sustainability
Downer’s environmental sustainability performance is measured
against the key areas of risk management, compliance,
minimising environmental impact and maximising resource
efficiency opportunities in its own and its customers’ businesses.
Downer’s key focus areas during the year were:
– Managing its top environmental critical risks by verifying that
critical controls were in place and effective;
– Incorporating sustainability design principles and initiatives
into major projects;
– Increasing employee knowledge and awareness of
environmental sustainability practices; and
– Increasing internal and external engagement of Downer’s
environmental capability.
There were no significant environmental incidents3 (≥ Level 4)
during FY17 which means Downer achieved its Group-wide
target of zero Level 54 or Level 65 environmental incidents.
However, Downer received four fines in its Australian
operations, totalling $34,780, and two fines in New Zealand,
totalling NZD$1,500 (see the 2017 Sustainability Report for
further details).
Downer operates within a number of highly carbon-intensive
industry sectors and recognises that climate change presents
a challenge to business, society and the natural environment.
Downer is committed to participating in climate change solutions
by developing processes and technology to reduce its direct
emissions and overall energy consumption.
Downer’s response to climate change requires an integrated
approach focusing on compliance, business improvement and
business development opportunities. This year, Downer has
commenced a review of its climate disclosure practices with the
view to aligning with the framework and recommendations of
the Taskforce on Climate-related Financial Disclosures (TCFD)
for disclosure reporting. Downer has been reporting its annual
carbon performance through voluntary disclosure in annual
sustainability reports and to CDP for many years.
Downer’s sustainability management has a focus on reducing
greenhouse gas (GHG) emissions associated with its operations
and provides the framework for identifying energy efficient
and carbon abatement opportunities across the Company’s
value chain. Climate related risks on major projects are typically
assessed by the project owner through various government
environmental planning and approvals processes. Downer
works in partnership with its customers to address climate
related risks by providing leading design, engineering and low
carbon solutions.
Reducing GHG emissions and improving energy efficiency are
supported by Downer’s business-specific energy management
plans that identify opportunities to maximise operational
efficiency, as well as manage the Company’s carbon footprint
relative to its business activities. These plans include annual
targets for GHG emissions reductions (Scopes 1, 2 and
defined Scope 36).
In FY17, more than 50 new projects were implemented that
have the capacity to deliver 186 terajoules of annualised energy
savings, equivalent to the abatement of over 12 kilotonnes of
CO2-e emissions across Scopes 1, 2 and defined Scope 3.
Downer is also one of Australia’s largest and most experienced
providers in the renewable energy sector offering design, build
and maintenance services for wind farms, wind turbine sites and
solar farms. Downer has been involved in the construction of
about half the wind turbines built in Australia and has recently
worked on the Sunshine Coast, Clare and Ross River solar farms.
When the Ross River Solar Farm is completed, Downer will have
facilitated the delivery of more than 2.3GW of renewable energy
to the Australian market.
3
4
5
6
A significant environmental incident or significant environmental spill (≥Level 4) is any environmental incident or spill where there is significant impact on or material harm
to the environment; or a notifiable incident where there is a spill that results in significant impact or material harm; or there is long-term community irritation leading to
disruptive actions and requiring continual management attention.
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.
110 Downer EDI Limited
Corporate governance
for the year ended 30 June 2017
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 2017, 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 is fomalised through the Downer Diversity
& Inclusiveness (D&I) Policy which outlines the Company’s
commitment to developing a diverse and inclusive workforce.
In 2016, Downer launched a revised Diversity Framework.
The purpose of this framework is to support the D&I Policy and
implementation of Divisional D&I strategies.
The Diversity & 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 2017 with respect to its broader diversity program,
but with a particular focus on gender, and specifically includes:
– Details of Downer’s key gender representation metrics;
– An overview of the gender diversity initiatives undertaken by
Downer throughout 2017; and
– An outline of Downer’s measurable gender diversity
objectives for 2018.
Gender representation metrics
As at 30 June 2017, the gender representation metrics
were as follows:
– Three of the six Non-executive Directors on the Downer
Board are women;
– Women currently make up 13.9% of Senior Executive1 roles;
– 11.1% of Manager2 roles are held by women; and
– Women constitute approximately 13.5% 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.
Annual Report 2017 111
Looking back: 2017 measurable objectives
Objective
Outcome
To ensure a coordinated and integrated
approach to D&I through the restructuring of
the Group Diversity Steering Committee (GDSC)
and Divisional Diversity Steering Committees
(DDSCs) 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’ Reconciliation Action Plan
(RAP) from Reconciliation Australia.
To continue the association with Jawun in
Australia and Māori based leadership programs
in New Zealand
In July 2016, Downer launched a revised Diversity Framework. This framework
now includes six DDSCs who report quarterly to the GDSC. The objective of the
DDSCs is to support and promote a diverse and inclusive workplace through the
implementation of their D&I Plans.
Regular talent reviews across the business continue to improve visibility of
the female talent that we have within Downer. As a result of the Performance
Development Review (PDR) process, 8 female employees have participated in
Downer’s Executive Development program in the last 18 months. Actions which
support female participation and development within the business have also
been included in the Divisional D&I Plans.
Divisional D&I Plans have been drafted and signed-off by the respective
leadership teams. These plans have a focus on (but are not limited to) gender.
Progress of these plans is reported to the GDSC on a quarterly basis.
Downer is committed to adopting a flexible approach to work in order to attract
and retain a talented and diverse workforce. With the establishment of the
DDSCs, responsibility for workplace flexibility is owned by the Divisions to ensure
policies, tools and training in relation to flexible work meet the requirements of
their workforce which includes salaried and waged employees.
A ‘like for like’ Gender Remuneration Review for salaried employees commenced
in December 2015 and has been ongoing. Recommendations implemented as a
result of this review include:
– The creation of a gender remuneration action plan;
– Identification of causes for the gaps;
– Reporting of pay equity metrics to the Downer Board and Executive
Committee; and
– Correction of like-for-like gaps.
The review remains ongoing.
Downer is committed to building on its existing relationships with Aboriginal and
Torres Strait Islander peoples, their communities and organisations. In September
2016, Downer launched its ‘Reflect’ RAP. Led by a Working Group, this RAP
affirms Downer’s commitment to the reconciliation process and provides the
Company with a practical framework to focus its efforts over a 12 month period.
In the 2017 financial year, 12 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. Following the ongoing
success of their Māori leadership programs, Downer New Zealand received
(in August 2016) the ‘Emerging Diversity & Inclusion Program Award’ at the
New Zealand Diversity Awards.
112 Downer EDI Limited
Corporate governance – continuedfor the year ended 30 June 2017 Looking ahead: 2018 measurable objectives
– Through the Talent Management & Succession Planning
process ensure that identified top female talent (across the
Divisions) have active performance and development plans
that are tracking to plan.
– Develop tools, policies and training in relation to Flexible
Work and pilot within the Rail Division to ensure that
individual and business needs are met. Set and monitor
targets to measure employee engagement in flexible work
and report to the GDSC.
– Review and update Downer’s Parental Leave Policy to include
employer funded paid parental leave for secondary carers.
– Following the successful delivery of Downer’s ‘Reflect’ RAP,
draft an ‘Innovate’ RAP which includes a focus on cultural
learning, Aboriginal and Torres Strait Islander employment
and supplier diversity.
– To continue the association with Jawun in Australia and
Māori based leadership programs in New Zealand.
– Establish baseline data on Aboriginal & Torres Strait Islander
people working at Downer.
Principle 2: Structure the Board to add value
Throughout the 2017 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.
Annual Report 2017 113
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 current membership is set out in the table below.
Members
P S Garling
T G Handicott
C G Thorne
S A Chaplain
G A Fenn
E A Howell
S A Chaplain
T G Handicott
P S Garling
R M Harding
G A Fenn
R M Harding
G A Fenn
T G Handicott
R M Harding
G A Fenn
T G Handicott
R M Harding
E A Howell
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.
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.
Board Committee
Audit and Risk Committee
Chairman
S A Chaplain
Zero Harm Committee
C G Thorne
Nominations and Corporate
Governance Committee
Remuneration Committee
R M Harding
T G Handicott
Disclosure Committee
T G Handicott
Rail Projects Committee
P S Garling
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 18.
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.
114 Downer EDI Limited
Corporate governance – continuedfor the year ended 30 June 2017 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 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 its most recently appointed director, the
Board selected a candidate with over 30 years’ experience in the
legal profession.
The chart below illustrates the balance achieved with the
current Board composition. The Company recognises the value
of diversity which has been a component of the appointment
process over the past few years.
Professional qualifications
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 in years
9+
6–9
3–6
0–3
0.0
1.0
2.0
3.0
Gender diversity
Gender diversity
3
4
Male
Female
From time to time, Downer engages external specialists to assist
with the selection process as necessary, and the Chairman,
Board and Group CEO meet with nominees as part of the
appointment process.
Nominations for re-election of Directors are reviewed by the
Nominations and Corporate Governance Committee and
Directors are re-elected in accordance with the Downer
Constitution and the ASX Listing Rules.
As part of its commitment to leading corporate governance
practice, the Board undertakes improvement programs, including
externally facilitated periodic reviews of its performance and
that of its Committees and Directors. The last review was
completed during 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.
Annual Report 2017 115
Principle 3: Promote ethical and responsible
decision-making
Principle 4: Safeguard integrity
in financial reporting
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.
116 Downer EDI Limited
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 FY17, together with the individual
attendances of members at the meetings, is set out in the
Directors’ Report on page 18.
The Audit and Risk Committee Charter is available on the
Downer website at www.downergroup.com.
Corporate governance – continuedfor the year ended 30 June 2017
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.
Principle 7: Recognise and manage risk
To mitigate the risks that arise through its activities, Downer has
various risk management policies and procedures in place that
cover (among other matters) interest rate management, foreign
exchange risk management, credit risk management, tendering
and contracting risk and project management.
Downer has controls at the Board, executive and business unit
levels that are designed to safeguard Downer’s interests and
ensure the integrity of reporting (including accounting, financial
reporting, environment and workplace health and safety policies
and procedures). These controls are designed to ensure that
Downer complies with legal and regulatory requirements, as well
as community standards.
Downer has a Risk Management Framework in place to enable
business risks to be identified, evaluated and managed.
The 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 2016
Sustainability Report is available on the Downer website at
www.downergroup.com.
The Company’s internal audit function objectively evaluates and
reports on the existence, design and operating effectiveness of
internal controls. Downer’s internal audit team is independent
of the external auditor and reports to the Audit and
Risk Committee.
Downer’s Audit and Risk Committee assists the Board in
its oversight of Downer’s risk profile and risk policies, the
effectiveness of the systems of internal control and Risk
Management Framework and Downer’s compliance with
applicable legal and regulatory obligations. The Audit and
Risk Committee Charter is available on the Downer website at
www.downergroup.com.
Management reports regularly to the Audit and Risk Committee
on the effectiveness of Downer’s management of its material
business risks and on the progress of mitigation treatments.
Annual Report 2017 117
Principle 8: Remunerate fairly and responsibly
The Board has established a Remuneration Committee and has
adopted the Remuneration Committee Charter which sets out its
role and responsibilities, composition, structure and membership
requirements and the procedures for inviting non-committee
members to attend meetings.
The Remuneration Committee is responsible for reviewing and
making recommendations to the Board about:
– Executive remuneration and incentive policies;
– The remuneration, recruitment, retention, performance
measurement and termination policies and procedures for
all senior executives reporting directly to the Group CEO;
– Executive and equity-based incentive plans; and
– Superannuation arrangements and retirement payments.
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 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 20.
The Company’s previous Constitution allowed for retiring
Non-executive Directors to receive a retiring allowance, subject
to the limitations set out in the Corporations Act 2001 (Cth).
Consistent with the ASX Principles, the right to retirement
benefits was frozen in 2005. However, because remuneration
arrangements for some Non-executive Directors were in place
prior to 2005, where such retirement benefits have been paid
they have been fully provided for in the financial statements.
Directors entitled to a retirement benefit were paid a reduced
fee and once a Director’s accumulated reduction in base fees
reached the value of the retirement benefit, the applicable base
fee reverted to the general fee level. This was applied to
Mr Humphrey from 1 July 2009 who retired in November 2016.
No retirement benefit has been offered to any current
Non-executive Director.
Non-executive Directors do not participate in any equity
incentive schemes.
The remuneration structure for Executive Directors and senior
executives is designed to achieve a balance between fixed and
variable remuneration taking into account the performance of
the individual and the performance of the Company. Executive
Directors receive payment of equity-based remuneration as
short and long-term incentives.
Executive Directors and senior executives are prohibited from
entering into transactions in associated products which limit the
economic risk of participating in unvested entitlements under
any of the Company’s equity-based remuneration schemes.
Further details about the remuneration of Executive Directors
and senior executives are set out in the Remuneration Report
at page 20 and details of Downer shares beneficially owned by
Directors are provided in the Directors’ Report at page 4.
118 Downer EDI Limited
Corporate governance – continuedfor the year ended 30 June 2017 Information for Investors
for the year ended 30 June 2017
Downer shareholders
Share registry
Downer had 17,756 ordinary shareholders as at 30 June 2017.
The largest shareholder, HSBC Custody Nominees (Australia)
Limited, holds 34.18% of the 594,702,512 fully paid ordinary
shares issued at that date. Downer has 15,942 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 an overseas listed issuer 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 2017 119
Information for Investors – continued
for the year ended 30 June 2017
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
International Towers Sydney 3
300 Barangaroo Avenue
Sydney NSW 2000
Australian securities exchange information as at 30 June 2017
Number of holders of equity securities:
Ordinary share capital
594,702,512 fully paid listed ordinary shares were held by 17,756 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 2017.
Shareholders
Dimensional Fund Advisors
AustralianSuper Pty Ltd
Distribution of holders of quoted equity securities
Shareholder distribution of quoted equity securities as at 30 June 2017 is as follows.
Range of holdings
1 – 1,000
1,001 – 5,000
5,001 – 10,000
10,001 – 100,000
100,001 and over
Total
Holding less than a marketable parcel
of shares
Number of
Shareholders
Shareholders
%
10,135
5,815
1,053
693
60
17,756
890
57.08
32.75
5.93
3.90
0.34
Ordinary
shares held
30,507,546
30,148,052
% of issued
shares
5.13
5.07
Ordinary
shares held
4,355,027
13,496,350
7,644,968
14,831,146
554,375,021
594,702,512
Shares
%
0.73
2.27
1.29
2.49
93.22
100.00
120 Downer EDI Limited
Twenty largest shareholders
Downer’s 20 largest shareholders of ordinary fully paid shares as at 30 June 2017 are as follows.
Shareholders
HSBC Custody Nominees (Australia) Limited
Chase Manhattan Nominees Limited
Citicorp Nominees Pty Ltd
National Nominees Limited
BNP Paribas Nominees Pty Ltd – Agency Lending DRP A/C
Citicorp Nominees Pty Limited – Colonial First State Inv A/C
BNP Paribas Noms Pty Ltd
CPU Share Plans Pty Limited
HSBC Custody Nominees (Australia) Limited
RBC Investor Services Australia Nominees Pty Ltd
AMP Life Ltd
SBN Nominees Pty Limited <10004 Account>
Argo Investments Ltd
UBS Nominees Pty Ltd
Equity Trustees Limited –
Buttonwood Nominees Pty Ltd
National Nominees Limited
Mr Barry Sydney Patterson + Mrs Glenice Margaret Patterson
EQT Wealth Services Limited
BNP Paribus Noms (NZ) Ltd
Total for top 20 shareholders
On-market share buy-back
Shares held
203,278,049
132,725,455
94,988,046
49,018,513
15,373,022
11,790,456
11,573,160
5,315,344
5,298,545
2,928,660
2,165,170
2,162,800
1,809,538
1,478,890
1,307,104
1,156,265
1,030,897
891,642
805,569
770,090
545,867,215
% of issued
shares
34.18
22.32
15.97
8.24
2.58
1.98
1.95
0.89
0.89
0.49
0.36
0.36
0.30
0.25
0.22
0.19
0.17
0.15
0.14
0.13
91.76
On 5 August 2014, the Board resolved to undertake an ongoing share buy-back program that commenced on 20 August 2014. The total
number of shares acquired was 2,716,761. The Board determined to continue the share buy-back program with a further share buy-back
program that commenced on 4 September 2015 and ended on 1 September 2016. The total number of shares acquired was 7,898,010.
Annual Report 2017 121
122 Downer EDI Limited
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This page has been intentionally left blank. 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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