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Annual Report 2020

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Annual Report D o w n e r A n n u a l R e p o r t 2 0 2 0 This Annual Report includes the Downer EDI Limited Directors’ Report, the Annual Financial Report and the Independent Audit Report for the financial year ended 30 June 2020. The Annual Report is available on the Downer website www.downergroup.com. Contents Directors’ Report Page 4 Auditor’s signed reports Page 51 Page 52 Auditor’s Independence Declaration Independent Auditor’s Report Financial Statements Page 60 Page 61 Page 62 Page 63 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 64-65 Page 66-78 Page 79-91 Page 92-94 Page 95-102 Page 103-111 Page 112-124 B1 Segment information B2 Revenue C1 Reconciliation of cash and cash equivalents D1 Employee benefits E1 Borrowings F1 Joint arrangements and associate entities G1 New accounting standards C2 Trade receivables and contract assets D2 Defined benefit plan E2 Financing facilities F2 Acquisition of businesses B3 Individually significant items C3 Inventories D3 Key management personnel compensation E3 Lease liabilities F3 Controlled entities F4 Related party information F5 Parent entity disclosures B4 Earnings per share C4 Trade payables and contract liabilities D4 Employee discount share plan E4 Commitments E5 Issued capital E6 Non-controlling interest (NCI) E7 Reserves E8 Dividends B5 Taxation B6 Remuneration of auditor C5 Property, plant and equipment C6 Right-of-use assets B7 Subsequent events C7 Intangible assets C8 Lease receivables C9 Other provisions C10 Contingent liabilities Page 125 Directors’ Declaration Other information Page 126 Sustainability Performance Summary 2020 Page 130 Corporate Governance Page 140 Information for Investors G2 Capital and financial risk management G3 Other financial assets and liabilities Annual Report 2020 1 Highlights Downer’s Urban Services businesses performed well during the 2020 financial year with strong demand for the Group’s road, rail, power, gas, water, health, education, defence and government services. Total revenue of $13.4 billion was in line with the prior year. Downer reported a statutory net loss after tax of $155.7 million while underlying NPATA was $215.1 million, with $386.0 million ($320.9 million after tax) of items outside the underlying result. Total Revenue2 Underlying1 EBITA $13,417.9m $416.0m Underlying1 NPATA Operating Cash Flow $215.1m $178.8m 1 Underlying EBITA and NPATA are non-IFRS measures that are used by Management to assess the performance of the business. They have been calculated from the statutory measures and underlying EBITA is reconciled to statutory NPAT in the Directors’ Report Group Financial Performance section on page 11. 2 Total revenue is a non-statutory disclosure and includes revenue from joint ventures, other alliances and other income. 2 Downer EDI Limited Downer’s strategy is to focus on its core Urban Services businesses. These businesses have: – demonstrated strength and resilience – leading market positions and attractive medium and long-term growth opportunities – a high proportion of government and government-related contracts – a capital light, services-based business model generating lower risk, more predictable revenues and cash flows. The Downer Portfolio Downer Group Transport Utilities Facilities Asset Services Wind down & re-scope Core Non-core Road Services Telecommunications Government Oil & Gas Rollingstock Services Transport Projects Water Health & Education Power Generation Power & Gas Defence Building Industrial Infrastructure & Construction (Facilities) Engineering & Construction (EC&M) Under review / to be sold Mining Laundries (Facilities) Hospitality (Facilities) Annual Report 2020 3 Directors’ Report for the year ended 30 June 2020 The Directors of Downer EDI Limited submit the Annual Financial Report of the Company for the financial year ended 30 June 2020. In compliance with the provisions of the Corporations Act 2001 (Cth), the Directors’ Report is set out below. Board of Directors R M HARDING (71) 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 Horizon Oil Limited and a Director of Cleanaway Waste Management Limited. He is a former Chairman of Roc Oil Company Limited, Clough Limited and ARC Energy Limited and a former Director of Santos Limited. Mr Harding will retire from the Board of Lynas Limited on 30 September 2020. Mr Harding holds a Masters in Science, majoring in Mechanical Engineering. Mr Harding lives in Sydney. G A FENN (55) Managing Director and Chief Executive Officer since July 2010 Mr Fenn has over 30 years’ experience in operational management, strategic development and financial management. He joined Downer in October 2009 as Chief Financial Officer and was appointed Chief Executive Officer in July 2010. He was previously a member of the Qantas Executive Committee, holding a number of senior roles over 14 years, as well as Chairman of Star Track Express and a Director of Australian Air Express. He worked at KPMG for eight years before he joined Qantas. Mr Fenn is currently a Director of Sydney Airport Limited and Spotless Group Holdings Limited and a Member of the UTS Engineering and IT Industry Advisory Board. Mr Fenn holds a Bachelor of Economics from Macquarie University and is a member of the Australian Institute of Chartered Accountants. Mr Fenn lives in Sydney. P S GARLING (66) 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, Energy Queensland Limited and Newcastle Coal Infrastructure Group and a Director of Charter Hall Limited. He is a former Director of Spotless Group Holdings Limited and a past President of Water Polo Australia Limited. Mr Garling holds a Bachelor of Building from the University of New South Wales and the Advanced Diploma from the Australian Institute of Company Directors. He is a Fellow of the Australian Institute of Building, Australian Institute of Company Directors and Institution of Engineers Australia. Mr Garling lives in Sydney. T G HANDICOTT (57) 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 currently the Chairman of listed company PWR Holdings Limited and of Peak Services Holdings Pty Ltd, which is the subsidiary of the Local Government Association of Queensland that is responsible for its commercial operations. Ms Handicott is also a Divisional Councillor of the Queensland Division of the Australian Institute of Company Directors. Ms Handicott is a former Director of CS Energy Limited, a former member of the Queensland University of Technology (QUT) Council, 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, Fellow of the Australian Institute of Company Directors and Member of Chief Executive Women, Ms Handicott holds a Bachelor of Laws (Hons) degree from the Queensland University of Technology. Ms Handicott lives in Brisbane. 4 Downer EDI Limited N M HOLLOWS (49) Independent Non-executive Director since June 2018 Ms Hollows has over 20 years’ experience in the resources sector in a number of senior managerial roles across both the public and private sectors, including in mining, utilities and rail. Her experience spans operational management, accounting and finance, mergers and acquisitions, capital management and corporate governance. Ms Hollows is the Non-executive Chair of Jameson Resources Limited, Chair of The Salvation Army Brisbane Red Shield and Fundraising Committee, a member of the Salvation Army Queensland Advisory Council and a member of the CEO Advisory Committee for Dean of Queensland University of Technology (QUT) Business School. P L WATSON (63) Independent Non-executive Director since May 2019 Mr Watson has extensive experience in the construction and engineering sectors in senior executive and governance roles, including in the industrial, transport, defence, health, justice and utilities sectors. He was Chief Executive Officer and Managing Director of Transfield Services Limited, now known as Broadspectrum, for 10 years. During this period, he led the business through a successful transition, cultivating a sustainable and successful public company. He also has considerable experience in various Non-executive Director roles. Mr Watson is currently a Consultant of Stephenson Mansell Group where he provides coaching and mentoring to senior executives. She was formerly the Chief Executive Officer of SunWater Limited, a Queensland Government owned corporation; the Chief Financial Officer and subsequently Chief Executive Officer of Macarthur Coal Limited; Managing Director of AMCI Australia and South East Asia; and Interim Chair of Queensland Rail Limited. Mr Watson is a former Chairman of LogiCamms Limited, Watpac Limited, Regional Rail Link Authority in Victoria and AssetCo Management which managed PPP assets; a former Director of the Major Transport Infrastructure Board in Victoria, Yarra Trams and Save the Children Australia; and was a Board member of Infrastructure Australia. A Fellow of the Australian Institute of Company Directors and a Member of Chief Executive Women and the Institute of Chartered Accountants, Ms Hollows holds a Bachelor of Business – Accounting and a Graduate Diploma in Advanced Accounting (Distinction) from the Queensland University of Technology and is a Graduate of Harvard Business School’s Program for Management Development. A Fellow of the Australian Academy of Technological Sciences and Engineering and member of the Institute of Engineers Australia and Australian Institute of Company Directors, Mr Watson holds a Diploma of Civil Engineering from the Caulfield Institute of Technology and is a Graduate of the Wharton Advanced Management Program of the University of Pennsylvania. Ms Hollows lives in Brisbane. Mr Watson lives in Melbourne. Annual Report 2020 5 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 Fenn1 P S Garling T G Handicott N M Hollows P L Watson Number of Fully Paid Ordinary Shares Number of Fully Paid Performance Rights Number of Fully Paid Performance Options 28,856 1,877,464 19,962 17,000 13,000 16,799 – 646,097 – – – – – – – – – – 1 Performance rights granted to Mr Fenn are subject to performance and/or service period conditions over the period 2017 to 2022. 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. – Implementing plans for office staff to work remotely where possible and increasing social distancing measures in all offices – Restricting visitors to customer sites and locations to only essential employees and contractors – Implementing temperature testing procedures at sites – Banning all non-essential business travel – Applying all current Government mandated guidelines relating to travel and self-isolation – Regular communication with employees reinforcing correct hygiene, self-isolation and social distancing practices. Downer has also put in place strategies to minimise the impact of COVID-19 on its employees and the communities in which it operates, including: – Increasing the focus on mental health support and activities for employees – Establishing a hardship program for affected workers – Establishing a redeployment and retraining program for displaced workers – Providing support for vulnerable community initiatives. Under the New Zealand Government’s Level 4 restrictions, Downer was only able to perform about 30% of its usual services. These restrictions were eased from late April 2020 and service levels then began gradually returning to normal. In Australia, Spotless’ Hospitality business has been generating virtually no revenue since COVID-19 regulations were introduced in March 2020. As a result, Downer reduced the size of this business in June to reflect the smaller scale of operations. Company Secretary The Company Secretarial function is responsible for ensuring that the Company complies with its statutory duties and maintains proper documentation, registers and records. It also provides advice to Directors and officers about corporate governance and gives practical effect to any decisions made by the Board. Mr Robert Regan was appointed Group General Counsel and Company Secretary in January 2019. He has qualifications in law from the University of Sydney and is an admitted solicitor in New South Wales. Mr Regan was formerly a partner of Corrs Chambers Westgarth and has over 30 years of experience in legal practice. Mr Peter Lyons was appointed joint Company Secretary in 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. Review of Operations COVID-19 Downer has complied with all Government regulations and advice in relation to the COVID-19 pandemic and has robust Business Continuity Plans in place. Senior managers communicate regularly with their teams to ensure they are fully informed about the evolving situation and putting in place appropriate strategies. Downer has implemented a range of control measures across its offices and sites to minimise the risks of COVID-19 transmission. This includes: – Increased cleaning of site amenities and facilities, including availability of hand sanitiser on all sites – Ensuring face-to-face meetings involve as few employees as possible and practising appropriate social distancing measures when these do take place 6 Downer EDI Limited Directors’ Report – continuedfor the year ended 30 June 2020Several other Downer businesses have also experienced a reduction in revenue, however there has been no material impact on demand for the majority of Downer’s Australian businesses, including: Road Services; Rollingstock Services; Transport Projects; Utilities; Defence consulting; Defence base and estate management; Health and Education; and Government services. In addition, Downer announced during the year that it would focus its construction efforts on areas where it has a competitive differentiation. As a result, Downer will no longer tender for “hard dollar” construction contracts in the solar, coal, iron ore and industrial E&I (electrical and instrumentation) and SMP (structural, mechanical and piping) sectors. Downer is committed to working closely with its customers and partners to minimise the impact on operations while keeping its employees and communities safe. Principal Activities Downer EDI Limited (Downer) is a leading provider of integrated services in Australia and New Zealand. Downer employs approximately 52,000 people, mostly in Australia and New Zealand but also in the Asia-Pacific region, South America and Southern Africa. Downer reports its results under five service lines: Transport; Utilities; Facilities; Engineering, Construction and Maintenance (EC&M); and Mining. Downer’s strategy is to focus on the core Urban Services businesses within the Transport, Utilities and Facilities service lines because they have: – Demonstrated strength and resilience – Leading market positions and attractive medium and long- term growth opportunities – A high proportion of government and government- related contracts – A capital light, services-based business model generating lower risk, more predictable revenues and cash flows. On 21 July 2020, Downer announced a package of initiatives to reshape the Group in line with its Urban Services strategy and create a stronger platform for long-term, sustainable growth. These initiatives are: – Achieving 100% ownership of Spotless (at the date of this Annual report, Downer owned 88% of Spotless) – Exiting non-core businesses – Right-sizing the cost base and operating model to align with the Urban Services strategy – A non-cash impairment of $165.0 million relating to the Spotless cash generating units. Downer has made an unconditional offer to acquire all of the issued share capital of Spotless not already owned by Downer. It is expected that the outcome of this offer will be known by the end of the 2020 calendar year. In relation to exiting non-core businesses, Downer is exploring the potential sale of its Mining portfolio (in parts or as a whole) and reviewing the prospects of its Hospitality business (within the Facilities service line) to determine which parts will continue and which will be exited or sold. Downer is also considering the sale of its Laundries business (within Facilities). For the 2020 financial year, an outline of each of the five services lines is set out below. Transport Transport comprises Downer’s Road Services, Transport Projects, and Rollingstock Services businesses. Total revenue1 (FY20) EBITA2 (FY20) 35.0% 48.8% Transport 1 2 Total revenue is a non-statutory disclosure and includes revenue, other income and notional revenue from joint ventures and other alliances not proportionately consolidated. Downer calculates EBITA by adjusting EBIT to add back acquired intangibles amortisation expense. Due to rounding, divisional percentages do not add up precisely to 100%. Road Services Downer manages and maintains road networks across Australia and New Zealand and manufactures and supplies products and services to create safe, efficient and reliable journeys. 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 road in Australia and more than 25,000 kilometres in New Zealand. Downer creates and delivers solutions to our customers’ challenges through strategic asset management and a leading portfolio of products and services. Downer is a leading manufacturer and supplier of bitumen-based products and an innovator in the sustainable asphalt industry and circular economy, using recycled products and environmentally sustainable methods to produce asphalt. Downer’s road network solutions are underpinned by industry- leading research, development and innovation, unique asset management tools and a commitment to safety, environment and sustainability through industry awarded Zero Harm programs. Downer has formed a number of strategic partnerships to meet the changing needs of our customers and markets. Downer has long-term asset stewardship and road management contracts through DM Roads in Australia, and a number of alliances in New Zealand such as the Infrastructure Alliance in Hamilton, Whanganui Alliance, Tararua Alliance, Waikato District Alliance and the Milford Road Alliance. Annual Report 2020 7 Downer works for all of Australia’s State road authorities, the New Zealand Transport Agency and a large number of local government councils and authorities in both countries. Customers also include road owners and businesses operating in industries including waste collection and management, mining, construction, airports and motor racing tracks. Transport Projects Downer delivers multi-disciplined infrastructure solutions to customers within the transport sector. The services provided by Downer include the design and construction of light rail, heavy rail, signalling, track and station works, rail safety technology, bridges and roads. Downer has a long history of delivering transport infrastructure projects under a variety of contracting models. Downer’s integrated capabilities enable intelligent transport solutions, road network management and maintenance, facility maintenance, utilities services and renewable energy technologies. Rollingstock Services Downer has over 100 years’ rail experience providing end-to-end, innovative transport solutions. Downer is a leading provider of rollingstock asset management services in Australia, with expertise in delivering whole-of- life asset management support to our customers. Downer’s capability spans all sectors, from rollingstock to infrastructure, and every project phase, from design and manufacture to through-life-support, fleet maintenance, operations and comprehensive overhaul of assets. Downer sets industry best practice with forward-looking technology solutions to deliver safe, efficient and reliable services for the public transport sector. Downer has formed strategic joint ventures and relationships with leading technology and knowledge providers including Keolis, CRRC, Hitachi and Bombardier. 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 an integrated public transport system for the city of Newcastle in New South Wales. Keolis Downer is also one of Australia’s most significant bus operators. Downer’s rollingstock customers include Sydney Trains, Transport for NSW, Public Transport Authority (WA), Metro Trains Melbourne, Public Transport Victoria, and Queensland Rail. Utilities Downer offers a range of services to customers across the power and gas, water, communications and renewables sectors. Total revenue1 (FY20) EBITA2 (FY20) 20.0% 23.7% Utilities 1 2 Total revenue is a non-statutory disclosure and includes revenue, other income and notional revenue from joint ventures and other alliances not proportionately consolidated. Downer calculates EBITA by adjusting EBIT to add back acquired intangibles amortisation expense. Due to rounding, divisional percentages do not add up precisely to 100%. Power and Gas Downer’s services include planning, designing, constructing, operating, maintaining, managing and decommissioning power and gas network assets. A collaborative approach has made Downer a benchmark end-to-end service provider to owners of utility assets. Downer designs and constructs steel lattice transmission towers, designs and builds substations, constructs and maintains electricity and gas networks, provides asset inspection and monitoring services, connects tens of thousands of new power and gas customers each year and provides meter, energy and water efficiency services for governments, utilities and corporations. Our performance on the network is benchmarked at activity unit level, repeatedly demonstrable and assessed against continually improving key performance indicators. Water Downer delivers complete water lifecycle solutions for municipal and industrial water users. Downer’s expertise includes water treatment, wastewater treatment, water and wastewater network construction and rehabilitation, desalination and biosolids treatment. As a leading provider of asset management services, Downer supports its customers across the full asset lifecycle from conceptual development through to design, construction, commissioning and into operations and maintenance. Downer collaborates with customers to manage their assets, so they create community benefits that are sustainable, innovative, cost-effective and provide value to all stakeholders. 8 Downer EDI Limited Directors’ Report – continuedfor the year ended 30 June 2020Communications Downer is a leading provider of end-to-end technology and communications service solutions, offering integrated civil construction, electrical, fibre, copper and radio network deployment capability throughout Australia and New Zealand. Key capabilities include: – Design, engineering and network construction of fixed and wireless networks – Mobile deployment: site acquisition, environmental and design services – Network operations and help desk outsourcing – Network maintenance – Warehousing and logistics – Smart metering – Smart home power and technology solutions – Fleet management – Network security – Remedial works and proactive maintenance – Customer connections, in-premise installations and service activations. Renewables Downer is one of Australia’s most experienced providers in the renewable energy market, delivering services to customers requiring both utility and commercial scale sustainable energy solutions. Downer offers trusted services and integrated solutions required for the entire asset lifecycle including procurement, assembly, design, construction, commissioning and maintenance for a range of renewable assets specifically in the wind, solar and power systems storage sectors including transmission and substations. Facilities The Facilities service line operates in Australia and New Zealand delivering facilities services to customers across a range of industry sectors including: defence; education; health; government; and hospitality. Total revenue1 (FY20) EBITA2 (FY20) 24.7% 21.6% Facilities 1 2 Total revenue is a non-statutory disclosure and includes revenue, other income and notional revenue from joint ventures and other alliances not proportionately consolidated. Downer calculates EBITA by adjusting EBIT to add back acquired intangibles amortisation expense. Due to rounding, divisional percentages do not add up precisely to 100%. Facilities businesses include Spotless, AE Smith, Alliance, Ensign, EPICURE, Mustard, Nuvo, Taylors and Envar. Spotless is the largest integrated facilities management services provider in Australia and New Zealand and its key capabilities include: – Air-conditioning, mechanical and electrical – Asset maintenance and management – Catering and hospitality – Cleaning – Facilities management – Laundry management – Security and electronic solutions – Utility support. The Facilities services line also includes Hawkins, New Zealand’s leading construction business. Hawkins delivers unique transformational projects across a variety of sectors including education, health, airports, commercial office buildings and heritage restorations. It leads the industry in civic projects including art galleries, event centres, stadiums and community facilities. Engineering, Construction and Maintenance (EC&M) Downer’s EC&M service line includes its Engineering & Construction and Asset Services businesses and works with customers in the public and private sectors delivering services including design, engineering, construction and maintenance of critical assets. Total revenue1 (FY20) EBITA2 (FY20) 8.7% (10.6)% EC&M 1 2 Total revenue is a non-statutory disclosure and includes revenue, other income and notional revenue from joint ventures and other alliances not proportionately consolidated. Downer calculates EBITA by adjusting EBIT to add back acquired intangibles amortisation expense. Due to rounding, divisional percentages do not add up precisely to 100%. Downer announced at its 2020 half-year results that it will focus its construction efforts on areas where it has a competitive differentiation. As a result, Downer will no longer tender for “hard dollar” construction contracts in the coal, iron ore and industrial E&I (Electrical and Instrumentation) and SMP (Structural, Mechanical and Piping) sectors. In the oil and gas sector, Downer’s capabilities cover the full range of services including maintenance, shutdown, turnaround and outage delivery, sustaining capital program delivery, project and commissioning services. Annual Report 2020 9 Downer is also the leading provider of original equipment manufacturer (OEM) maintenance and shutdown services essential in running Australia’s power stations, servicing customers that supply 80% of the National Electricity Market. Downer is an OEM specialist in the design, supply, construction, maintenance and overhaul of boilers, turbines and generating plants. Downer’s Mineral Technologies business is the world leader in fine physical mineral separation solutions, including spiral gravity concentrators, magnetic and electrostatic separation technology. Mineral Technologies delivers innovative, process solutions for iron ore beneficiation, mineral sands, silica sands, coal, chromite, gold, tin, tungsten, tantalum and several other fine materials. Mining Downer is one of Australia’s leading diversified mining contractors serving its customers across more than 60 sites in Australia, Papua New Guinea, South America and Southern Africa. Total revenue1 (FY20) EBITA2 (FY20) 11.6% 16.4% Mining 1 2 Total revenue is a non-statutory disclosure and includes revenue, other income and notional revenue from joint ventures and other alliances not proportionately consolidated. Downer calculates EBITA by adjusting EBIT to add back acquired intangibles amortisation expense. Due to rounding, divisional percentages do not add up precisely to 100%. Downer provides services at all stages of the mining lifecycle, including: – Exploration drilling – Open cut mining services in Australia – Underground mining services in Australia and Papua New Guinea – Drilling, explosives manufacture and supply, blasting and crushing – Tyre management (through the subsidiary Otraco International) – Mine closure and rehabilitation. Downer’s mining services customers include BHP Mitsubishi Alliance, Fortescue Metals Group, the Gold Fields-Gold Roads Resources joint venture, Karara Mining Ltd, Millmerran Power Partners, OZ Minerals and Stanwell Corporation Ltd. 10 Downer EDI Limited Group Financial Performance For the 12 months ended 30 June 2020, Downer reported total revenue in line with the prior year while earnings before interest, tax and amortisation of acquired intangible assets (EBITA) and statutory net profit after tax (NPAT) were both lower. The table below provides a comparison of the underlying earnings for FY20 versus underlying results for FY19 and a reconciliation to statutory NPAT. Underlying1 EBITA (A$m) Reporting Segment Transport Utilities Facilities2 Asset Services3 Core Urban Services Businesses Infrastructure & Construction (Spotless)2 Engineering & Construction (Downer)3 Businesses in wind down Mining Laundries2 Hospitality2 Businesses under review or to be sold Corporate Group Underlying EBITA Amortisation of acquired intangibles (pre-tax) Underlying EBIT Net interest expense Tax expense Underlying NPAT Amortisation of acquired intangibles (post tax) Underlying NPATA Items outside of underlying NPATA Tax effect on items outside NPATA Statutory NPATA Amortisation of acquired intangibles (post tax) Statutory NPAT Transport Utilities Facilities EC&M FY20 FY19 235.6 114.6 133.9 27.1 242.4 136.1 133.6 13.4 Variance (%) (2.8%) (15.8%) 0.2% >100% 511.2 525.5 (2.7%) Facilities (9.0) (3.1) >(100%) EC&M (69.2) (78.2) 79.0 9.1 (19.7) Mining Facilities Facilities 19.9 >(100%) 16.8 >(100%) 3.0% 76.7 (48.0%) 17.5 >(100%) 22.5 Unallocated 68.4 (85.4) 416.0 116.7 (98.4) 560.6 (41.4%) 13.2% (25.8%) (71.3) 344.7 (112.0) (67.5) 165.2 (70.4) 490.2 (82.4) (117.0) 290.8 (1.3%) (29.7%) (35.9%) 42.3% (43.2%) 49.9 215.1 49.3 340.1 1.2% (36.8%) (386.0) (28.0) >(100%) 65.1 (105.8) 13.5 >100% 325.6 >(100%) (49.9) (155.7) (49.3) (1.2%) 276.3 >(100%) 1 2 3 The underlying result is a non-IFRS measure that is used by Management to assess the performance of the business. Non-IFRS measures have not been subject to audit or review. Total underlying EBITA for the Facilities segment in FY20 was $114.3 million (FY19: $170.5 million). Refer to Note B1 on page 68. Total underlying EBITA for the EC&M segment in FY20 was loss $42.1 million (FY19: profit $33.3 million). Refer to Note B1 on page 68. Directors’ Report – continuedfor the year ended 30 June 2020A reconciliation of the underlying result to the statutory result is provided in the table below: $m Underlying result Historical contract claims adjustments Portfolio restructure and exit costs Payroll remediation costs Goodwill impairment Spotless shareholder class action Legal settlement Total items outside underlying result Statutory result – profit/(loss)  Net interest expense Tax expense (112.0) – – – – – – – (112.0) (88.9) 5.5 42.2 4.5 – 10.2 2.7 65.1 (23.8) EBITA 416.0 (18.8) (142.4) (16.3) (165.0) (34.0) (9.5) (386.0) 30.0 Deduct: Amortisation of acquired intangibles (post-tax) (49.9) – – – – – – – (49.9) NPATA 215.1 (13.3) (100.2) (11.8) (165.0) (23.8) (6.8) (320.9) (105.8) NPAT 165.2 (13.3) (100.2) (11.8) (165.0) (23.8) (6.8) (320.9) (155.7) Downer calculates EBITA and NPATA by adjusting EBIT and NPAT to add back acquired intangible assets amortisation expense. Group FY20: $71.3 million, $49.9 million after-tax. (FY19: $70.4 million, $49.3 million after-tax) Revenue Total revenue for the Group decreased by $30.4 million, or 0.2%, to $13.4 billion. Transport revenue increased by 7.9%, or $344.0 million, to $4.7 billion. This growth has been driven by continuing strong performance in the Road Services business particularly in Australia, increased contributions from Transport Projects, both in Australia and New Zealand, and strong performance in the Rollingstock Services business. Utilities revenue increased by 7.2%, or $181.3 million, to $2.7 billion due to increased activities in water, power and gas, as well as from new renewables projects. This was partially offset by reduced contribution from nbnTM contracts as the project winds down. Facilities revenue decreased by 2.3%, or $77.0 million, to $3.3 billion largely due to the impact of COVID-19 on Hospitality and projects completed in New Zealand not being fully replaced. This was partially offset by increased revenue from Government- related contracts and contribution from Envar (acquired in 2H19). EC&M revenue decreased by 31.5%, or $536.6 million, to $1.2 billion as a result of project completions, particularly the Ichthys contract, and reduced construction activity in line with Downer’s strategy. In the Asset Services business, COVID-19 resulted in deferrals of non-essential maintenance and shutdowns. Mining revenue increased by 4.8%, or $71.3 million, to $1.5 billion with higher activities at several sites partially offset by completed contracts at Roy Hill and Cloudbreak. COVID-19 impacted some operational activities due to travel restrictions. Expenses Total expenses increased by 3.4% compared to the prior corresponding period (pcp) and includes $386.0 million of items outside the underlying result, while the pcp included a $45.0 million individually significant item balance in relation to the Murra Warra wind farm contract. Excluding these items, total expenses increased by 0.7%, or $81.5 million. Employee benefits expenses decreased by 2.8%, or $123.1 million, to $4.2 billion and represent 32.9% of Downer’s cost base. The decrease is mainly due to a shift in the mix of labour, where subcontractors’ costs as a percentage of revenue has increased, as well as from the benefit of integration and restructuring activities across the Group. Included in Employee benefits expenses there is $51.0 million of pre-tax items in relation to portfolio restructure and exit costs and payroll remediation costs as described in Note B3 in the Financial Report. Excluding these items, employee benefits expenses would have decreased by 4.0%, or $174.1 million, and would represent 33.5% of Downer’s cost base. Subcontractor costs increased by 5.1%, or $212.3 million, to $4.4 billion and represent 34.4% of Downer’s cost base. This increase is a result of higher contract activities and the change in the subcontractor mix on some contracts during the year. Raw materials and consumables costs increased by 2.0%, or $43.3 million, to $2.2 billion and represent 16.9% of Downer’s cost base. The increase is mainly due to bogie overhaul activities in Rollingstock Services and from contract completion activities, particularly in the EC&M segment. Plant and equipment costs decreased by 4.2%, or $29.2 million, to $660.6 million and represent 5.2% of Downer’s cost base. The decrease in plant and equipment costs is attributed to a less capital-intensive business as well as initiatives to drive efficient plant and equipment usage and maintenance practices. Following the adoption of AASB 16 Leases from 1 July 2019, the depreciation charges in relation to the right-of-use assets is now recognised and disclosed separately. The depreciation charge against the right-of-use assets of $151.8 million represents 1.2% of Downer’s cost base. Annual Report 2020 11 Other depreciation and amortisation increased by 1.5%, or $5.5 million, to $365.5 million and represents 2.9% of Downer’s cost base. This increase is driven by ongoing investment in business-critical equipment over recent years. Impairment of non-current assets of $212.0 million represents $165.0 million impairment of goodwill and $47.0 million impairment of capitalised information systems, right-of-use assets; plant and equipment and leasehold improvement balances as a result of portfolio restructuring activities. Other expenses, which include communication, travel, occupancy and professional fees costs, decreased by $50.1 million or 7.3% to $632.5 million and represent 4.9% of Downer’s cost base. This decrease is primarily as a result of the application of AASB 16 Leases, which has resulted in the majority of the Group’s leases being brought on balance sheet, and therefore incurring depreciation and interest charges rather than operating lease rental charges that had previously been disclosed as part of Other expenses. Included in Other expenses is $94.9 million of pre-tax items as described in Note B3 of the Annual Report. Excluding these items, Other expenses would have decreased by 15.7%, or $100.0 million, to $537.6 million and would represent 4.3% of Downer’s cost base. Earnings The results of the Group have been adversely impacted by contract losses in the EC&M service line as well as by the impact of $367.2 million (pre-tax) of Individually Significant Items. Transport EBITA decreased by 2.8%, or $6.8 million, to $235.6 million driven by completed Transport Infrastructure projects in Australia and New Zealand, completion of the construction phase of contracts within Rollingstock Services, and lower contribution from the Keolis Downer JV as Yarra Trams patronage was impacted by COVID-19. Road Services in Australia continued to perform strongly. Utilities EBITA decreased by 15.8% to $114.6 million as a result of reduced contribution from nbnTM contracts as the project winds down and from telecommunications contract completions in New Zealand. Facilities EBITA decreased by 38.8%, or $66.1 million, to $104.4 million due to the significant impact of COVID-19 on the Hospitality business as well as completion of construction contracts not fully replaced. COVID-19 also reduced volumes in the Laundries business as elective surgery activities were restricted. This was partially offset by increased activity in Government contracts, including additional cleaning activities associated with COVID-19. EC&M reported an EBITA loss of $51.0 million for the year, a $84.3 million decrease compared to the pcp. This was primarily due to a small number of loss-making construction contracts as well as from the completion of contracts in the pcp not fully replaced. The Asset Services business grew despite COVID-19 causing cancellations and delays of plant maintenance and shutdown activities. 12 Downer EDI Limited Mining EBITA increased by 3.0% to $79.0 million driven by improved performance from existing contracts, the contribution of new contracts and benefits from restructuring initiatives. Corporate costs decreased by $13.0 million or 13.2% to $85.4 million following restructuring initiatives. Net finance costs, excluding $26.4 million of interest on lease liabilities arising from the changes in lease accounting under AASB 16 Leases, increased by $3.2 million or 3.9%, to $85.6 million as a result of increase in debt draw downs and debt refinancing to support business activities. The tax expense of $2.4 million results in an effective tax rate of (1.6)% which is lower than the statutory rate of 30.0% due to the impact of items including non-taxable distributions from joint ventures and lower tax rates in overseas jurisdictions (e.g. New Zealand) as well as non-deductible items outside statutory results such as the Spotless goodwill impairment of $165.0 million. Group Cash Flow and Financing Funding, liquidity and capital are managed at Group level, with Divisions focused on working capital and operating cash flow management. During the year ended 2020, the Group was successful in renegotiating the maturity dates of a significant portion of its debt facilities and establishing $787.8 million of new committed debt facilities, $500 million of which was established in direct response to the global COVID-19 pandemic to ensure the Group’s liquidity strength was maintained during a period of heightened global uncertainty and volatility. In addition, the Group deferred payment of the 2019 interim dividend of $83.3 million to further augment its strong liquidity position. On 21 July 2020, the Group announced the launch of a $400 million equity raising to support the acquisition of the remaining shares in Spotless and provide flexibility for continued investment in Downer’s core businesses. The Group now has no material debt facilities maturing in the 12 months to 30 June 2021 and a strong liquidity position which will assist in mitigating any further market volatility. Operating Cash Flow Operating cash flow before interest and tax was $340.4 million, a $416.6 million decrease from the prior year. Most of this decrease ($339.6 million) occurred in the first six months of the year as a result of lower operating cash flows in EC&M due to losses incurred on a small number of constructions contracts, the impact of project completions in Utilities, and Waratah bogie overhaul activities in Transport. Operating cash flow before interest and tax for the second half of the year was $320.9 million, compared to $397.9 million in the second half of the prior year. The decrease of $77.0 million is largely driven by the impact of COVID-19 and project completion activities across the Group. The operating cash flow in the second half of FY20 represents a 74.2% underlying EBITDA conversion. Directors’ Report – continuedfor the year ended 30 June 2020The Group delivered net operating cash flow of $178.8 million with a FY20 underlying EBITDA conversion of 39.5%. Net interest paid increased $32.8 million compared to the prior year. Of this increase, $26.4 million relates to interest payments in relation to the lease liabilities recognised on adoption of AASB 16 Leases from 1 July 2019. Investing Cash Total investing cash outflow was $397.9 million, $111.8 million lower than prior year, driven by $55.5 million lower payments for property, plant and equipment and $33.2 million less payments for business acquisitions. With the onset of COVID-19, the Group has deferred all non-essential investments. Debt and Bonding The Group’s performance bonding facilities totalled $2,034.8 million at 30 June 2020, $108.3 million lower compared to the pcp with $595.0 million undrawn. There is sufficient available capacity to support the ongoing operations of the Group. As at 30 June 2020, the Group had liquidity of $1,858.5 million comprising cash balances of $588.5 million and undrawn committed debt facilities of $1,270.0 million. The Group continues to be rated BBB (Stable) by Fitch Ratings. Group Financial Position The ongoing review of the Group’s compliance with Modern Award and Enterprise Agreements obligations has determined that the Group had a liability of $24.8 million for periods prior to 1 July 2018. As a result, prior year comparatives have been restated to properly reflect the opening balance of retained earnings, employee benefits provision and related deferred tax assets impact of $7.4 million. The after-tax impact of $17.4 million was reflected as an adjustment in opening retained earnings, of which $15.3 million was attributable to the parent and $2.1 million to non-controlling interests. In the analysis below, the balances as at 30 June 2019 are inclusive of the above adjustments. The net assets of Downer decreased $412.3 million or 13.6% to $2,620.5 million. The main drivers of this decrease are the impact of the $320.9 million of items outside the underlying results and the adoption of AASB 16 Leases from 1 July 2019 which resulted in an adjustment to opening retained earnings of $66.0 million. Net debt is calculated as borrowings (excluding lease liabilities) less the cash and cash equivalents. Net debt has increased $470.0 million to $1,462.8 million mainly driven by $122.2 million lower cash and cash equivalent balances and a lower operating cash flow to the pcp due to project completion activities as explained above. As a result of a lower cash balance, drawdowns made to support operational activities and a reduced equity resulting from the items recognised during the year, Group gearing at 30 June 2020 was 35.5% (calculated on a pre-AASB 16 basis) which is 10.5 percentage points higher than 30 June 2019. Total trade receivables and contract assets have increased 16.7% or $345.2 million to $2,411.1 million as a result of contract asset balance increases in EC&M and in Transport as a result of project commencements and bogie overhaul activities. Inventories have increased 9.7% or $29.4 million to $334.0 million driven by bogie overhaul activities in Transport and higher stock levels in Utilities as a result of new contracts. Current tax assets increased $7.5 million to $65.2 million due to the timing of tax payments. Interest in joint ventures and associates increased by $1.8 million to $110.6 million. This represents Downer’s share of net profit from joint ventures and associates of $19.4 million, offset by $17.2 million distributions received and $0.4 million of exchange losses. Property, plant and equipment decreased by $23.1 million with depreciation and impairment charges of $275.1 million and net disposals of $19.3 million being partially offset by $286.2 million of additions during the year. Right-of-use assets at 30 June 2020 were $592.6 million. This balance primarily arose as a result of the adoption of AASB 16 Leases as at 1 July 2019 recognising an initial balance of $570.6 million. The movement to 30 June 2020 relates to new leases entered since 1 July 2019 net of depreciation and impairment charges. Intangible assets decreased by $234.6 million reflecting the $165.0 million impairment of goodwill in relation to Spotless, $23.9 million impairment of capitalised information systems and an additional $61.4 million investment in software during the year, offset by $100.5 million of amortisation charges. Net deferred tax balances (net of deferred tax asset and liabilities) moved from a net deferred tax liability position of $36.7 million as at 30 June 2019 to a net deferred tax asset position of $47.0 million. The net movement of $83.7 million is primarily due to the recognition of available income tax losses as well as the initial adoption of AASB 16 Leases. Total trade payables and contract liabilities increased by $69.4 million or 2.8% largely due to the recognition of $83.3 million on dividend payables following the deferral of the FY20 interim dividend and $34.0 million payable following the Spotless shareholder class action settlement. Excluding these specific payable amounts, trade payables and contract liabilities balances decreased by $47.9 million or 1.9% due to timing of payments and conversion of contract liabilities as project work is delivered. Trade payables and contract liabilities represents 41.7% of Downer’s total liabilities. Other financial liabilities decreased by $7.2 million to $60.2 million, representing 1.0% of Downer’s total liabilities. The decrease mainly reflects a $26.7 million reduction in deferred and contingent consideration payable on acquisitions made in prior years, offset by a $17.0 million increase in the fair value of derivative financial instruments. Annual Report 2020 13 Lease liabilities at 30 June 2020 were $763.2 million, of which $727.8 million was recognised on adoption of AASB 16 Leases as at 1 July 2019. The increase represents new leasing arrangements entered into since 1 July 2019, offset by $152.9 million of principal payments made during the year. Lease liabilities represent 12.6% of Downer’s total liabilities. Provisions of $545.6 million decreased by $56.3 million mainly driven by provision utilisation during the year, particularly for Murra Warra and new Royal Adelaide Hospital, while the adoption of AASB 16 Leases resulted in $37.1 million reduction of onerous provisions related to leases being recognised against the right-of- use assets. Provisions represent 9.0% of Downer’s total liabilities. Employee related provisions (mainly annual leave and long service leave) made up 79.2% of this balance with the remainder covering contract provisions, decommissioning and restructuring and warranty obligations. Total equity decreased by $412.3 million compared to pcp. The main drivers of this reduction are the loss for the year of $155.7 million, the $174.0 million dividends paid/declared and the $66.0 million impact for the adoption of AASB 16 Leases. Net foreign currency losses on translation of foreign operations, particularly in New Zealand, resulted in a movement in the foreign currency translation reserve of $13.9 million. The Non-controlling interest’s share of the Total Equity decreased $9.6 million to $144.2 million. The reduction is due to $5.4 million losses by the non-controlling interest holders’ share of the results in Spotless and Otraco South Africa, $1.0 million of other comprehensive losses and $3.2 million post-tax impact arising from the adoption of AASB 16 Leases. Dividends In respect of the financial year ended 30 June 2020, the Board: – Declared an interim dividend of 14.0 cents per share, unfranked, that was to be paid on 25 March 2020 to shareholders on the register at 26 February 2020. On 24 March 2020 the payment date was deferred to 25 September 2020. – Decided not to declare a final dividend for the 2020 financial year. The unfranked dividend will be paid out of Conduit Foreign Income (CFI). The Board also determined to continue to pay a fully imputed dividend on the ROADS security, which having been reset on 15 June 2020 has a yield of 4.32% per annum payable quarterly in arrears, with the next payment due on 15 September 2020. As this dividend is fully imputed (the New Zealand equivalent of being fully franked), the actual cash yield paid by Downer will be 3.11% per annum until the next reset date. Consistent with prior year, the Company’s Dividend Reinvestment Plan remains suspended. As detailed in the Directors’ Report for the 2019 financial year, the Board declared a 50% franked final dividend of 14.0 cents per share, that was paid on 2 October 2019 to shareholders on the register at 4 September 2019, with the unfranked portion paid out of CFI. Zero Harm Downer’s1 Lost Time Injury Frequency Rate (LTIFR) increased to 0.67 from 0.57 and its Total Recordable Injury Frequency Rate (TRIFR) increased to 2.88 from 2.70 per million hours worked2. Regrettably, in July 2019, an employee of Otraco died as a result of an incident at our facility in Calama, Chile. Senior leaders from the business attended the site to meet with family and colleagues to offer support. Downer continues to co-operate with regulatory investigations. Downer Group Safety Performance (12-month rolling frequency rates) I R F R T 3.5 3.0 2.5 2.0 2.70 0.57 2.88 0.67 R F T L I 1.5 1.2 0.9 0.6 0.3 0.0 9 1 - n u J 9 1 - l u J 9 1 - g u A 9 1 - p e S 9 1 - t c O 9 1 - v o N 9 1 - c e D 0 2 - n a J 0 2 - b e F 0 2 - r a M 0 2 - r p A 0 2 - y a M 0 2 - n u J LTIFR TRIFR 1 2 Safety data excludes Hawkins and Spotless. 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. Total Recordable Injuries (TRIs) are the number of LTIs + medically treated injuries (MTIs) for employees and contractors. Total Recordable Injury Frequency Rate (TRIFR) is the number of TRIs per million hours worked. 14 Downer EDI Limited Directors’ Report – continuedfor the year ended 30 June 2020Group Business Strategies and Prospects for Future Financial Years Downer’s Purpose is to create and sustain the modern environment by building trusted relationships with our customers. Our Promise is to work closely with our customers to help them succeed, using world-leading insights and solutions. Our business is founded on four Pillars: – Safety: Zero Harm is embedded in Downer’s culture and is fundamental to the Company’s future success – Delivery: we build trust by delivering on our promises with excellence while focusing on safety, value for money and efficiency – Relationships: we collaborate to build and sustain enduring relationships based on trust and integrity – Thought leadership: we remain at the forefront of our industry by employing the best people and having the courage to challenge the status quo. 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 Downer believes that a sustainable and embedded Zero Harm culture is fundamental to the Company’s ongoing success, and to building trusted relationships with customers and business partners. Downer’s approach to Zero Harm enables it to work safely and environmentally responsibly in industry sectors with inherently hazardous environments. Zero Harm at Downer means a work environment that supports the health and safety of its people, allows it to deliver its business activities in an environmentally sustainable manner, and advance the communities in which it operates. Downer has a robust Critical Risk program throughout its business. Risks that could cause serious injury to people or harm to the environment, and the controls needed to eliminate or manage those risks, are understood. This knowledge forms the core of Downer’s risk management processes, and the monitoring of its critical controls. There is a strong commitment to Downer’s Zero Harm objectives across all levels of the business. Each Division has in place a Zero Harm management system that meets the requirements of the Downer Zero Harm Framework. These systems are certified as a minimum to AS/NZS 4801 or BS OHSAS 18001, and ISO 14001:2015. Each system is reviewed regularly, undergoing internal and external audit. Downer has been developing a single management system known as The Downer Standard that applies across all businesses, and is presently planning for certification of that system. As outlined on page 6 of this Annual Report, Downer developed and implemented a range of measures in response to COVID-19 including Business Continuity Plans and Business Resumption Plans. Policies were also developed for implementing new safety procedures, such as non-contact temperature testing. Annual Report 2020 15 Strategic Objective Prospects Risks and risk management Embed asset management and standardisation as a cornerstone of the Delivery pillar Downer has developed extensive asset management knowledge and expertise and also adopts and implements world-leading insights and solutions. Downer strives for standardisation in its risk management and project delivery to ensure consistent quality outcomes for its customers. Focus on engagement with customers as a cornerstone of the Relationships pillar Utilise technology in core service offerings as a cornerstone of our Thought Leadership pillar Providing valuable and reliable products and services to customers, and their customers, is at the heart of Downer’s culture. It enables Downer’s customers to focus more on their core expertise while 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. Technology is an inherent feature of today’s world and there is therefore greater demand for technology in the services Downer provides. Customer operations are growing in complexity and this creates opportunities for Downer to connect, manage, monitor and report on core services and infrastructure. The expectations of Downer’s customers, and their customers, continue to grow with regards to reliable, intuitive and cost-effective assets and services. Downer has invested in capability and talent to improve asset management, standard processes, data analytics and lifecycle performance analytics. A number of these investments have Group- wide application in addition to their bespoke customer benefit. Risks to be managed include: not delivering value- added services to customers; scope reduction by customers who elect to use pure maintenance/ blue collar services; and an inability to deliver obligations in performance frameworks and service outcome contracts. Relationships creating success continues to be Downer’s core operating philosophy that drives delivery of projects and services. It helps to ensure investment as initiatives and activities are focused on helping Downer’s customers to succeed. Risks to be managed include: the threat of new competitors and disruptors in traditional markets; not keeping pace with changing customer expectations; and the threat of commoditisation of core products and services. Downer invests in a range of technology platforms and partnerships to meet customer needs. Downer focuses on selecting the right investments – for example those that can be leveraged across a number of service lines to maximise value for the greatest number of customers. 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 a need for greater investment in technology and data services. 16 Downer EDI Limited Directors’ Report – continuedfor the year ended 30 June 2020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. Prospects Downer’s response Service line Transport The multi-billion dollar market for transport services continues to grow in both Australia and New Zealand. Governments in both countries continue to invest in a range of projects to reduce congestion, improve mobility, and provide better linkages between communities. Utilities Growth across utility markets is multi-faceted with a good pipeline of prospects in both Australia and New Zealand. Facilities EC&M Large-scale and long-term outsourcing contracts continue to come to market, however the long- term nature of contracts in this sector means that a lot of work is already under contract. There is a strong pipeline of opportunities on the short-to-medium term horizon in both Australia and New Zealand. Downer’s EC&M service line includes its Engineering and Construction and Asset Services businesses. In recent years, a number of projects in the Engineering and Construction business have underperformed significantly. At the same time, the Asset Services business has performed well and achieved good growth. Downer is a market leader in road services in both Australia and New Zealand, light rail construction in Australia and heavy rail construction and maintenance in Australia. Downer maintains strong strategic partnerships with leading global transport solutions providers and, through this model, is pursuing opportunities in rollingstock manufacture and maintenance, and transport network operations and maintenance. The Keolis Downer joint venture is a leading Australian multi-modal transport operator. Downer has market leading positions in the power, gas, water and communications 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 Downer brings to customers. Through the acquisition of Spotless, Downer is a major force in both Australia and New Zealand with market leading positions across key sectors including: defence; health; education and government. Government restrictions imposed in March 2020 to slow the spread of COVID-19 forced the majority of customers serviced by Spotless’ Hospitality business to close. In June 2020, Downer reduced the footprint of this business to reflect the smaller scale of operations. Downer announced at its 2020 half year results that it will focus its construction efforts on areas where it has competitive differentiation. As a result, Downer will no longer tender for “hard dollar” construction contracts in the coal, iron ore, and industrial E&I (electrical and instrumentation) and SMP (structural, mechanical and piping) sectors. Downer will continue to invest and grow its Asset Services offering in EC&M. Annual Report 2020 17 Service line Prospects Downer’s response Mining Downer has a proven track record as a leading provider of mining services in Australia and is well positioned to build on its strong market position and pipeline of work. Downer is one of Australia’s leading diversified mining contractors offering customers feasibility studies, open cut mining services, underground mining services, tyre management, drilling and blasting services, mine closure and rehabilitation, and asset management. Downer announced in August 2019 that it was conducting a review of its portfolio of businesses and that Mining would be an important area of focus. On 16 March 2020, Downer announced its review of Mining, including a potential sale, had been suspended due to the extraordinary market volatility caused by COVID-19. In July 2020, Downer announced it was again exploring the potential sale of the Mining portfolio, in parts or as a whole, in response to enquiries from a number of interested parties. 18 Downer EDI Limited Directors’ Report – continuedfor the year ended 30 June 2020Downer’s ability to manage the impacts of its activities on the natural and built environment is fundamental to its long-term success. This typically relates to land, air, water and greenhouse gas (GHG) emissions created from the activities it carries out for its customers. Downer’s purpose is to create and sustain the modern environment by building trusted relationships with its customers. Downer is committed to helping its customers succeed by developing and delivering environmentally responsible and sustainable solutions, so communities remain resilient for the future. Downer remains focused on developing solutions to reduce its energy consumption and GHG emissions. Downer is committed to transitioning to a low carbon economy and focusing its attention on managing risks associated with environmental management and climate change. Downer is also taking advantage of the commercial opportunities this presents for its business, in particular the energy transition and delivering infrastructure that is resilient to the physical impacts of climate change. Downer’s Zero Harm Management System Framework sets the minimum standards for health, safety, environment and sustainability within its Divisions. For environmental management each Division’s Zero Harm Management System is certified to ISO 14001:2015. Divisions also adhere to environmental management requirements established by customers in addition to all applicable licence and regulatory requirements. Each Division is required to have an Environmental Sustainability Action Plan (ESAP) and strategies in place supported by suitably qualified environment and sustainability professionals. The ESAP allocates internal responsibilities for reducing the impact of its operations and business activities on the environment. In addition, all Divisions’ management systems are audited internally and externally by independent third parties. Outlook In the current environment, Downer is not providing earnings guidance for the 2021 financial year. The acquisition of the remaining shares in Spotless will allow Downer to get the full benefits of the acquisition. Spotless is an important part of Downer’s Urban Services strategy - driving consistent earnings and reliable cash flow from long term customers in critical sectors. Downer’s diversification across critical services in road, rail, power, gas, water, defence, health, education and government has delivered resilience in earnings and cash flows and there continues to be strong demand for these services. Subsequent Events On 21 July 2020 Downer announced the launch of a $400 million equity raising to support the acquisition of the remaining shares in Spotless and provide flexibility for continued investment in Downer’s core business. Downer has also announced it has made an unconditional offer to acquire all of the issued share capital of Spotless not already owned for an upfront cash consideration of approximately $134.5 million, plus a maximum of 7.5 million Downer shares to be issued on exercise of the Downer Contingent Share Option. Downer has entered into a call option deed with Coltrane Master Fund, L.P. under which it has a call option over 2.99% of Spotless shares, which on exercise will increase Downer’s ownership above the 90% threshold required to proceed to compulsory acquisition. Outside of the above, at the date of this report, there have been no other matters or circumstances 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. Environmental Management Environmental management is a key component of Downer’s Zero Harm philosophy and it places a strong emphasis on meeting its environmental compliance obligations. Downer’s environmental commitments are outlined in its Environmental Sustainability Policy which can be found on the Downer website at www.downergroup.com/board-policies. Annual Report 2020 19 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 2020 or 30 June 2019. 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 2020 financial year and the number of meetings attended by each Director (while they were a Director or Board Committee member). During the year, 17 Board meetings, six Audit and Risk Committee meetings, four Zero Harm Committee meetings, two Remuneration Committee meetings and two Nominations and Corporate Governance Committee meetings were held. In addition, 25 ad hoc meetings (attended by various Directors) were held in relation to various matters including tender reviews and major projects. Director R M Harding G A Fenn S A Chaplain5 P S Garling2 T G Handicott3 N M Hollows C G Thorne4 P L Watson Director R M Harding G A Fenn S A Chaplain5 P S Garling2 T G Handicott3 N M Hollows C G Thorne4 P L Watson Board Audit and Risk Committee Remuneration Committee Held1 17 17 3 17 17 17 17 17 Attended 17 17 3 17 17 17 15 17 Held1 – – 2 – 6 6 6 6 Attended – – 2 – 6 6 5 6 Held1 2 – – 2 2 1 – – Attended 2 – – 2 2 1 – – Zero Harm Committee Nominations and Corporate Governance Committee Held1 – 4 2 – – – 4 4 Attended – 4 2 – – – 3 4 Held1 2 – – – 2 – – – Attended 2 – – – 2 – – – These columns indicate the number of meetings held during the period each person listed was a Director or member of the 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. 4 Dr Thorne was also Chairman of the Tender Risk Evaluation Committee which meets on an unscheduled basis. Dr Thorne retired as a Director of the Company on 13 July 2020. 5 Ms Chaplain retired as a Director of the Company on 7 November 2019. 20 Downer EDI Limited Directors’ Report – continuedfor the year ended 30 June 2020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, 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 4 to 6, 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 at pages 130 to 139 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 – 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 and 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 51 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 Advisory and due diligence services 2020 $ 2019 $ 242,148 338,957 468,318 710,466 275,000 613,957 Rounding of Amounts The Company is of a 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 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 2020 21 Key remuneration issues in 2020 2020 will be remembered as one of the more challenging years in corporate memory. COVID-19 has had a significant impact not just on Downer and its people, but also on the national and global economy. In recognition of these likely impacts: – The Directors decided to voluntarily reduce their fees by 50% for the Chairman and 30% for the other Non-executive Directors for the period 1 April 2020 to 30 June 2020 – The Managing Director, Chief Executive Officer – New Zealand and Chief Executive Officer – Spotless decided to voluntarily reduce their fixed remuneration by 50% for the period 1 March 2020 to 30 June 2020 – The other KMP decided to voluntarily reduce their fixed remuneration by 30% for the period 1 March 2020 to 30 June 2020 – A significant number of other executives decided to voluntarily reduce their fixed remuneration. The funds from these voluntary remuneration reductions were used to establish a fund to provide financial assistance to Downer and Spotless employees who are experiencing severe hardship. Further, no short-term incentive awards have been made in relation to the 2020 financial year. Remuneration Report Chairman’s Letter Dear Shareholders, Downer’s 2020 Remuneration Report provides information about the remuneration of its most senior executives and explains how performance has been linked to reward outcomes at Downer for the 2020 financial year. At the last Annual General Meeting in November 2019, 97.3% of all votes cast by shareholders were in favour of the 2019 Remuneration Report. The structure of the 2020 Remuneration Report has been prepared with the same objective of providing readers with a transparent view of key performance and outcomes using the report structure adopted in previous years. A strong future Several decisions have been made since the last Chairman’s Letter with a clear objective to create a stronger platform for long-term, sustainable growth and position Downer as one of Australia’s largest integrated providers of Urban Services. These include: – Repositioning construction efforts to markets and projects where Downer has competitive strength and opportunity to drive long-term services based contracts – Completing significant refinancing and establishment of new facilities to bolster the Group’s liquidity and reduce short- term debt maturities – Exploring options to sell the Mining and Laundries businesses and reviewing the medium to long-term prospects of the Hospitality business to determine which parts will continue, be exited or be sold – Undertaking a capital raising to strengthen the balance sheet, fund the acquisition of the remaining shares in Spotless and provide flexibility for continued investment in Downer’s core business. The acquisition of the remaining shares in Spotless continues the reshaping of Downer as an Urban Services business with resilient earnings, long-term customer relationships and more predictable cash flows. Many of the activities that Downer’s people perform every day have potential risks and ensuring they remain safe is of paramount importance. Downer’s Lost Time Injury Frequency Rate at 30 June 2020 was 0.67 and the Total Recordable Injury Frequency Rate was 2.88. Downer’s culture and our commitment to continuous improvement in Zero Harm remains a core strategic objective. 22 Downer EDI Limited Directors’ Report – continuedfor the year ended 30 June 2020 Link between Downer performance and reward outcomes Downer’s remuneration framework for key senior employees has been very successful in aligning 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 – 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 Annual Report 2020 23 Remuneration Report – AUDITED The Remuneration Report provides information about the remuneration arrangements for key management personnel (KMP), which means Non-executive Directors and the Group’s most senior executives, for the year to 30 June 2020. 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 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 Enhancements since 2019 Short-term incentive (STI) plan – The Zero Harm measures for safety and environmental performance 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 executives to: – Review baselines and set targets for annualised GHG emission reductions to contribute towards meeting Downer’s science-based target for areas of control and identify, assess and determine Return on Investment (ROI) for three opportunities that will contribute to Downer’s decarbonisation strategy – Implement updated Group-wide consistent policies, procedures and supporting documents. 24 Downer EDI Limited Directors’ Report – continuedfor the year ended 30 June 2020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 N M Hollows C G Thorne P L Watson Chairman, Independent Non-executive Director Managing Director and Chief Executive Officer Independent Non-executive Director (retired 7 November 2019) Independent Non-executive Director Independent Non-executive Director Independent Non-executive Director Independent Non-executive Director (retired 13 July 2020) 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 S Cinerari M J Ferguson S L Killeen B C Petersen P J Tompkins Role Chief Executive Officer – Transport and Infrastructure to 25 August 2019 Chief Operating Officer – Australian Operations from 26 August 2019 Chief Financial Officer Chief Executive Officer – New Zealand Chief Executive Officer – Mining, Energy and Industrial Services to 25 August 2019 Chief Executive Officer – Spotless Annual Report 2020 25 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 – 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 – 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 – 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 – 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. 26 Downer EDI Limited Directors’ Report – continuedfor the year ended 30 June 2020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 significant 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 – 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 earnings (NPATA), 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 NPATA, EBITA 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 – 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 – 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 ASX 100 companies (excluding ASX “Financials” sector companies) – Group NPATA – Divisional EBITA – FFO – Engagement with Downer’s people – Zero Harm measures of safety and environmental sustainability. Remuneration for all executives varies with performance on these key measures. Annual Report 2020 27 The following graph shows the Company’s performance compared to the median performance of the ASX 100 over the three-year period to 30 June 2020. 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 2017 Dec 2017 Jun 2018 Dec 2018 Jun 2019 Dec 2019 Jun 2020 * S&P/ASX 100 companies as at 30/06/2017 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 Free cash flow m $ ’ 300 200 100 0 -100 -200 247.81 258.32 180.6 181.5 2016 2017 2018 2019 2020 (155.7) 300 200 100 m $ ’ 0 -100 -200 -300 242.3 203.03 178.33 185.74 2016 2017 2018 2019 2020 (219.1) Adjusted for material unbudgeted transactions and individually significant items. 1. 2. Adjusted for material unbudgeted transactions. 3. Adjusted for material unbudgeted transactions, including payment for Spotless shares. 4. Adjusted for material unbudgeted transactions. Basic earnings per share5 e r a h s r e p s t n e C 50 40 30 20 10 0 -10 -20 -30 38.0 35.8 42.9 10.7 2016 2017 2018 2019 (26.6) 2020 5. 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. 28 Downer EDI Limited 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 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 LTIFR TRIFR 0.66 0.70 0.55 0.78 0.55 0.57 0.67 0.57 2016 2017 2018 2019 2020 12 10 8 6 4 2 0 s r u o h 0 0 0 0 0 0 , 1 , r e p s e i r u n j l I e b a d r o c e R l a t o T Directors’ Report – continuedfor the year ended 30 June 2020 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 – 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 advisors without seeking approval of the Board or management. During the reporting period, the Remuneration Committee retained Guerdon Associates Pty Ltd as its advisor. Guerdon Associates Pty Ltd does not provide services to management and is considered to be independent. Remuneration arrangements for executives of Spotless are set by the Board of Spotless. Spotless’ People and Remuneration Committee is comprised of two independent Directors and one Director nominated by Downer. Details of the remuneration structure and arrangements for 2020 for the Chief Executive Officer – Spotless, as established by the Spotless Board, are outlined at section 6.7. Annual Report 2020 29 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 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 – 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. In recognition of the likely impact of the coronavirus on Downer and its people, the Managing Director, Chief Executive Officer – New Zealand and Chief Executive Officer – Spotless decided to voluntarily reduce their fixed remuneration by 50% for the period 1 March 2020 to 30 June 2020 and the other KMP decided to voluntarily reduce their fixed remuneration by 30% for the same period. A significant number of other executives also decided to reduce their fixed remuneration. The funds from these voluntary remuneration reductions were used to establish a fund to provide financial assistance to Downer and Spotless employees who are experiencing severe hardship. Otherwise, no adjustment has been made to remuneration for the Managing Director since July 2012. 30 Downer EDI Limited Directors’ Report – continuedfor the year ended 30 June 20206.3 Short-term Incentive 6.3.1 STI tabular summary The following table outlines the major features of the 2020 STI plan. Purpose of STI plan – Focus performance on drivers of shareholder value over 12-month period – Improve Zero Harm and people related results – 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 NPATA for corporate executives and Division EBITA for divisional heads. Maximum STI that can be earned – KMP appointed pre-2011: up to 100% of fixed remuneration – 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 – 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 2019 to 30 June 2020. Performance assessed August 2020, following audit of accounts. Additional service period after performance period for payment to be made Payment timing Form of payment 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. September 2020 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. 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 NPATA and divisional EBITA, 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 STI performance measures were tested were incorrect in a material respect or have been reversed or restated – Settle deferred components in shares or cash. New executives (either new starts or promoted employees) are eligible to participate in the STI in the year in which they commence in their position with a pro-rata entitlement. There is no STI entitlement where an executive’s employment terminates prior to the end of the financial year. Where an executive’s employment terminates prior to the vesting date, 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. Annual Report 2020 31 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 2020. 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 NPATA for corporate executives and EBITA 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. Whether to exclude the impact of significant items (positive or negative) is considered on a case by case basis. 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, and will generally have 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. 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 percentage x scorecard result x IPM. 32 Downer EDI Limited Directors’ Report – continuedfor the year ended 30 June 20206.3.4 STI performance requirements Overall performance is assessed on Group NPATA, Divisional EBITA, FFO, Zero Harm and a measure of employee engagement. NPATA and EBITA include joint ventures and associates and include, inter alia, changes in accounting policy. NPATA and EBITA provide transparency on operational business performance, align with how Downer presents its results to the market and allow for easier understanding of alignment between performance and remuneration outcomes. The Board considers this approach to be appropriate as the Board is the ultimate decision maker for transactions that give rise to acquired intangibles that result in the amortisation expense and the impact of amortisation of acquired intangibles, which in nature relate to long-term strategic decisions, remains reflected in incentive outcomes through the EPS measure in the LTI plan. FFO is defined as net cash from operating activities (i.e. EBIT plus non-cash items in operating profit plus distributions received from JVs or associates plus movements in working capital plus movements in operating assets less net interest less tax paid), less investing cash flow. Zero Harm reflects Downer’s commitment to safety and environmental, social and governance matters. The Zero Harm element includes safety and environmental measures, underscoring Downer’s commitment to customers, employees, regulators and the communities in which it operates. The 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) Environmental GHG emission reductions Achieve TRIFR and LTIFR below defined threshold for area of responsibility. TRIFR is calculated as the number of recordable injuries per million hours calculated over 12 months. LTIFR is calculated as the number of lost time injuries per million hours calculated over 12 months. Review baselines and set targets for annualised GHG emission reductions to contribute towards meeting Downer’s science-based target for areas of control. Identify, assess and determine Return on Investment (ROI) for three opportunities for each Line of Business that will contribute to Downer’s decarbonisation strategy. Critical Risks Conduct an operationally led review of Bow Tie analyses. Critically analyse Critical Risk control performance and initiate a program of projects to improve the resilience of critical controls. Zero Harm Leadership Performance of a minimum number of Critical Risk observations by senior executives within their business, across businesses, and in partnership with clients. Implementation of updated Group-wide consistent policies, procedures and supporting documents. Should a workplace fatality or serious environmental incident occur, the relevant safety or environmental portion of the STI is foregone. Weightings applied to the 2020 STI scorecard measures for all executives, including the Managing Director, are set out in the table below. Executive Corporate Business unit Group NPATA Divisional EBITA 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 outcomes are set out in section 7.3. Annual Report 2020 33 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 2020 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 – 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 – KMP appointed from 2011: 50% of fixed remuneration. Performance period 1 July 2019 to 30 June 2022. Performance assessed September 2022. 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 2023. Performance rights vest July 2023. Form of award and payment Performance rights. 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 ASX 100 index, excluding financial services companies, at the start of the performance period, measured over the three years to 30 June 2022. 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% 34 Downer EDI Limited Directors’ Report – continuedfor the year ended 30 June 2020EPS growth The EPS growth performance condition is based on the Company’s compound annual EPS growth over the three years to 30 June 2022. 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 NPATA and FFO for each of the three years to 30 June 2022. These measures are considered to be key drivers of shareholder value. Accordingly, they have been included in the LTI plan to reward sustainable financial performance. 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% Percentage of performance rights subject to Scorecard condition that qualify for vesting 0% 30% Above 90% to < 110% 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% 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 restructures. If the rights vest, executives can exercise them to receive shares that are normally acquired on-market. The Board retains the discretion to vest awards in the form of cash. Performance rights do not have voting rights or accrue dividends. How performance rights and shares are acquired Treatment of dividends and voting rights on performance rights Restriction on hedging Hedging of entitlements under the plan by executives is not permitted. Restriction on trading New participants Terminating executives Vested shares arising from the rights may only be traded with the approval of the Remuneration Committee. Approval requires that trading complies with the Company’s Securities Trading Policy. New executives (either new starts or promoted employees) are eligible to participate in the LTI on the first grant date applicable to all executives after they commence in their position. 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. Annual Report 2020 35 Change of control 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 2020 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 – The maximum reward is capped at a “stretch” performance level that is considered attainable without excessive risk taking. Performance for the 2020 LTI grants will be measured over the three-year period to 30 June 2022. The proportion of performance rights that can vest will be calculated in September 2022, but executives will be required to remain in service until 30 June 2023 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. 36 Downer EDI Limited Directors’ Report – continuedfor the year ended 30 June 20206.4.3 Performance requirements One tranche of performance rights in the 2020 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 2020 LTI grants will be the companies, excluding financial services companies, in the ASX 100 index as at the start of the performance period on 1 July 2019. 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 – Management’s strong focus on improving the Company’s ranking among ASX 100 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 2022. 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% 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 2022. 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 – 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 NPATA and Group FFO. The performance of each component will be measured over the three-year period to 30 June 2022. NPATA 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 2020 the components are equally weighted. At the beginning of each financial year NPATA and FFO target performance levels are set. At the end of each financial year – Calculate actual performance – 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 – 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 2020 37 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 Managing Director’s shareholding is currently well in excess of the guideline. 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. The 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 interests of shareholders – Is consistent with the Board’s long-term view when considering the value of major transactions to Downer’s shareholders – 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 12 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. Where this transition to Downer’s framework takes place over a longer 38 Downer EDI Limited period due to the complexity of the implementation or the maturity profile of the acquired business, the Board will consider an extension to a more appropriate period. The integration of Hawkins and Spotless into the Downer Zero Harm Framework is ongoing. Accordingly, the Zero Harm performance of these businesses remains excluded from Group lagging performance measures at this time. Close attention is given to continuous improvement of the Zero Harm performance and culture of these businesses. 6.6 Treatment of significant items From time to time, Downer’s performance is impacted by significant items. Where these occur, the Board considers whether to adjust for their impact (positive or negative) on a case by case basis, having regard to the circumstances relevant to each item. The Board considers this approach to be appropriate as it ensures that executives and the Board make decisions solely based on the best interests of Downer. 6.7 Chief Executive Officer – Spotless Downer has an interest of 87.8% in Spotless Group Holdings Limited (Spotless). Remuneration arrangements for executives of Spotless are set by the Board of Spotless. Spotless’ People and Remuneration Committee is comprised of two independent Directors and one Director nominated by Downer. Following is a summary of the remuneration structure and arrangements for FY20 for P Tompkins in his role as Chief Executive Officer – Spotless as established by the Spotless Board. 6.7.1 Remuneration structure The remuneration for the CEO – Spotless has a fixed component and a component that varies with performance. Fixed remuneration is the sum of salary and the direct cost of providing employee benefits, including superannuation and other non-cash benefits. Remuneration is benchmarked against a peer group of competitors. While market levels of remuneration are monitored on a regular basis, there is no contractual requirement or expectation that any adjustments will be made. 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 assessed over three years is an LTI. In 2018, the Spotless Board determined that it was inappropriate to grant performance rights under the LTI, which was based on EPS and TSR performance hurdles, due to the low level of free float shares in Spotless and lack of trading liquidity following the takeover by Downer. Accordingly, for 2020 the Spotless Board determined it was appropriate that P J Tompkins – Chief Executive Officer – Spotless participate in the Downer Group Long-Term Incentive Plan. Directors’ Report – continuedfor the year ended 30 June 20206.7.2 STI tabular summary The following table outlines the major features of the Spotless 2020 STI plan. Minimum performance “gateway” before any payments can be made Achievement of a gateway based on budgeted NPATA must be met before any STI payment can be made. A further Zero Harm gateway must be met for an award for safety performance to be made. Maximum STI that can be earned 75% of fixed remuneration. Percentage of STI that can be earned on achieving target expectations Discretion to vary payments 56.25% of the maximum. For an executive to receive more, performance in excess of target expectations will be required. The Board, in its discretion, may vary STI payments by up to + or – 50% from the payment applicable to the level of performance achieved, up to the maximum for that executive. Performance period 1 July 2019 to 30 June 2020. Performance assessed August 2020, 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. September 2020 for the first 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. Form of payment Payments are made in cash. Performance requirements The Spotless performance scorecard is comprised of the following measures: Measure Group NPATA Divisional EBITA Group FFO Divisional FFO Zero Harm People Weighting 7.5% 22.5% 7.5% 22.5% 30% 10% Board discretion 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 STI performance measures were tested were incorrect in a material respect or have been reversed or restated. There is no STI entitlement where employment terminates prior to the end of the financial year. Where employment terminates prior to the vesting date, the unvested deferred components will be forfeited other than where the Spotless Board judges the executive to be an eligible leaver. Further information on Spotless’ remuneration practices is contained in its Remuneration Report which can be found on the Spotless website www.spotless.com. Annual Report 2020 39 7. Details of Executive Remuneration 7.1 Remuneration received in relation to the 2020 financial year Executives receive a mix of remuneration during the year, comprising fixed remuneration, an STI paid in cash, and a LTI in the form of performance rights that vest four years later, subject to meeting performance and continued employment conditions. In recognition of the likely impact of COVID-19 on Downer and its people, the Managing Director, Chief Executive Officer – New Zealand and Chief Executive Officer – Spotless decided to voluntarily reduce their fixed remuneration by 50% for the period 1 March 2020 to 30 June 2020 and the other KMP decided to voluntarily reduce their fixed remuneration by 30% for the same period. The table below lists the remuneration actually received in relation to the 2020 financial year, comprising fixed remuneration, cash STIs relating to 2020, deferred STIs payable in 2020 in respect of prior years and the value of LTI grants that vested during the 2020 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 2020 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 year2 $ Fixed Remuneration1 $ 1,828,488 1,042,861 925,001 841,591 165,592 877,626 5,681,159 – – – – – – – Deferred Bonus paid or payable in respect of prior years4 $ 793,550 487,080 273,947 256,041 327,259 215,476 2,353,353 Total payments $ 2,622,038 1,529,941 1,198,948 1,097,632 492,851 1,093,102 8,034,512 Equity that vested during 20203 $ Total remuneration received $ 3,068,230 1,150,589 – – 271,668 536,943 5,027,430 5,690,268 2,680,530 1,198,948 1,097,632 764,519 1,630,045 13,061,942 G A Fenn S Cinerari M J Ferguson S L Killeen B C Petersen5 P J Tompkins 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 2020 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 restricted shares granted in previous years that vested during the year, calculated as the number of restricted shares that vested multiplied by the closing market prices of Downer shares on the vesting date of $7.34. 4 Deferred Bonus represents the deferred cash bonus amount to be paid in September 2020, being the second deferred component of the 2018 award and the first deferred component of the 2019 award, being 25% of each award. Amounts represent the payments relating to the period during which the individual was Key Management Personnel (KMP). 5 40 Downer EDI Limited Directors’ Report – continuedfor the year ended 30 June 20207.2 Remuneration of executive key management personnel required under the Corporations Act 2001 (Cth) In recognition of the likely impact of COVID-19 on Downer and its people, the Managing Director, Chief Executive Officer – New Zealand and Chief Executive Officer – Spotless decided to voluntarily reduce their fixed remuneration by 50% for the period 1 March 2020 to 30 June 2020 and the other KMP decided to voluntarily reduce their fixed remuneration by 30% for the same period. 2020 Short-term employee benefits Post-employment benefits Cash Bonus paid or payable in respect of current year2 $ – – – – – – Deferred Bonus paid or payable4 $ 451,217 282,755 161,328 161,745 30,976 116,541 Salary and fees $ 1,490,664 996,497 891,596 804,223 162,430 843,346 5,188,756 G A Fenn S Cinerari M J Ferguson S L Killeen B C Petersen1 P J Tompkins Non- monetary $ Super- annuation $ Other benefits $ Term- ination Benefits $ Subtotal $ 316,821 16,301 12,402 – – 13,277 21,003 30,063 21,003 37,368 3,162 21,003 – 2,279,705 – 1,325,616 – 1,086,329 – 1,003,336 196,568 – 994,167 – – – – – – – – Share- based payment transac- tions3 $ 793,520 332,556 208,578 278,369 51,454 213,766 Total $ 3,073,225 1,658,172 1,294,907 1,281,705 248,022 1,207,933 – 1,204,562 358,801 133,602 – 6,885,721 1,878,243 8,763,964 1 2 3 Amounts represent the expense relating to the period during which the individuals were Key Management Personnel (KMP). Cash Bonus paid or payable in respect of current year represents cash payments in relation to the 2020 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 8.3 and an estimate of the fair value of grants to be made in respect of the 2020 financial year attributable to the period. 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 2020 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. 2019 Short-term employee benefits Post-employment benefits Cash Bonus paid or payable in respect of current year2 $ Deferred Bonus paid or payable4 $ Salary and fees $ Non- monetary $ Super- annuation $ Other benefits $ Term- ination Benefits $ Subtotal $ Share- based payment transac- tions3 $ Total $ G A Fenn S Cinerari M J Ferguson S L Killeen D Nelson1 B C Petersen P J Tompkins1 1,774,469 1,079,469 904,567 824,997 312,889 1,079,469 686,640 821,975 488,492 273,482 222,585 – 325,368 149,834 6,662,500 2,293,049 2,281,736 746,800 481,580 280,050 303,371 – 371,374 109,874 282,247 25,030 12,402 387 – 1,453 8,925 330,444 20,531 29,591 20,531 24,750 10,266 20,531 14,571 140,771 4,727,178 – 2,525,831 – 1,786,432 – 1,539,480 – 1,363,388 – 1,040,233 2,092,461 – – – 1,129,952 – – 1,040,233 12,748,733 2,415,989 15,164,722 – 3,646,022 2,104,162 – – 1,491,032 – 1,376,090 1,363,388 1,798,195 969,844 1,081,156 421,669 295,400 163,390 – 294,266 160,108 1 2 3 Amounts represent the expense relating to the period during which the individuals were Key Management Personnel (KMP). Cash Bonus paid or payable in respect of current year represents cash payments in relation to the 2019 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 8.3. 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 2019 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. Annual Report 2020 41 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 2020 that are performance and non-performance related and the proportion of STIs that were earned during the year ended 30 June 2020 due to the achievement of the relevant performance targets. Proportion of 2020 remuneration 2020 Short-term incentive G A Fenn1 S Cinerari1 M J Ferguson S L Killeen P J Tompkins1 Performance Related % Non- performance Related % 41% 37% 29% 34% 27% 59% 63% 71% 66% 73% Paid % Forfeited % 0% 0% 0% 0% 0% 100% 100% 100% 100% 100% 1 Performance related portion includes the reversal of expense for forfeited equity incentives described in section 6.4. 7.3.2 STI performance outcomes No STI awards were made in relation to the 2020 financial year. 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 NPATA. For Divisional executives, the hurdle is 90% of the Division budgeted profit target. Profit for this purpose is defined as EBITA. Specific STI financial and commercial targets remain commercially sensitive and so have not been reported. Regrettably, in July 2019, an employee of Otraco died as a result of an incident at our facility in Calama, Chile. Senior leaders from the business attended the site to meet with family and colleagues to offer support. Accordingly, the STI safety gate was not met for Corporate and the relevant business. An employee engagement survey was not conducted in 2020 due to constraints arising from COVID-19. Accordingly, no award was made in respect of the People measure. The following table summarises the average performance achieved by the KMP across each element of the scorecard. Group NPATA Divisional EBITA Group FFO Divisional FFO Zero Harm People Weighting of scorecard element Percentage of the element achieved Corporate Division Corporate Division1 30.0 7.5 0.0 0.0 22.5 0.0 30.0 7.5 0.0 0.0 22.5 50.0 30.0 30.0 12.5 64.6 10.0 10.0 0.0 0.0 1 Performance includes the results for each Division for each element, even if the EBITA gateway was not achieved. 42 Downer EDI Limited Directors’ Report – continuedfor the year ended 30 June 2020The following table sets out the performance achieved by each KMP across each element of the scorecard. G A Fenn and M J Ferguson Element Measure Below Threshold Threshold Target Maximum Safety and Environmental Employee engagement Profit (NPATA) FFO Zero Harm People Financial S Cinerari Element Measure Zero Harm People Financial S L Killeen Safety and Environmental Employee engagement Profit (NPATA) FFO Element Measure Zero Harm People Financial Safety and Environmental Employee engagement Profit (NPATA/EBITA) FFO P J Tompkins Element Measure Zero Harm People Financial Safety and Environmental Employee engagement Profit (NPATA/EBITA) FFO Below Threshold Below Threshold Below Threshold Threshold Target Maximum Threshold Target Maximum Threshold Target Maximum For 2020, the IPM was not applied to the members of the KMP as no STI awards were made. Annual Report 2020 43 7.3.3 LTI performance outcomes The table below summarises LTI performance measures tested and the outcomes for each executive. Relevant executives1 G A Fenn, S Cinerari, M J Ferguson, B C Petersen, P J Tompkins G A Fenn, S Cinerari, M J Ferguson, P J Tompkins Relevant LTI measure Performance outcome % LTI tranche that vested 2017 plan – performance period 1 July 2016 to 30 June 2019 TSR tranche – percentile ranking of Downer’s TSR relative to the constituents of the ASX 100 over a three-year period. Actual performance ranked at the 89th percentile based on a TSR result of 121.65%. 100% became provisionally qualified. EPS tranche – compound annual earnings per share growth against absolute targets over a three-year period. Scorecard tranche – sustained NPAT and FFO performance against budget over a three-year period. Actual performance was –0.19%. 0% became provisionally qualified. 100% were forfeited. Actual performance was 94.3% for NPAT and 162.6% for FFO. 45.1% became provisionally qualified. 54.9% were forfeited. 2018 plan – performance period 1 July 2017 to 30 June 20202 TSR tranche – percentile ranking of Downer’s TSR relative to the constituents of the ASX 100 over a three-year period. Actual performance ranked at the 18th percentile based on a TSR result of –17.9%. 0% became provisionally qualified. 100% were forfeited. EPS tranche – compound annual earnings per share growth against absolute targets over a three-year. Scorecard tranche – sustained NPAT and FFO performance against budget over a three-year period. Actual performance was –186.6%. 0% became provisionally qualified. 100% were forfeited. Actual performance was 41.1% for NPAT and 49.7% for FFO. 0% became provisionally qualified. 100% were forfeited. 1 2 Relevant executive refers to members of the KMP who are participants in the plan tested. Test outcomes for the 2018 plan are provisional and will be confirmed following release of the Company’s audited 2020 results. Accordingly, the outcomes are not reflected in the disclosures in section 8. 7.4 Major transactions and significant items 7.4.1 Major transactions There were no major transactions during 2020. 7.4.2 Adjustments made to incentive calculations for major transactions and significant items The Board determined that no adjustments be made to KPI calculations for the impact of significant items. 7.5 Variances from policy There were no variances from policy during the year. 44 Downer EDI Limited Directors’ Report – continuedfor the year ended 30 June 2020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 2019 Net Change Balance at 30 June 2020 Balance at 1 July 2019 Net Change Balance at 30 June 2020 No. 1,164,203 106,463 7,086 2,663 94,811 No. 418,015 156,756 (5,086) 12,865 90,700 No. 1,582,218 263,219 2,000 15,528 185,511 No. 1,555,492 595,766 236,670 132,045 303,149 No. (631,846) (236,943) (40,093) – (110,573) No. 923,646 358,823 196,577 132,045 192,576 G A Fenn S Cinerari M J Ferguson S L Killeen P J Tompkins 8.2 Preference shares KMP equity holdings in fully paid preference shares issued by Works Finance (NZ) Limited, a wholly-owned subsidiary of Downer EDI Limited, are as follows: S L Killeen Preference shares Balance at 1 July 2019 Net change Balance at 30 June 2020 No. 3,000 No. – No. 3,000 Annual Report 2020 45 8.3 Options and rights No performance options were granted by Downer EDI Limited or exercised during the 2020 financial year. As outlined in section 6.4.1, the LTI plan for the 2020 financial year is in the form of performance rights. During the year, the LTI plan for the 2020 financial year was approved as outlined in section 6.4 of this report; however due to ongoing restructuring of the Group, grants of performance rights have not yet been made to KMP; however they are expected to be made in early 2021. This means that grants in relation to 2020 and 2021 are expected to be made during the 2021 financial year. The following table shows the number of performance rights granted by Downer EDI Limited 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. G A Fenn S Cinerari M J Ferguson S L Killeen P J Tompkins 2016 Plan 2017 Plan Number of performance rights1 Vested % Forfeited % Number of performance rights2 Vested % Forfeited % 711,717 266,894 – – 124,551 58.7 58.7 – – 58.7 – – – – – 503,526 188,822 94,411 – 88,116 – – – – – 42.5 42.5 42.5 – 42.5 1 2 Grant date 30 June 2016. Expiry date is 1 July 2019. The fair value of shares granted was $3.24 per share for the EPS and Scorecard tranches and $0.97 per share for the TSR tranche. Grant date 21 June 2017. Expiry date is 1 July 2020. The fair value of shares granted was $5.29 per share for the EPS and Scorecard tranches and $4.61 per share for the TSR tranche. G A Fenn S Cinerari M J Ferguson S L Killeen P J Tompkins 2018 Plan 2019 Plan Number of performance rights1 Vested % Forfeited % Number of performance rights2 Vested % Forfeited % 332,160 137,016 70,584 66,240 66,432 – – – – – – – – – – 301,791 113,172 71,675 65,805 75,448 – – – – – – – – – – 1 2 Grant date 21 June 2018. Expiry date is 1 July 2021. The fair value of shares granted was $6.12 per share for the EPS and Scorecard tranches and $3.38 per share for the TSR tranche. Grant date 3 June 2019. Expiry date is 1 July 2022. The fair value of shares granted was $5.93 per share for the EPS and Scorecard tranches and $2.22 per share for the TSR tranche. 46 Downer EDI Limited Directors’ Report – continuedfor the year ended 30 June 2020 The maximum number of performance options and 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 P J Tompkins Maximum number of shares for the vesting year1 2021 289,695 108,635 54,318 – 50,696 2022 332,160 137,016 70,584 66,240 66,432 2023 301,791 113,172 71,675 65,805 75,448 1 The quantity of performance rights that may vest in future years has been adjusted in the 2021 financial year to reflect the discount to the market price of the Company’s shares offered to shareholders in the equity raising announced on 21 July 2020. The adjustment factor of 0.9812 is based on the theoretical ex-rights price (TERP) of $4.18 divided by the last share price prior to the announcement of the equity raising. The quantities in this table are before this adjustment. The maximum expense for performance options and 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. In respect of the 2020 plan an estimated expense has been recognised that will be trued up following formal valuation after the grants have been made. G A Fenn S Cinerari M J Ferguson S L Killeen P J Tompkins 2021 1,287,301 517,724 301,160 278,368 300,177 2022 854,348 339,131 209,158 192,028 213,586 2023 500,000 206,250 125,000 114,763 125,000 8.4 Remuneration consultants Guerdon Associates Pty Ltd was engaged by the Board Remuneration Committee to provide remuneration advice in relation to KMP, but did not provide the Board Remuneration Committee with remuneration recommendations as defined under Division 1, Part 1.2, 9B (1) of the Corporations Act 2001 (Cth). The Board was satisfied that advice received was free from any undue influence by Key Management Personnel to whom the advice may relate, because strict protocols were observed and complied with regarding any interaction between Guerdon Associates Pty Ltd and management, and because all remuneration advice was provided to the Board Remuneration Committee chair. 9. Key Terms of Employment Contracts 9.1 Notice and termination payments Executives are on contracts with no fixed end date. The following table captures the notice periods applicable to termination of the employment of executives. Managing Director Other Executives Termination notice period by Downer 12 months 12 months Termination notice period by employee 6 months 6 months Termination payments payable under contract 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. Annual Report 2020 47 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. $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. Downer can terminate Mr Fenn’s employment: (a) Immediately for misconduct or other circumstances justifying summary dismissal; or (b) By providing 12 months’ written notice. When notice is required, Downer can make a payment in lieu of notice of all or part of any notice period (calculated based on Mr Fenn’s fixed annual remuneration). If Mr Fenn resigns because ill health prevents him from continuing his duties, he will receive a payment in recognition of his past services equivalent to 12 months’ fixed remuneration. At the discretion of the Board, his shares under the LTI plan may also vest. If Downer terminates Mr Fenn’s employment on account of redundancy, in addition to the notice (or payment in lieu of notice) required to be given by Downer, Mr Fenn will receive a payment in recognition of his past services equivalent to 12 months’ fixed remuneration. If Mr Fenn resigns he will be subject to a six-month post-employment restraint in certain areas where the Downer Group operates, where he is restricted from working for competitive businesses. The agreement contains provisions regarding leave entitlements, duties, confidentiality, intellectual property, moral rights and other facilitative and ancillary clauses. It also contains provisions regarding corporate governance and a provision dealing with the Corporations Act 2001 (Cth) limits on termination benefits to be made to Mr Fenn. Fixed remuneration STI opportunity LTI opportunity Termination Other 48 Downer EDI Limited Directors’ Report – continuedfor the year ended 30 June 2020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 included: – The receipt of dividends from Downer EDI Limited – Participation in the Long-Term Incentive Plan – Terms and conditions of employment – 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. In recognition of the likely impact of the coronavirus on Downer and its people, the Directors decided to voluntarily reduce their fees by 50% for the Chairman and 30% for the other Non-executive Directors for the period 1 April 2020 to 30 June 2020. The funds from these voluntary remuneration reductions were used to establish a fund to provide financial assistance to Downer and Spotless employees who are experiencing severe hardship. Otherwise, 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 2021 financial year. Fees for Non-executive Directors are fixed and are not linked to the financial performance of the Company. The Board believes this is necessary for Non-executive Directors to maintain their independence. Shareholders approved an annual aggregate cap of $2.0 million for Non-executive Director fees at the 2008 AGM. The allocation of fees to Non-executive Directors within this cap has been determined after consideration of a number of factors, including the time commitment of Directors, the size and scale of the Company’s operations, the skill sets of Board members, the quantum of fees paid to Non-executive Directors of comparable companies and participation in Board Committee work. The basis of fees and the fee pool are reviewed when new Directors are appointed to the Board, when the structure of the Board changes, or at least every three years. Reference is made to individual Non-executive Director fee levels and workload (i.e. number of meetings and the number of Directors) at comparably sized companies from all industries other than the financial services sector, and the fee pools at these companies. In addition, an assessment is made on the extent of flexibility provided by the fee pool to recruit any additional Directors for planned succession after allocation of fees to existing Directors. The Chairman receives a base fee of $375,000 per annum (inclusive of all Committee fees) plus superannuation. The other Non- executive Directors each receive a base fee of $150,000 per annum plus superannuation. Additional fees are paid for Committee duties: $35,000 for the chair of the Audit and Risk Committee; and $15,000 for the chair of each of the Zero Harm Committee, Remuneration Committee, Rail Projects Committee and Tender Risk Evaluation Committee. 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. Annual Report 2020 49 11.2 Non-executive Directors’ remuneration The table below sets out the remuneration paid to Non-executive Directors for the 2020 and 2019 financial years. In recognition of the impact of the coronavirus pandemic on the Company and its people, Directors fees were reduced for the period 1 April 2020 to 30 June 2020 by 50% for the Chairman and 30% for the other Non-executive Directors. R M Harding S A Chaplain1 P S Garling T G Handicott N M Hollows C G Thorne P L Watson Short-term benefits Post-employment benefits Board fee $ Chair fee $ Total fees $ Super- annuation $ Termination benefits $ 328,125 375,000 52,917 150,000 138,750 150,000 138,750 150,000 138,750 150,000 138,750 150,000 138,750 16,965 – – – 21,146 13,875 15,000 13,875 15,000 32,375 13,854 19,167 30,000 8,583 – 328,125 375,000 52,917 171,146 152,625 165,000 152,625 165,000 171,125 163,854 157,917 180,000 147,333 16,965 31,172 35,625 5,027 16,259 14,499 15,675 14,499 15,675 16,257 15,566 15,002 17,100 13,997 1,612 – – – – – – – – – – – – – – Total $ 359,297 410,625 57,944 187,405 167,124 180,675 167,124 180,675 187,382 179,420 172,919 197,100 161,330 18,577 Year 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 1 Amounts represent the payments relating to the period during which the individual was a Non-executive Director (NED). 11.3 Equity held by Non-executive Directors The table below sets out the equity in Downer held by Non-executive Directors for the 2020 and 2019 financial years. 2020 2019 Balance at 1 July 2019 Net change Balance at 30 June 2020 Balance at 1 July 2018 Net change Balance at 30 June 2019 R M Harding P S Garling T G Handicott N M Hollows C G Thorne P L Watson 28,856 19,962 14,000 3,000 82,922 – – – 3,000 – – 6,329 28,856 19,962 17,000 3,000 82,922 6,329 14,210 16,940 14,000 – 82,922 – 14,646 3,022 – 3,000 – – 28,856 19,962 14,000 3,000 82,922 – 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, 12 August 2020 50 Downer EDI Limited Directors’ Report – continuedfor the year ended 30 June 2020Auditor’s Independence Declaration Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 To the Directors of Downer EDI Limited I declare that, to the best of my knowledge and belief, in relation to the audit of Downer EDI Limited for the financial year ended 30 June 2020 there have been: i. ii. no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. KPMG K NI_01  P__01Jpp  PAR_NAM_0 1  PAR_POS_01  PAR_DAT_01  PAR_CIT_01  K Cameron Slapp Partner Sydney 12 August 2020 PAR_SIG_01  PAR_NAM_01  PAR_POS_01  PAR_DAT_01  PAR_CIT_01  KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. Annual Report 2020 51                                         Independent Auditor’s Report for the year ended 30 June 2020 Independent Auditor’s Report To the shareholders of Downer EDI Limited Report on the audit of 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 2020 and of its financial performance for the year ended on that date; and The Financial Report comprises:  Consolidated statement of financial position as at 30 June 2020  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  complying with Australian Accounting Standards and the Corporations Regulations 2001. 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. 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. 52 Downer EDI Limited Key Audit Matters The Key Audit Matters we identified are:  Recognition of revenue  Value of goodwill Recognition of revenue Refer to Note B2 ‘Revenue’ ($12,669.4m) Key Audit Matters are those matters that, in our professional judgement, were of most significance in our audit of the Financial Report of the current period. These matters were addressed in the context of our audit of the Financial Report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. The key audit matter How the matter was addressed in our audit Recognition of revenue is a key audit matter due to the: • • Significance of revenue to the financial statements; and Large number of contracts with numerous estimation events potentially occurring over the course of the contract’s life. This results in complex and judgemental revenue recognition from rendering of services and construction contracts and therefore significant audit effort is required to gather sufficient audit evidence for revenue recognition. We focused on the Group’s assessment of the following elements of revenue recognition for rendering of services and construction contracts, as applicable: • Revisions to total expected costs for certain events or conditions occurring during the performance of the contract, or are expected to occur to complete the contract, which is difficult to estimate; • The Group’s assessment of when a modification to the contract scope and/or price for variations and claims is approved and enforceable. The Group’s consideration of the enforceability or approval may include evidence that is written, oral or implied by customary business practice and therefore requires a degree of judgement. The Group’s assessment of the enforceability of variations and claims can drive different accounting treatments, increasing the risk of inappropriately recognising revenue; and Our procedures included: • We obtained an understanding of the Group’s process of accounting for rendering of services and construction contract revenues. We considered the appropriateness of the Group’s accounting policy for rendering of services and construction contract revenues, including variations and claims and variable consideration, against the requirements of the accounting standards. We tested key controls such as: ‒ Management’s 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 potential legal risks; ‒ Management’s review of key contracts where events or conditions have occurred that require changes to revenue recognition; ‒ The Group’s requirement to obtain customer acceptance prior to billing an invoice. • We selected a statistical sample of revenue recognised and checked to customer approval of the service being performed or cash received. • 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 or variable consideration. We also included factors which indicated to us a greater level of judgement was required by the Group Annual Report 2020 53 Independent Auditor’s Report – continued for the year ended 30 June 2020 • The Group’s policy for the determination of the amount of revenue recognised from variable consideration which is highly probable of not reversing. Variable consideration is contingent on the Group’s performance and includes key performance payments, abatements offsetting revenue under the contract and liquidated damages. The Group's determination that variable consideration is highly probable requires a degree of estimation and judgement. This increased the audit effort we applied to gather sufficient audit evidence. when assessing the revenue recognition based on the estimates developed for current and forecast contract performance. For the samples selected, where relevant: ‒ we read the selected contract terms and conditions to evaluate the individual characteristics of each contract reflected in the Group’s estimate of revenue; ‒ we assessed the estimation of total expected costs, including cost contingencies for contracting risks, by challenging the Group’s project and finance managers on their estimations. We also checked key forecast cost assumptions to underlying documentation such as Enterprise Bargaining Agreements for wage rates, salary costs 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 evaluated the Group’s assessment of when a modification to the contract scope and/or price for variations and claims is approved and enforceable. This included assessing the underlying records, legal documents, customer correspondence and contracts. We recalculated the amount of revenue using the modified features of the contract. We compared the recalculated amounts against the amounts recorded by the Group; ‒ we assessed the Group’s estimation of the highly probable amount of revenue for variations and claims. This included comparing underlying evidence such as timesheets, correspondence with customers, and reports from objective time and cost claim experts (where applicable) for consistency with contract terms; ‒ we evaluated the Group’s legal and external experts’ reports received on contentious matters to identify conditions indicating 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; ‒ we assessed the scope, competency and objectivity of the legal and external experts engaged by the Group; and • we evaluated the method applied by the Group to estimate the highly probable amount of the 54 Downer EDI Limited key performance payments, liquidated damages and abatements against the specific contract terms. This included gathering underlying evidence in relation to the Group’s performance against the terms of the contract. We then recalculated the amount of variable consideration. We compared the recalculated amounts to the amounts recorded by the Group as offsets to revenue. Value of goodwill Refer to Note C7 ‘Intangible assets’ ($2,281.3m) The key audit matter How the matter was addressed in our audit The value of goodwill is a key audit matter due to the size of the balance (being 26.3% of total assets) and the significant audit effort arising from: • • The Group having 8 groups of Cash Generating Units (CGUs) for which the impairment of goodwill is assessed; Significantly higher estimation uncertainty continuing from the business disruption impact to the Spotless CGU arising from the COVID-19 global pandemic; • A recorded impairment charge of $165m against goodwill in the Spotless CGU, increasing the sensitivity of the model to small changes in key assumptions. We focused on the following key forward looking assumptions in the Group’s value in use models and fair value less cost of disposal models including: • Forecast cash flows including budgeted EBIT - the Group experienced significant business disruption in the Spotless CGU as a result of the COVID-19 pandemic and announced restructuring. The uncertainty continuing from the business interruption of the COVID-19 pandemic increases the risk of inaccurate forecasts or a significantly wider range of possible outcomes for us to consider. We focused on what the Group considers to be the future Spotless business model when assessing the feasibility of the CGU’s forecast cashflows. • Discount rates – these are complicated in nature and vary according to the conditions and environment the specific CGU is Our procedures included: • We obtained an understanding of the Group’s goodwill impairment assessment process and tested key controls such as the review and approval of the budget by management and the Board. • We considered the appropriateness of the value in use and fair value less cost of disposal (FVLCOD) methods applied by the Group to perform the annual test of goodwill for impairment against the requirements of the accounting standards. • We assessed the integrity of the value in use and FVLCOD models used, including the accuracy of the underlying calculation formulas. • We assessed the accuracy of previous Group forecasting to inform our evaluation of forecasts included in the value in use and FVLCOD models. 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 obtained the Group’s value in use models and FVLCOD model and checked amounts to the Board approved FY21 budget and the FY22- FY23 business plan. We challenged the Group’s projected cash flows by comparing the budget and business plan to our understanding of the business. We compared actual performance in FY20 to the budget for FY20. We also compared the compound annual growth rate between FY19 and the terminal year in the models to further challenge the projected cash flows in a COVID-19 economic environment. Annual Report 2020 55 Independent Auditor’s Report – continued for the year ended 30 June 2020 subject to from time to time; and • • Long-term growth rates – certain valuations for CGUs of the Group are highly sensitive to changes in this assumption. Using forward-looking assumptions tends to be prone to greater risk for potential bias, error and inconsistent application. These conditions necessitate additional scrutiny by us, in particular to address the objectivity of sources used for assumptions, and their consistent application. The significant judgement involved in key assumptions required the involvement of valuation specialists to supplement our senior audit team members in assessing this key audit matter. 56 Downer EDI Limited For the Spotless CGU we challenged the Group’s assessment of cash flow synergies a market participant would expect to generate following the acquisition of the minority interest in Spotless. We compared cost savings to the Group’s Board approved restructuring plans following the acquisition. • We considered the sensitivity of the models by varying key assumptions including budgeted EBIT, long-term growth rates and discount rates, within a reasonably possible range. We considered the interdependencies of key assumptions when performing the sensitivity analysis. We did this to identify those CGUs at higher risk of impairment and those assumptions at higher risk of bias or inconsistency in application to focus our further procedures. • For the Spotless CGU, we further challenged the Group’s significant forecast cash flow assumptions including impacts of COVID-19 and expected rate of recovery, what the Group considers as their future business model and budgeted EBIT for the CGU. We compared forecast cash flows to authoritative published studies of industry trends and expectations, and considered differences for the Group’s operations. • We checked the consistency of the forecast cash flows to the Group’s business plans and our experience regarding the feasibility of these in the industry and COVID-19 economic environment in which they operate. • Working with our valuation specialists we: ‒ ‒ ‒ independently developed a discount rate range using publicly available market data for comparable entities, adjusted by risk factors specific to the Group and the industry it operates in; independently assessed the long term growth rate for each of the CGUs against publicly available market data for comparable entities and compared this to the Group’s assumption; and compared the implied multiples from comparable market transactions to the implied multiple from the Group’s FVLCOD model. • For the Spotless CGU we recalculated the impairment charge against the recorded amount. • 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 and the requirements of the accounting standards. 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 opinion. In connection with our audit of the Financial Report, our responsibility is to read the Other Information. In doing so, we consider whether the Other Information is materially inconsistent with the Financial Report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the work we have performed on the Other Information that we obtained prior to the date of this Auditor’s Report we have nothing to report. Responsibilities of 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 and whether the use of the going concern basis of accounting is appropriate. 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 the 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_responsibilities/ar1.pdf. This description forms part of our Auditor’s Report. Annual Report 2020 57 Independent Auditor’s Report – continued for the year ended 30 June 2020 Report on the Remuneration Report Opinion Directors’ responsibilities In our opinion, the Remuneration Report of Downer EDI Limited for the year ended 30 June 2020, complies with Section 300A of the Corporations Act 2001. 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 24 to 50 of the Directors’ report for the year ended 30 June 2020. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. KPM_INI_01  KPMG Cameron Slapp Partner Sydney 12 August 2020 Stephen Isaac Partner 58 Downer EDI Limited                   Financial Statements for the year ended 30 June 2020 Page 60 Page 61 Page 62 Page 63 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 64-65 Page 66-78 Page 79-91 Page 92-94 Page 95-102 Page 103-111 Page 112-124 B1 Segment information B2 Revenue C1 Reconciliation of cash and cash equivalents D1 Employee benefits E1 Borrowings F1 Joint arrangements and associate entities G1 New accounting standards C2 Trade receivables and contract assets D2 Defined benefit plan E2 Financing facilities F2 Acquisition of businesses B3 Individually significant items C3 Inventories D3 Key management personnel compensation B4 Earnings per share C4 Trade payables and contract liabilities D4 Employee discount share plan B5 Taxation B6 Remuneration of auditor C5 Property, plant and equipment C6 Right-of-use assets B7 Subsequent events C7 Intangible assets C8 Lease receivables C9 Other provisions C10 Contingent liabilities E3 Lease liabilities F3 Controlled entities F4 Related party information F5 Parent entity disclosures E4 Commitments E5 Issued capital E6 Non-controlling interest (NCI) E7 Reserves E8 Dividends Page 125 Directors’ Declaration Other information Page 126 Sustainability Performance Summary 2020 Page 130 Corporate Governance Page 140 Information for Investors G2 Capital and financial risk management G3 Other financial assets and liabilities Annual Report 2020 59 Consolidated Statement of Profit or Loss and Other Comprehensive Income for the year ended 30 June 2020 Revenue Other income Total revenue and other income Employee benefits expense Subcontractor costs Raw materials and consumables used Plant and equipment costs Depreciation on leased assets Other depreciation and amortisation Impairment of non-current assets Other expenses from ordinary activities Total expenses Share of net profit of joint ventures and associates Earnings before interest and tax Finance income Lease finance costs Other finance costs Net finance costs (Loss) / profit before income tax Income tax expense (Loss) / profit after income tax (Loss) / profit for the year is attributable to: – Non-controlling interest – Members of the parent entity (Loss) / profit for the year Other comprehensive income Items that may be reclassified subsequently to profit or loss – Actuarial movement on net defined benefit plan obligation – Income tax effect of actuarial movement on defined benefit plan obligation Items that will 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 effect of items above Other comprehensive loss for the year (net of tax) Other comprehensive loss for the year is attributable to: – Non-controlling interest – Members of the parent entity Other comprehensive loss for the year Note B2 B2 D1 C6 C5,C7 F1(a) B5(a) D2 2020 $’m  2019 $’m 12,669.4  73.3  12,742.7  (4,217.3) (4,406.0) (2,157.7) (660.6) (151.8) (365.5) (212.0) (632.5) (12,803.4) 12,789.4  23.3  12,812.7  (4,340.4) (4,193.7) (2,114.4) (689.8) – (360.0) – (682.6) (12,380.9) 19.4  (41.3) 6.0  (26.4) (91.6) (112.0) (153.3) (2.4) (155.7) (5.4) (150.3) (155.7) 0.7  (0.2) (14.6) (3.3) (5.3) 2.9  (19.8) (1.0) (18.8) (19.8) 30.4  462.2  8.8  – (91.2) (82.4) 379.8  (103.5) 276.3  14.5  261.8  276.3  –  –  9.6  (2.0) (13.7) 4.3  (1.8) (0.9) (0.9) (1.8) Total comprehensive (loss) / income for the year (175.5) 274.5  Earnings per share (cents) – Basic earnings per share – Diluted earnings per share(i) B4 B4 (26.6) (26.6) 42.9  42.3  (i) At 30 June 2020, the ROADS are anti-dilutive and consequently, diluted EPS remained at a loss of 26.6 cents per share. The consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes on pages 64 to 124. 60 Downer EDI Limited Consolidated Statement of Financial Position as at 30 June 2020 ASSETS Current assets Cash and cash equivalents Trade receivables and contract assets Other financial assets Inventories Lease receivables Current tax assets Prepayments and other assets Total current assets Non-current assets Trade receivables and contract assets Interest in joint ventures and associates Property, plant and equipment Right-of-use assets Intangible assets Other financial assets Lease receivables Deferred tax assets Prepayments and other assets Total non-current assets Total assets LIABILITIES Current liabilities Trade payables and contract liabilities Borrowings Lease liabilities Other financial liabilities Employee benefits provision Other provisions Current tax liabilities Total current liabilities Non-current liabilities Trade payables and contract liabilities Borrowings Lease liabilities Other financial liabilities Employee benefits provision Other provisions Deferred tax liabilities Total non-current liabilities Total liabilities Net assets EQUITY Issued capital Reserves Retained earnings Parent interests Non-controlling interest Total equity 30 June 2020 $’m  Restated(i) 30 June 2019 $’m  588.5  2,315.9  26.2  334.0  18.5  65.2  56.4  3,404.7  95.2  110.6  1,350.2  592.6  2,896.1  21.4  48.3  141.5  11.9  5,267.8  8,672.5  2,497.4  1.4  168.9  45.8  377.1  74.1  11.0  3,175.7  28.8  2,049.9  594.3  14.4  55.0  39.4  94.5  2,876.3  6,052.0  2,620.5  2,429.7  (47.7) 94.3  2,476.3  144.2  2,620.5  710.7  1,991.5  35.0  304.6  12.4  57.7  52.8  3,164.7  74.4  108.8  1,373.3  –  3,130.7  5.2  38.7  100.9  18.7  4,850.7  8,015.4  2,405.5  14.6  –  47.4  365.3  107.0  15.4  2,955.2  51.3  1,688.9  –  20.0  45.1  84.5  137.6  2,027.4  4,982.6  3,032.8  2,425.1  (27.5) 481.4  2,879.0  153.8  3,032.8  Note C1(c) C2 G3 C3 C8 C2 F1(a) C5 C6 C7 G3 C8 B5(b) C4 E1 E3 G3 D1 C9 C4 E1 E3 G3 D1 C9 B5(b) E5 E7 E6 (i) June 2019 balances have been restated following review of the Group’s compliance with Enterprise Agreements (EAs) and Modern Award obligations (Refer to Note D1). The consolidated statement of financial position should be read in conjunction with the accompanying notes on pages 64 to 124. Annual Report 2020 61 Consolidated Statement of Changes in Equity for the year ended 30 June 2020 2020 $’m Restated balance at 30 June 2019 Opening balance adjustment on application of AASB 16(i) (net of tax) Balance at 1 July 2019 Loss after income tax Other comprehensive loss for the year (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 Declared dividends(ii) Balance at 30 June 2020 Issued capital Reserves Retained earnings Total attributable to owners of the parent Non- controlling interest Total 2,425.1  (27.5) 481.4  2,879.0  153.8  3,032.8  –  2,425.1  –  –  –  4.6  –  –  –  2,429.7  –  (27.5) –  (18.8) (18.8) (4.6) 4.8  (1.6) –  (47.7) (62.8) 418.6  (150.3) –  (150.3) –  –  –  (174.0) 94.3  (62.8) 2,816.2  (150.3) (18.8) (169.1) –  4.8  (1.6) (174.0) 2,476.3  (3.2) 150.6  (5.4) (1.0) (6.4) –  –  –  –  144.2  (66.0) 2,966.8  (155.7) (19.8) (175.5) –  4.8  (1.6) (174.0) 2,620.5  (i) Refer to Note G1 for details on opening balance adjustments made on application of new accounting standard AASB 16. (ii) Relates to the 2019 final dividend and $7.4 million ROADS dividends paid during the financial year. The payment of 2020 interim dividend of $83.3 million was deferred to 25 September 2020 (Refer to Note E8). 2019 Balance at 30 June 2018 Adjustment on restatement of employee obligations (net of tax)(i) Restated balance at 1 July 2018 Opening balance adjustment on application of AASB 15 (net of tax)(ii) Restated balance at 1 July 2018 Profit after income tax Other comprehensive loss for the year (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 Payment of dividends(iii) Restated balance at 30 June 2019 Reserves Retained earnings Total attributable to owners of the parent Non- controlling interest Total (26.9) –  (26.9) –  (26.9) –  (0.9) (0.9) (3.2) 4.0  (0.5) –  (27.5) 655.1  3,050.1  155.0  3,205.1  (15.3) 639.8  (245.3) 394.5  261.8  –  261.8  –  –  –  (174.9) 481.4  (15.3) 3,034.8  (245.3) 2,789.5  261.8  (0.9) 260.9  –  4.0  (0.5) (174.9) 2,879.0  (2.1) 152.9  (12.7) 140.2  14.5  (0.9) 13.6  –  –  –  –  153.8  (17.4) 3,187.7  (258.0) 2,929.7  276.3  (1.8) 274.5  –  4.0  (0.5) (174.9) 3,032.8  Issued capital 2,421.9  –  2,421.9  –  2,421.9  –  –  –  3.2  –  –  –  2,425.1  June 2019 balances have been restated following review of the Group’s compliance with Enterprise Agreements (EAs) and Modern Award obligations (Refer to Note D1). Refer to Annual Report as at 30 June 2019 for details on opening balance adjustments made on application of new accounting standard AASB 15. (i) (ii) (iii) Payment of dividend relates to the 2018 final dividend, 2019 interim dividend and $8.3 million 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 64 to 124. 62 Downer EDI Limited Consolidated Statement of Cash Flows for the year ended 30 June 2020 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Distributions from equity accounted investees Operating cash flow before interest and tax Interest received Interest paid on lease liabilities(i) Interest and other costs of finance paid Income tax paid Net cash generated by operating activities Cash flows from investing activities Proceeds from sale of property, plant and equipment Payments for property, plant and equipment Payments for intangible assets Payments for acquisition of businesses, net of cash acquired Investment in joint venture entities Divestment of Freight Rail Advances to joint ventures Purchases of assets as a lessor Recovery on acquisition of business Net cash used in investing activities Cash flows from financing activities Proceeds from borrowings Repayments of borrowings Payment of principal of lease liabilities(ii) Dividends paid Net cash generated by / (used in) financing activities Net (decrease) / increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effect of exchange rate changes Cash and cash equivalents at the end of the year Note 2020 $’m  2019 $’m  13,841.5  (13,518.3) 17.2  340.4  4.7  (26.4) (82.0) (57.9) 178.8  21.9  (290.7) (61.7) (29.8) –  –  (3.6) (34.0) –  (397.9) 7,411.9  (7,063.2) (152.9) (90.7) 105.1  (114.0) 710.7  (8.2) 588.5  F1(a) C1(a) F2 F1(a) C1(b) C1(c) 14,177.4  (13,442.8) 22.4  757.0  5.2  –  (76.1) (55.9) 630.2  16.1  (346.2) (44.8) (63.0) (8.5) (6.9) (5.5) (52.6) 1.7  (509.7) 3,859.3  (3,704.2) –  (174.9) (19.8) 100.7  606.2  3.8  710.7  (i) The Group has classified: – cash payments for the interest portion of lease payments as operating activities consistent with the presentation of other interest payments – short-term lease payments and payments for leases of low-value assets as operating activities. (ii) The Group has classified cash payments for the principal portion of lease payments as financing activities. The consolidated statement of cash flows should be read in conjunction with the accompanying notes on pages 64 to 124. Annual Report 2020 63 Notes to the consolidated financial statements for the year ended 30 June 2020 A About this report Statement of compliance Accounting estimates and judgements 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 report 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 12 August 2020. 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 value of the consideration given in exchange for assets. All amounts are presented in Australian dollars, unless otherwise noted. The accounting policies used 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 2019, except in relation to the relevant new and amended accounting standards adopted by the Group and their effects on the current period or prior periods as described in Note G1. During the current reporting period the Group completed a review of employment arrangements relating to Spotless. This review identified an underpayment of employee entitlements relating to current and previous years. The comparative balances have been voluntarily restated under AASB 101 Presentation of Financial Statements in respect of these adjustments as described in Note D1. 64 Downer EDI Limited 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 Credit risk B2 B5 B5 C2 Useful lives and residual values C5 to C7 Impairment of assets Other provisions Employee benefits obligations Valuation of the defined benefit plan assets and obligations Lease liabilities Acquisition of businesses C7 C9 D1 D2 E3 F2 73 76 76 82 83 86 90 93 94 98 108 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. A. About this report – continued In preparing the Financial Report, all intercompany balances and transactions, and unrealised profits arising within the consolidated entity, are eliminated in full. (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 Monetary assets and liabilities Reporting date Non-monetary assets and liabilities carried at fair value Date of transaction 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 Assets and liabilities Equity Average exchange rate Reporting date Historical 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, unwind of discount on provisions, costs 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 lease charges. (iv) Non-current assets held for sale and discontinued operations On 22 August 2019, the Group announced it was undertaking a review of its Mining and Laundries businesses. As a consequence of market volatility caused by the COVID-19 pandemic, these businesses have not met the definition of assets held for sale under AASB 5, as any potential disposal is not considered highly probable of occurring at the reporting date. Annual Report 2020 65 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. Revenue B3. Individually significant items B4. 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. B5. Taxation B6. Remuneration of auditor B7. 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. 66 Downer EDI Limited Notes to the consolidated financial statements – continuedfor the year ended 30 June 2020B1. Segment information – continued The reportable segments identified within the Group are outlined as follows: Service line Segment description Transport Utilities Facilities Comprises the Group’s road services, transport infrastructure and rail businesses. Downer’s road and transport infrastructure services include: road network management; routine road maintenance; asset management systems; spray sealing; asphalt laying; manufacture and supply of bitumen-based products and asphalt products; the use of recycled products and environmentally sustainable methods to produce asphalt; landfill diversion solutions; intelligent transport systems; design and construction of light rail and heavy rail networks; signalling; track and station works; rail safety technology; and bridges. The Rail business spans all light rail and heavy rail sectors, from rollingstock to infrastructure; from design and manufacture to through-life-support including fleet maintenance, operations and comprehensive overhaul of assets. 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 water and wastewater treatment, network construction and rehabilitation; design, construction and maintenance services for a range of renewable assets in the wind, solar and power system storage sectors; and end-to-end technology and communications solutions including design, civil construction, network construction, operations and maintenance across fibre, copper and radio networks. Facilities operates in Australia and New Zealand and provides outsourced facility services to customers across a diverse range of industry sectors including: defence; education; government; healthcare; resources; leisure; and hospitality. Facilities provides catering and laundry services; technical and engineering services; maintenance and asset management services and refrigeration solutions to various industries; as well as building and construction solutions across a variety of sectors in New Zealand. Engineering, Construction and Maintenance (EC&M) Provides design, engineering, construction, shutdowns, turnaround and outage delivery, operations maintenance and ongoing management of strategic assets across a range of sectors and in all stages of the project lifecycle including: feasibility studies; engineering design; procurement and construction; structural, mechanical and piping; electrical and instrumentation; commissioning and decommissioning services; and design and manufacture of mineral process equipment. Mining Provides services across all stages of the mining lifecycle including: resource definition; exploration drilling and mine feasibility studies; open cut and underground mining services; drilling, explosives manufacture and supply; blasting and crushing; asset management; tyre management; and mine closure and rehabilitation. Annual Report 2020 67 B1. Segment information – continued 2020 $’m Transport Utilities Facilities EC&M Mining Un- allocated Total Segment revenue and other income 4,081.1  2,688.0  3,308.4 1,168.0  1,493.1  4.1  12,742.7  Share of sales revenue from joint ventures and associates(i) Total revenue including joint ventures and other income(i) 611.2  –  7.3  –  56.7  –  675.2  4,692.3  2,688.0  3,315.7  1,168.0  1,549.8  4.1  13,417.9  Share of net profit from joint ventures and associates Depreciation and amortisation EBIT before amortisation of acquired intangibles and historical contract claims adjustments Historical contract claims adjustments(ii) EBIT before amortisation of acquired intangibles (EBITA) Amortisation of acquired intangibles Total reported segment results (EBIT) 15.3  150.2  235.6  –  235.6  (10.9) 224.7  –  40.1  114.6  –  114.6  (2.6) 112.0 0.3  109.8  114.3  (9.9) 104.4  (9.8) 94.6  –  15.3  (42.1) (8.9) (51.0) –  (51.0) 3.8  119.2  79.0  –  79.0  –  79.0  –  82.7  (452.6) –  (452.6) (48.0) (500.6) Net finance costs Total loss before income tax Acquisition of segment assets Segment assets Segment liabilities Carrying value of equity accounted investees 98.3  2,649.1  1,278.6  101.1  34.9  1,193.6  478.5  –  68.5  2,624.2  1,751.2  1.2  3.8  617.4  345.6  –  107.0  939.0  339.8  8.3  30.2  649.2  1,858.3  –  19.4  517.3  48.8 (18.8) 30.0  (71.3) (41.3) (112.0) (153.3) 342.7  8,672.5  6,052.0  110.6  2019 $’m Transport Utilities Facilities EC&M Mining Un- allocated Total Segment revenue and other income 3,775.7  2,506.7  3,384.7  1,704.6  1,423.5  17.5  12,812.7  Share of sales revenue from joint ventures and associates(i) Total revenue including joint ventures and other income(i) 572.6  –  8.0  –  55.0  –  635.6  4,348.3  2,506.7  3,392.7  1,704.6  1,478.5  17.5  13,448.3  Share of net profit from joint ventures and associates Depreciation and amortisation EBIT before amortisation of acquired intangibles (EBITA) Amortisation of acquired intangibles Total reported segment results (EBIT) 26.6  67.2  242.4  (8.3) 234.1  –  18.0  136.1  (3.2) 132.9  0.5  90.1  170.5  (11.9) 158.6  –  9.4  33.3  –  33.3  3.3  114.2  76.7  –  76.7  Net finance costs Total profit before income tax –  61.1  30.4  360.0  (126.4) (47.0) (173.4) 532.6  (70.4) 462.2  (82.4) 379.8  Acquisition of segment assets Segment assets(iii) Segment liabilities(iii) Carrying value of equity accounted investees 228.0  2,126.0  925.0  99.1  24.0  1,268.9  566.5  –  101.5  2,787.7  1,591.7  1.6  14.7  570.4  327.6  –  184.1  839.1  294.0  8.1  39.4  423.3  1,277.8  –  591.7  8,015.4  4,982.6  108.8  (i) This is a non-statutory disclosure as it relates to Downer’s share of revenue from equity accounted joint ventures and associates. (ii) Relates to historical Spotless contracts on foot at the time of Downer acquisition which are separately monitored by the Group’s Chief Operating Decision Maker. (iii) June 2019 balances have been restated following review of the Group’s compliance with Enterprise Agreements (EAs) and Modern Award obligations (Refer to Note D1). 68 Downer EDI Limited Notes to the consolidated financial statements – continuedfor the year ended 30 June 2020B1. Segment information – continued Reconciliation of segment EBIT to net (loss) / profit after tax: Segment EBIT Unallocated: Portfolio restructure and exit costs Payroll remediation costs Goodwill impairment Spotless Shareholder class action Legal settlement Murra Warra wind farm loss Amortisation of Spotless and Tenix acquired intangible assets Fair value gain on revaluation of existing interest in Downer Mouchel Joint Venture Corporate costs Total unallocated Earnings before interest and tax Net finance costs (Loss) / profit before income tax Income tax expense (Loss) / profit after income tax Segment assets by geographical location: Segment results Note  B3 B3 B3 B3 B3 B3 B5(a) 2020 $’m  459.3  (142.4) (16.3) (165.0) (34.0) (9.5) –  (48.0) –  (85.4) (500.6) (41.3) (112.0) (153.3) (2.4) (155.7) 2019 $’m  635.6  –  –  –  –  –  (45.0) (47.0) 17.0  (98.4) (173.4) 462.2  (82.4) 379.8  (103.5) 276.3  Geographical location(i) Australia New Zealand and Pacific Rest of the world Total (i) Assets are allocated based on the geographical location of the legal entity. (ii) Total of non-current assets other than deferred tax assets and financial instruments. Segment assets Non-current(ii) 2020 $’m  2019 $’m  4,394.7  559.2  7.5  4,961.4  4,222.5  404.4  4.6  4,631.5  Acquisition of segment assets Non-current 2020 $’m  273.1  64.8  4.8  342.7  2019 $’m  545.0  46.4  0.3  591.7  Annual Report 2020 69 B2. Revenue Revenue and other income 2020 $’m Service revenue Construction contracts Sale of goods Total revenue from contracts with customers Other revenue Total revenue Government grants(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 other income(ii) 2019 $’m Service revenue Construction contracts Sale of goods Total revenue from contracts with customers Other revenue Total revenue Other income Total revenue and other income Share of sales revenue from joint ventures and associates(ii) Total revenue including joint ventures and other income(ii) Transport Utilities Facilities EC&M Mining Un- allocated 2,837.0  1,025.2  191.7  4,053.9  2.9  4,056.8  21.1  3.2  24.3  1,730.4  936.7  1.1  2,668.2  1.1  2,669.3  17.1  1.6  18.7  2,425.8  749.7  108.5  3,284.0  –  3,284.0  24.4  – 24.4  833.5  315.4  13.9  1,162.8  3.7  1,166.5  –  1.5 1.5  1,446.1  –  42.6  1,488.7  –  1,488.7  –  4.4  4.4  4,081.1  2,688.0  3,308.4  1,168.0  1,493.1  –  –  –  –  4.1  4.1  –  –  –  4.1  Total 9,272.8  3,027.0  357.8  12,657.6  11.8  12,669.4  62.6  10.7  73.3  12,742.7  611.2  –  7.3  –  56.7  –  675.2  4,692.3  2,688.0  3,315.7  1,168.0  1,549.8  4.1  13,417.9  Transport Utilities Facilities EC&M Mining 2,628.4  936.9  204.4  3,769.7  5.2  3,774.9  1,441.7  1,061.5  1.2  2,504.4  1.4  2,505.8  2,381.7 821.6  180.5 3,383.8  –  3,383.8  914.6  767.0  14.9  1,696.5  6.9  1,703.4  1,363.5  –  57.0  1,420.5  0.9  1,421.4  0.8  0.9  0.9  1.2  2.1  Un- allocated (1.4) –  –  (1.4) 1.5  0.1  17.4  Total 8,728.5 3,587.0  458.0 12,773.5  15.9  12,789.4  23.3  3,775.7  2,506.7  3,384.7  1,704.6  1,423.5  17.5  12,812.7  572.6  –  8.0  –  55.0  –  635.6  4,348.3  2,506.7  3,392.7  1,704.6  1,478.5  17.5  13,448.3  (i) Government grants represents incentives received under the New Zealand Government’s wage subsidy scheme available to eligible businesses impacted by the COVID-19 pandemic. (ii) This is a non-statutory disclosure as it relates to Downer’s share of revenue from equity accounted joint ventures and associates. 70 Downer EDI Limited Notes to the consolidated financial statements – continuedfor the year ended 30 June 2020B2. Revenue – continued Revenue from contracts with customers by geographical location: 2020 $’m Geographical location(i) Australia New Zealand and Pacific Rest of the world Total revenue from contracts with customers 2019 $’m Geographical location(i) Australia New Zealand and Pacific Rest of the world Total revenue from contracts with customers Transport Utilities Facilities EC&M Mining Un- allocated Total 2,883.8  1,170.0  0.1  2,098.1  570.1  –  2,549.5  734.5  –  1,124.5  –  38.3  1,429.2  –  59.5  4,053.9  2,668.2  3,284.0  1,162.8  1,488.7  Transport Utilities Facilities EC&M Mining –  –  –  –  Un- allocated 2,610.2  1,159.5  –  2,007.8  496.6  –  2,481.6  902.2  –  1,676.5  0.2  19.8  1,364.0  –  56.5  (1.4) –  –  10,085.1  2,474.6  97.9  12,657.6  Total 10,138.7  2,558.5  76.3  3,769.7  2,504.4  3,383.8  1,696.5  1,420.5  (1.4) 12,773.5  (i) Revenue is allocated based on the geographical location of the legal entity. Recognition and measurement Revenue The Group recognises revenue when a customer obtains control of the goods or services, in accordance with AASB 15 Revenue from Contracts with Customers. Revenue is measured at the fair value of the consideration received or receivable. Determining the timing of the transfer of control – at a point in time or over time – requires judgement. 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 – Facilities management. Typically, under the performance obligations of a service contract, the customer consumes and receives the benefit of the service as it is provided. As such, service revenue is recognised over time as the services are provided. (ii) Construction contracts The contractual terms and the way in which the Group operates its construction contracts is predominantly derived from projects containing one performance obligation. Under these performance obligations, customers either simultaneously receive and consume the benefits as the Group performs them or performance creates or enhances an asset that the customer controls as the asset is created or enhanced. Therefore, contracted revenue is recognised over time based on stage of completion of the contract. (iii) Sale of goods Revenue is recognised at a point in time when the customer obtains control of goods. (iv) Other revenue Other revenue primarily includes rental income. (v) Other income Other income for the current year primarily relates to government grants received under the New Zealand Government’s Wage Subsidy Scheme available to eligible businesses that were adversely impacted by the COVID-19 pandemic. The Group elects to present these subsidies in “Other income” as allowed under AASB 120 Accounting for Government grants and disclosure of Government assistance. Annual Report 2020 71 B2. Revenue – continued Recognition and measurement – continued Contract modifications For services and construction contracts, revenue from variations and claims is recognised to the extent they are approved or enforceable under the contract. The amount of revenue is then recognised to the extent it is highly probable that a significant reversal of revenue will not occur. In making this assessment, the Group considers a number of factors including nature of the claim, formal or informal acceptance by the customer of the validity of the claim, stage of negotiations, or the historical outcome of similar claims to determine whether the enforceable and “highly probable” threshold has been met. Revenue in relation to modifications, such as a change in the scope of the contract, will only be included in the transaction price, when it is approved by the parties to the contract or the modification is enforceable and the amount becomes highly probable. Modifications may also be recognised when client instruction has been received in line with customary business practice for the customer. Contract costs (tender costs) Costs incurred during the tender/bid process are expensed, unless they are incremental to obtaining the contract and the Group expects to recover those costs or where they are explicitly chargeable to the customer regardless of whether the contract is obtained. Performance obligations and contract duration Revenue is allocated to each performance obligation and recognised as the performance obligation is satisfied which may be at a point in time or over time. AASB 15 requires a granular approach to identify the different revenue streams (i.e. performance obligations) in a contract by identifying the different activities that are being undertaken and then aggregating only those where the different activities are significantly integrated or highly interdependent. Revenue will be recognised, on certain contracts over time, as a single performance obligation when the services are part of a series of distinct goods and services that are substantially integrated with the same pattern of transfer. AASB 15 provides guidance in respect of the term over which revenue may be recognised and is limited to the period for which the parties have enforceable rights and obligations. When the customer can terminate a contract for convenience (without a substantive penalty), the contract term and related revenue is limited to the termination period. The Group has elected to apply the practical expedient to not adjust the total consideration over the contract term for the effect of a financing component if the period between the transfer of services to the customer and the customer’s payment for the services is expected to be one year or less. Measure of progress The Group recognises revenue using the measure of progress that best reflects the Group’s performance in satisfying the performance obligation within the contracts over time. The different methods of measuring progress include an input method (e.g. costs incurred) or an output method (e.g. milestones reached). The same method of measuring progress will be consistently applied to similar performance obligations. Variable consideration Variable consideration that is contingent on the Group’s performance, including key performance payments, liquidated damages and abatements that offset revenue under the contract, is recognised only when it is highly probable that a reversal of that revenue will not occur. In addition, where the identified revenue stream is determined to be a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer (for example maintenance services), variable consideration is recognised in the period/(s) in which the series of distinct goods or services subject to the variable consideration are completed. Loss-making contracts Loss-making contracts are recognised under AASB 137 Provisions, Contingent Liabilities and Contingent Assets as onerous contracts. 72 Downer EDI Limited Notes to the consolidated financial statements – continuedfor the year ended 30 June 2020B2. Revenue – continued Recognition and measurement – continued Key estimates and judgements: Revenue recognition Stage of completion Determining the stage of completion requires an estimate of expenses incurred to date as a percentage of total estimated costs. Modifications When a contract modification exists and the Group has an approved enforceable right to payment, revenue in relation to claims and variations is only included in the transaction price when the amount claimable becomes highly probable. Management uses judgement in determining whether an approved enforceable right exists. Variable consideration Determining the amount of variable consideration requires an estimate based on either the “expected value” or the “most likely amount”. The estimate of variable consideration can only be recognised to the extent it is highly probable that a significant revenue reversal will not occur in future. Changes in these estimates or judgements could have a material impact on the financial statements of the Group. B3. Individually significant items The following material items of expenses, forming part of the unallocated segment, are relevant to an understanding of the Group’s financial performance: 2020 $’m Employee benefits expense Raw materials and consumables used Impairment of non-current assets Other expenses from ordinary activities Loss before interest and tax Income tax benefit Loss after income tax  Portfolio restructure and exit costs Payroll remediation costs Goodwill impairment Spotless shareholder class action Legal settlement 42.1 9.7 46.6 44.0 142.4 (42.2) 100.2 8.9 – – 7.4 16.3 (4.5) 11.8 – – 165.0 – 165.0 – 165.0 – – – 34.0 34.0 (10.2) 23.8 – – – 9.5 9.5 (2.7) 6.8 Total 51.0 9.7 211.6 94.9 367.2 (59.6) 307.6 Portfolio restructure and exit costs Represents restructuring costs incurred following management’s decision to scale back the Group’s construction service offerings as well as costs associated in rightsizing the business to reflect the new business model and remain competitive in a post-COVID-19 environment. The material elements of the costs associated with the portfolio restructure program are as follows: – The Hospitality business has been the most acutely affected part of the Group through COVID-19 with all major event venues and other customer premises either closed or running at a fraction of capacity. The business has effectively been placed into hibernation, awaiting demand to recover, with cost plus arrangements in place for those customers requiring service. Downer is not eligible for the Federal Government’s JobKeeper subsidy. Restructure costs of $46.4 million have been expensed to cover redundancies, asset impairments, stock write-offs, onerous contracts and other exit costs. – The Group has exited the resource based electrical and mechanical major construction market within the Engineering and Construction (E&C) business unit. Restructure costs of $15.0 million have been expensed to cover redundancies and other exit costs. Spotless has exited the facilities based electrical and mechanical major construction market within the Infrastructure and Construction (I&C) business unit. Restructure costs of $9.3 million have been expensed to cover redundancies and other exit costs. Annual Report 2020 73 Goodwill impairment Following the identification of possible impairment indicators, the Group undertook an assessment of the carrying value of the Spotless Group of CGUs. As a result of this assessment, a goodwill impairment of $165.0 million was recognised as at 30 June 2020. Refer to Note C7 for further details. Spotless Shareholder class action This represents the expense (net of insurance recoveries) to settle the shareholder class action commenced against Spotless in the Federal Court of Australia in May 2017. The settlement was without admission of liability and includes interest and costs to the Applicant. This claim has previously been disclosed as a contingent liability. Legal settlement Downer has entered into a settlement agreement in relation to a legacy leaky building claim in New Zealand. The amount represents the costs of remediation works to be undertaken in excess of the insurance cover. This claim has been previously disclosed as a contingent liability. 2019 The Group recognised $45.0 million as an individually significant item in relation to Downer’s obligation to complete the Murra Warra wind farm following Senvion’s insolvency as announced to the market on 1 August 2019. The provision related to the credit risk assumed by Downer to complete the contract as Downer and Senvion shared liability under the project jointly and severally. This individually significant item is classified to the unallocated segment and is disclosed as part of “other expenses from ordinary activities” in the statement of profit or loss at 30 June 2019. B3. Individually significant items – continued Portfolio restructure and exit costs – continued – Downer has reduced management overhead across the Group through reduction in management layers, head-count, property footprint, systems and discretionary spend to better reflect the new operating model. Restructure costs of $35.6 million have been expensed. – Transaction costs of $10.0 million relating to the portfolio review of Mining and Laundries have been expensed in FY20. – The carrying value of information systems has been impaired by $26.1 million. The impairment relates to applications and infrastructure in businesses that are being wound down. Payroll remediation costs During the year, Spotless commenced a review of the applicable Enterprise Agreements (EAs) and Modern Award obligations, together with the assumptions regarding their interpretation and application in its payroll systems in order to validate the correct application of pay rates to employees as well as identify historical underpayments and overpayments. The process is ongoing. On 1 July 2020, Spotless lost a Federal Court case with respect to Ordinary and Customary Turnover of Labour rate (OCTL) redundancy payments for employees made redundant on cessation of specific contracts. Spotless has recognised an employee benefits provision of $41.1 million in relation to these matters, including interest and other remediation costs. Of this amount, $24.8 million relating to the EAs and Modern Award obligations that should have been incurred in previous years, has been recognised as a prior period error in opening retained earnings (Refer to Note D1), with $16.3 million being recognised as an expense in the period. The $16.3 million comprises all the estimated OCTL redundancy amounts and EAs and Modern Award obligation amounts relating to FY20. The expected liability is the Group’s best estimate of the shortfall at this time, and has required assumptions regarding complex variables including the assessment of large volumes of payroll data and the interpretation of a number of applicable EAs and Modern Award obligations. Changes to any of these variables have the potential to result in further adjustments to the calculation of the shortfall, which could result in a further liability and expense being required in subsequent reporting periods. Downer is committed to ensuring its people are paid in accordance with their employment agreements and the law and has a dedicated team investigating Spotless and Downer practices, systems and processes. 74 Downer EDI Limited Notes to the consolidated financial statements – continuedfor the year ended 30 June 2020B4. Earnings per share Basic earnings per share The calculation of basic earnings per share (EPS) is based on the result attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding. 2020 2019 (Loss) / profit attributable to members of the parent entity ($'m) Adjustment to reflect ROADS dividends paid ($'m) (Loss) / profit attributable to members of the parent entity used in calculating EPS ($’m) Weighted average number of ordinary shares (WANOS) on issue (m’s)(i) Basic earnings per share (cents) (150.3) (7.4) (157.7) 592.3  (26.6) Diluted earnings per share The calculation of diluted EPS is based on the result attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding after adjustments for the effects of all dilutive potential ordinary shares. 2020 (Loss) / profit attributable to members of the parent entity used in calculating basic EPS ($’m) Weighted average number of ordinary shares – Weighted average number of ordinary shares (WANOS) on issue (m’s)(i) (ii) – WANOS adjustment to reflect potential dilution for ROADS (m’s)(iii) WANOS used in the calculation of diluted EPS (m’s) Diluted earnings per share (cents)(iv) (150.3) 593.0  29.4  622.4  (26.6) 261.8  (8.3) 253.5  591.2  42.9  2019 261.8  592.2  26.9  619.1  42.3  (i) The WANOS on issue has been adjusted by the weighted average effect of the unvested executive incentive shares. (ii) For diluted earnings per share, the WANOS has been further adjusted by the potential vesting of executive incentive shares. (iii) The WANOS adjustment is the value of ROADS that could potentially be converted into ordinary shares at the reporting date. It is calculated based on the issued value of ROADS in New Zealand dollars converted to Australian dollars at the spot rate prevailing at the reporting date, which was $186.9 million (2019: $191.2 million), divided by the average market price of the Company’s ordinary shares for the period 1 July 2019 to 30 June 2020 discounted by 2.5% according to the ROADS contract terms, which was $6.37 (2019: $7.10). (iv) At 30 June 2020, the ROADS are anti-dilutive and consequently, diluted EPS remained at a loss of 26.6 cents per share. B5. Taxation (a) Reconciliation of income tax expense The prima facie income tax expense on the pre-tax result for the year reconciles to the income tax expense / (benefit) in the financial statements as follows: 2020 $’m (Loss) / 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 Impairment of goodwill Non-taxable gains Other items Under provision of income tax in previous year Total income tax expense Current tax expense Deferred tax (benefit) / expense (153.3) (46.0) (1.4) 0.9  (4.2) 49.5  –  2.9  0.7  2.4  45.0  (42.6) 2019 $’m  379.8  113.9  (1.7) 0.8  (6.8) – (5.1) 0.1  2.3  103.5  63.4  40.1  The tax rate used in the above reconciliation is the corporate tax rate of 30% payable by Australian corporate entities on taxable profits under Australian tax law. There has been no change in the corporate tax rate when compared with the previous year. Annual Report 2020 75 B5. Taxation – continued (a) Reconciliation of income tax expense – 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; this 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 taxable profits will be available to utilise them. Deferred tax assets and liabilities are not recognised for: – 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 – 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 – Temporary differences arising from goodwill. Deferred tax assets and liabilities are measured at the tax rates and tax laws that are expected to apply in the year when the asset is utilised or liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted at the reporting date. Income taxes relating to items recognised directly in equity are recognised in equity and not in the income statement. Offsetting deferred tax balances Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company/consolidated entity intends to settle its current tax assets and liabilities on a net basis. Tax consolidation Downer EDI Limited and its wholly-owned Australian 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 deductible temporary differences, unused tax losses and tax offsets, 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. Income taxes The Group is subject to income taxes in Australia and jurisdictions where it has foreign operations. Judgement is required to determine the worldwide provision for income taxes and to assess 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. 76 Downer EDI Limited Notes to the consolidated financial statements – continuedfor the year ended 30 June 2020B5. Taxation – continued (b) Movement in deferred tax balances 2020 $’m Trade receivables and contract assets Property, plant and equipment, right-of-use assets and lease liabilities Intangible assets Income tax losses Trade payables and contract liabilities Employee benefits and other provisions Other Net deferred tax assets/ (liabilities) Set-off of DTA against DTL Net tax assets / (liabilities) 2019 $’m Trade receivables and contract assets Joint ventures and associates Property, plant and equipment Intangible assets Income tax losses Trade payables and contract liabilities Employee benefits and other provisions(i) Other Net deferred tax assets/ (liabilities) Set-off of DTA against DTL Net tax assets / (liabilities) At 30 June 2019 (Restated) Application of AASB 16 At 1 July 2019 Recognised in profit or loss Recognised in other comprehen- sive income Net foreign currency exchange differences Acquis- ition and disposal Net balance at 30 June 2020 Deferred tax assets Deferred tax liabilities (63.4) –  (63.4) (70.3) –  0.4  –  (133.3) –  (133.3) 28.9  –  –  (12.0) (153.7) 28.3  (29.9) 34.6  68.3  (40.9) (153.7) 28.3  27.9  154.0  11.1  –  –  –  –  –  –  –  (0.2) 0.1  –  0.1  0.5  (1.0) 27.9  9.1  37.1  37.1  154.0  11.1  27.4  3.4  (0.2) 1.3  11.2  –  192.9  14.8  192.9  14.8  –  –  –  (42.1) (119.0) 96.6  –  –  96.6  (42.1) (119.0) –  –  –  –  –  (36.7) 28.9  (7.8) 42.6  1.1  (0.1) 11.2  47.0  At 30 June 2018 Application of AASB 15 and balance restatement(i) At 1 July 2018 (Restated) Recognised in profit or loss Recognised in other comprehen- sive income Net foreign currency exchange differences Acquis- ition and disposal 47.0  Net balance at 30 June 2019 (Restated) 341.4  (294.4) 199.9  (94.5) (199.9) 141.5  Deferred tax assets Deferred tax liabilities (100.5) (0.9) (32.2) (164.1) 32.5  83.2  –  –  –  –  (17.3) (0.9) (32.2) (164.1) 32.5  (36.6) 0.9  (8.0) 19.7  (4.2) 34.5  –  34.5  (9.5) 129.4  6.6  33.0 –  162.4  6.6  (1.7) (0.7) (94.7) 116.2 21.5  (40.1) –  –  –  –  –  –  –  3.8  3.8  (0.3) –  (0.1) (0.2) –  (9.2) –  (0.6) (9.1) –  (63.4) –  (40.9) (153.7) 28.3  –  –  –  –  28.3  (63.4) –  (40.9) (153.7) –  (0.2) 3.1  27.9  27.9  (0.4) 1.0  (6.3) 0.4  154.0  11.1  154.0  11.1  –  –  –  (0.2) (21.7) (36.7) (36.7) 221.3  (120.4) 100.9  (258.0) 120.4  (137.6) (i) 1 July 2018 balances have been restated by $7.4 million following review of the Group’s compliance with Enterprise Agreements (EAs) and Modern Award obligations (Refer to Note D1). The remaining $25.6 million relates to the adjustment on adoption of AASB 15. Annual Report 2020 77       B6. Remuneration of auditor B7. Subsequent events 2020 $ 2019 $ Audit and review of financial statements 5,224,180  5,402,736  Assurance services: Regulatory assurance services Other assurance services Total assurance services Other services: Tax services Advisory services Total other services The auditor of the Group is KPMG. 50,000  340,211  390,211  – 452,044 452,044  242,148  468,318  710,466  338,957 275,000 613,957  On 21 July 2020, the Group announced the launch of a $400 million equity raising to support the acquisition of the remaining shares in Spotless and provide flexibility for continued investment in Downer’s core business. Downer has also announced it has made an unconditional offer to acquire all of the issued share capital of Spotless not already owned for an upfront cash consideration of approximately $134.5 million, plus a maximum of 7.5 million Downer shares to be issued on exercise of the Downer Contingent Share Option. Downer has entered into a call option deed with Coltrane Master Fund, L.P. under which it has a call option over 2.99% of Spotless shares, which on exercise will increase Downer’s ownership above the 90% threshold required to proceed to compulsory acquisition. Outside of the above, at the date of this report, there have been no other matters or circumstances 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. 78 Downer EDI Limited Notes to the consolidated financial statements – continuedfor the year ended 30 June 2020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 receivables and contract assets C3. Inventories C4. Trade payables and contract liabilities C5. Property, plant and equipment C6. Right-of-use assets C7. Intangible assets C8. Lease receivables C9. Other provisions C10. Contingent liabilities C1. Reconciliation of cash and cash equivalents (a) Reconciliation of cash flows from operating activities (Loss) / profit after tax for the year Adjustments for: Share of joint ventures and associates’ profits net of distributions Depreciation on right-of-use of assets Depreciation and amortisation of other non-current assets Impairment of goodwill Impairment of other non-current assets Amortisation of deferred borrowing costs Net gain on sale of property, plant and equipment Termination of right-of-use assets / lease liabilities Fair value gain on revaluation of existing interest in Downer Mouchel Joint Venture Unrealised exchange gains Movement in current tax balances Movement in deferred tax balances Movements on net defined benefit plan obligation Share-based employee benefits expense Other Changes in net assets and liabilities, net of effects from acquisition and disposal of businesses: (Increase) / decrease in assets: Current trade receivables and contract assets Current inventories Other current assets Non-current trade receivables and contract assets Other non-current assets Increase / (decrease) in liabilities: Current trade payables and contract liabilities Current financial liabilities Shareholder class action payable Current provisions Non-current trade payables and contract liabilities Non-current financial liabilities Non-current provisions Net cash generated by operating activities Note F1(a) C6 C5,C7 C7 C5,C6,C7 F2 D2 D1 C4 2020 $’m (155.7) (2.2) 151.8  365.5  165.0  47.0  6.7  (5.7) (0.2) –  (0.1) (11.9) (43.7) 7.0  4.8  0.1  684.1  (315.1) (31.9) (4.3) (21.0) 8.1  15.8  4.8  34.0  (18.8) (22.3) 8.3  (7.2) (349.6) 178.8  2019 $’m 276.3  (8.0) –  360.0  –  – 4.2  (4.8) – (17.0) (1.5) 6.9  40.5  –  4.0  2.3  386.6  (67.1) (29.3) (1.5) (10.2) 0.4  65.9  (3.7) –  16.1  24.2  (3.1) (24.4) (32.7) 630.2  Annual Report 2020 79 C1. Reconciliation of cash and cash equivalents – continued (b) Reconciliation of liabilities arising from financing activities $’m Interest bearing loans Lease liabilities(i) Total liabilities from financing activities 1 July 2019 1,693.3  10.2  AASB 16 Transition adjustment –  717.6  Net cash flows 348.7  (152.9) Lease net additions and remeasure –  193.5  Amortisation and foreign exchange movement 9.3  (5.2) 30 June 2020 2,051.3 763.2 1,703.5  717.6 195.8  193.5  4.1  2,814.5 (i) Upon adoption of AASB 16 Leases, the 30 June 2019 lease liabilities that were disclosed as finance leases in the comparative figures have been presented as part of the lease liability balances in Note E3. (c) Cash and cash equivalents For the purpose of the statement of cash flows, cash and cash equivalents comprises: Cash Short-term deposits Total cash and cash equivalents C2. Trade receivables and contract assets 2020 $’m 567.9  20.6  588.5  2019 $’m 663.2  47.5  710.7  Trade receivables Contract assets(i) Other receivables Loss allowance on trade receivables and contract assets arising from contracts with customers Total Included in the financial statements as: Current(i) Non-current 2020 $’m 792.1  1,573.5  2,365.6  64.7  2019 $’m 888.0  1,084.4  1,972.4  111.0  (19.2) 2,411.1  (17.5) 2,065.9  2,315.9  95.2  1,991.5  74.4  (i) Current contract assets: $1,482.9 million (2019: $1,074.8 million). Allowance for credit losses: The Group’s trade receivables and contract assets are disaggregated based on their expected credit risks between Government and Private (non-government) customers. An analysis of the balances is presented below: Government – not due  Government – 0 to 90 days past due Government – more than 90 days past due Private – not due Private – 0 to 90 days past due Private – more than 90 days past due Total gross carrying amount Credit impaired – specific allowance Not credit impaired – lifetime expected credit loss Loss allowance on trade receivables and contract assets arising from contracts with customers 2020 $’m 1,193.7  43.5  46.5  1,013.3  42.8  25.8  2,365.6  6.9  12.3  19.2  2019 $’m 1,058.0  34.7  44.4  754.8  42.9  37.6  1,972.4  11.9  5.6  17.5  The Group has policies to manage its overall exposure to credit risk as set out in Note G2(e). 80 Downer EDI Limited Notes to the consolidated financial statements – continuedfor the year ended 30 June 2020 C2. Trade receivables and contract assets – continued In assessing lifetime expected credit losses (ECL) as at 30 June 2020, the Group has considered the increased risk arising from the economic impacts of the COVID-19 pandemic. The Group has assessed ECLs by segmenting the portfolio of trade receivables and contract assets by customer (i.e. Government and private) as well as by geography to better assess inherent credit risk. The Group defines counterparties as “Government” if the contract is with a National, Federal, State or Local Government body, or an agency or entity that is owned, controlled or guaranteed by such bodies. Any counterparties other than those defined as “Government”, are classified as “Private”, and include Blue-Chip listed companies, PPPs, large multinational companies, network infrastructure companies as well as other private sector businesses. The credit risk associated with Government balances is considered to be negligible (FY19: negligible) due to the high credit worthiness of the counterparties. No Government balances are currently in default. For “Private” balances, the Group has recorded specific impairment losses for counterparties that are currently in default. The $19.2 million loss allowance as at 30 June 2020 includes a specific provision of $6.3 million for a customer following the entity entering administration. The remaining ECLs have increased from $5.6 million at 30 June 2019 to $12.3 million at 30 June 2020 reflecting additional credit risk in the current portfolio of trade receivables and contract assets mainly from the effect of the economic downturn caused by the COVID-19 pandemic is expected to have on private counterparties. Credit losses on “Private” counterparty balances have historically averaged less than 1%. The allowance for credit losses, excluding specific provisions, is 1.1% (2019: 0.7%) of the private trade receivables and contract assets. Remaining performance obligations As of 30 June 2020, the aggregate amount of the transaction price allocated to the remaining performance obligations is $13,466.1 million (2019: $14,514.3 million). The Group will recognise this revenue when the performance obligations are satisfied. Approximately ~46% of remaining performance obligations are expected to occur within the next five years; with the remaining ~54% related to long-term service/maintenance contracts ranging up to 42 years. The remaining performance obligations balances for both 30 June 2020 and 30 June 2019 presented above relate to the revenue expected to be recognised from ongoing construction type contracts with an expected duration of more than 12 months. During the current financial year revenue of $1,372.0 million has been recognised in relation to performance obligations satisfied or partially satisfied in previous periods. 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. Contract assets Contract assets primarily relate to the Group’s rights to consideration for work performed but not billed at the reporting date. The contract assets are transferred to trade receivables when the rights have become unconditional. This usually occurs when the Group issues an invoice in accordance with contractual terms to the customer. Payments from customers are received based on a billing schedule/ milestone basis, as established in our contracts. Costs to obtain or fulfil contracts Costs incremental to obtaining a contract and that are expected to be recovered or are explicitly chargeable to the customer regardless of whether the contract is obtained are capitalised. Financial assets and liabilities AASB 9 Financial Instruments (AASB 9) contains a classification and measurement approach for financial assets that reflects the business model in which assets are managed and their cash flow characteristics. AASB 9 contains three principal classification categories for financial assets: measured at amortised cost, fair value through other comprehensive income (FVOCI) and fair value through profit or loss (FVTPL). Fair value Due to the short-term nature of these financial rights, the carrying amounts of the trade receivables and contract assets are estimated to represent their fair values. Impairment The Group has applied the simplified approach to recognise lifetime expected credit losses for trade receivables, contract assets and finance lease receivables as permitted by AASB 9. The Group considers the relevant credit risk associated with disaggregated portions of the financial assets and after considering specific provisions against counterparties and defaults, applies an expected credit loss (ECL) percentage derived from recorded historic credit losses associated with specific population. The key disaggregation of the balances is between those that are backed by Government funding and those that are not and, between those that are current or are overdue less than 90 days or become more than 90 days overdue. The Group exercises considerable judgement about how economic factors (such as the economic downturn triggered by the COVID-19 pandemic) affect this ECL of each of the disaggregated balances independently, and applies a premium as deemed appropriate to adjust the historically determined default rates to present the total expected credit losses on the current balances. This impairment model applies to financial assets measured at amortised cost or FVOCI (except for investments in equity instruments). Annual Report 2020 81 C2. Trade receivables and contract assets – continued Key estimate and judgement: Credit risk Credit risk represents the risk that a counterparty will fail to perform an obligation causing a financial loss to the Group. The Group minimises credit risk by undertaking transactions with a large number of customers in various industries and geographical areas. A credit risk management policy is in place and exposure to credit risk is monitored on an ongoing basis. The Group uses historical information as a basis for the estimation of expected credit losses and then adjusts its assessment of credit risk based on current macro/micro economic conditions however, judgement is applied in doing this assessment. C3. Inventories Current Raw materials Work in progress Finished goods Components and spare parts Total inventories 2020 $’m 134.6  1.3  57.7  140.4  334.0  2019 $’m 127.0  7.3  56.2  114.1  304.6  Recognition and measurement Inventories are valued at the lower of cost and net realisable value. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. C4. Trade payables and contract liabilities Trade payables Contract liabilities Accruals Shareholder class action payable Dividends payable Other payables Total trade payables and contract liabilities Included in the financial statements as: Current Non-current Note B3 E8 2020 $’m 697.7  497.7  1,034.4  34.0  83.3  179.1  2,526.2  2,497.4  28.8  2019 $’m 810.6  501.5  1,007.2  – –  137.5  2,456.8  2,405.5  51.3  Recognition and measurement Trade payables, accruals and other payables Trade payables, accruals and other payables are recognised when the Group becomes obliged to make future payments resulting from the purchase of goods and services. Contract liabilities Contract liabilities primarily relate to the Group’s obligation to transfer goods or services to a customer for which the Group has received consideration (or an amount of consideration is due) from the customer. Contract liabilities are recognised as revenue when work is performed under the contract. If the net amount of the Group’s rights to consideration for work performed after deduction of progress payments received is negative, the difference is recognised as a liability and included as part of contract liabilities. Of the Contract liabilities balance of $501.5 million at 30 June 2019, substantially all has been recognised in the current year. Fair value Due to the short-term nature of these financial obligations, their carrying amounts are estimated to represent their fair values. 82 Downer EDI Limited Notes to the consolidated financial statements – continuedfor the year ended 30 June 2020C5. Property, plant and equipment 2020 $’m Balance at 30 June 2019 Opening balance adjustment on application of AASB 16 Balance at 1 July 2019 Additions Disposals at net book value Depreciation expense Impairment charge(i) Net foreign currency exchange differences at net book value Net book value as at 30 June 2020 Cost Accumulated depreciation and impairment 2019 Carrying amount as at 1 July 2018 Additions Disposals at net book value Acquisition of businesses Depreciation expense Reclassifications at net book value Reclassified as intangible assets Net foreign currency exchange differences at net book value Net book value as at 30 June 2019 Cost Accumulated depreciation and impairment Freehold land and buildings Plant, equipment and leasehold improvements Equipment under finance lease(ii) Laundries rental stock 124.0 – 124.0  4.0  (0.2) (4.4) –  (0.3) 123.1 155.1 (32.0) 118.8  10.5  (3.0) 0.1  (2.9) –  –  0.5  124.0  152.8  (28.8) 1,196.2  – 1,196.2  248.7  (19.1) (225.6) (6.8) (5.5) 1,187.9 2,748.7 (1,560.8) 1,106.3  305.3  (8.5) 12.0  (219.8) 0.4  (0.8) 1.3  1,196.2  2,722.1  (1,525.9) 9.0  (9.0) –  –  –  –  –  –  –  –  –  14.1  2.3  (2.3) –  (4.8) (0.4) –  0.1  9.0  24.5  (15.5) 44.1  –  44.1  33.5  –  (35.0) (3.3)  (0.1) 39.2 139.0  (99.8) 41.2  35.2  –  –  (32.5) – –  0.2  44.1  105.9  (61.8) Total 1,373.3  (9.0) 1,364.3  286.2  (19.3) (265.0) (10.1) (5.9) 1,350.2  3,042.8  (1,692.6) 1,280.4  353.3  (13.8) 12.1  (260.0) –  (0.8) 2.1  1,373.3  3,005.3  (1,632.0) Impairment relates to leasehold improvement assets as a result of the portfolio restructure. (i) (ii) These assets, previously disclosed as Property, plant and equipment have been derecognised on application of AASB 16 and are now presented separately within Right-of- use assets (refer to Note C6). 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 Useful life Depreciation method Freehold land Buildings Leasehold improvements Plant and equipment – mining, power and gas Plant and equipment – other Laundries rental stock n/a 20 to 50 years Life of lease Working hours 3 to 25 years 18 months to 5 years No depreciation Straight-line Straight-line Based on hours of use Straight-line 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 leasehold improvements) and turnover policies. In addition, the condition of the assets is assessed at least annually and considered against the remaining useful life. Adjustments to useful lives and residual values are made when considered necessary. Annual Report 2020 83 C6. Right-of-use assets The Group leases many assets including property, motor vehicles and plant and equipment. Information about leased assets for which the Group is a lessee is presented below: 2020 $’m Plant and Equipment Leasehold Property Motor Vehicles Total Balance recognised on adoption of AASB 16 Additions Remeasure Depreciation charge for the period Impairment charge(i) Disposals at net book value Net foreign currency exchange differences at net book value Net book value as at 30 June 2020 Cost Accumulated depreciation and impairment 385.5  57.5  (24.1) (60.8) (13.0) (1.5) (2.7) 340.9  413.9  (73.0) 101.7  56.4  9.2  (56.0) –  (0.9) (1.3) 109.1  164.8  (55.7) 83.4  86.1  10.1  (35.0) –  (1.2) (0.8) 142.6  176.8  (34.2) 570.6  200.0  (4.8) (151.8) (13.0) (3.6) (4.8) 592.6  755.5  (162.9) (i) Impairment recognised as a result of the impact that the portfolio restructure had on property footprint across the businesses (refer to Note B3). Recognition and measurement Right-of-use assets The right-of-use assets are initially measured at cost, which comprises: – The amount of the initial measurement of the lease liability – Any lease payments made at or before the commencement date, less any lease incentives and any initial direct costs incurred by the lessee – An estimate of the costs to dismantle and remove the underlying asset or to restore the underlying asset. Subsequently the right-of-use asset is measured at cost less any accumulated depreciation and impairment losses and adjusted for certain remeasurements of the lease liability. The right-of-use asset is depreciated over the shorter period of the lease term and the economic useful life of the underlying asset. If a lease transfers ownership of the underlying asset or the costs of the right-of-use asset reflects that the Group will exercise a purchase option, the asset will be depreciated from the commencement date to the end of the useful life of the underlying asset. The depreciation starts at the commencement date of the lease. Where the initially anticipated lease term is subsequently reassessed, any changes are reflected in a remeasurement of the lease liability and a corresponding adjustment to the asset. If the recoverable amount of a right-of-use asset is less than its carrying value, an impairment charge is recognised in the profit or loss, and the carry value of asset written-down to its recoverable amount. Should the recoverable amount increase in future periods the carrying value may be adjusted to the lower of the recoverable value or the amortised cost of the asset had it not been impaired. Key estimate and judgement: Useful lives/lease term and recoverable value The estimation of the useful lives has been based on the assets’ lease terms. There are a number of judgements made in determining the lease terms as noted in the Key estimate and judgement section of Note E3. The expected useful life of the asset includes a judgement as to whether available extension changes will be exercised. Changes to this assessment are reflected as a remeasurement, with a corresponding adjustment for the liability. In assessing whether a right-of-use asset is impaired, judgement is required to determine the recoverable value of the asset. For corporate right-of-use assets, impairment is assessed against the recoverable amount of cash generating units to which they are allocated. 84 Downer EDI Limited Notes to the consolidated financial statements – continuedfor the year ended 30 June 2020C7. Intangible assets 2020 $’m Carrying amount as at 1 July 2019 Additions Disposals at net book value Business acquisition adjustments Amortisation expense Impairment charge(i) Net foreign currency exchange differences at net book value Net book value as at 30 June 2020 Cost Accumulated amortisation and impairment 2019 Carrying amount as at 1 July 2018 Additions Disposals at net book value Acquisition of businesses Reclassifications at net book value Amortisation expense Net foreign currency exchange differences at net book value Net book value as at 30 June 2019 Cost Accumulated amortisation and impairment Customer contracts and relationships Goodwill Brand names on acquisition Intellectual property on acquisition Software and system development 2,454.5 –  –  (5.5) –  (165.0) (2.7) 2,281.3  2,598.7  (317.4) 2,351.5  –  –  98.2  –  –  4.8  2,454.5  2,606.9  (152.4) 345.0 2.7  –  –  (67.1) –  –  280.6  494.7  (214.1) 381.1  –  –  30.2  –  (66.3) –  345.0  494.1  (149.1) 71.3  –  –  –  (4.0) –  (0.3) 67.0  79.1  (12.1) 74.7  –  –  –  –  (3.9) 0.5  71.3  79.4  (8.1) 2.0  –  –  –  (0.2) –  –  1.8  2.4  (0.6) 2.2  –  –  –  –  (0.2) –  2.0  2.4  (0.4) 257.9  61.4  (0.2) –  (29.2) (23.9) (0.6) 265.4  478.0  (212.6) 241.2  45.3  (0.3) –  0.8  (29.6) 0.5  257.9  419.3  (161.4) Total 3,130.7  64.1  (0.2) (5.5) (100.5) (188.9) (3.6) 2,896.1  3,652.9  (756.8) 3,050.7  45.3  (0.3) 128.4  0.8  (100.0) 5.8  3,130.7  3,602.1  (471.4) (i) $165.0 million impairment as a result of assessment of the carrying value of the Spotless group of CGUs (Refer to recoverable amount section in Note C7 and to Note B3). $23.9 million impairment of capitalised Information Systems (including applications and IT infrastructure), in CGUs that are being wound down as part of the portfolio restructure (Refer to Note B3). 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. 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. Annual Report 2020 85 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 Intellectual property acquired Customer contracts and relationships Other intangible assets Useful Life 5 to 15 years 20 years 15 to 20 years 1 to 20 years 20 years 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 or groups of CGUs (“CGUs”) that are significant individually or in aggregate, taking into consideration the nature of service, resource allocation, how operations are monitored and where independent cash flows are identifiable. Consistent with prior year, eight independent CGUs have been identified across the Group against which goodwill has been allocated and for which impairment testing has been undertaken. The goodwill allocation to each CGUs is presented below: Carrying value of consolidated goodwill 2020 $’m 275.1  335.0  55.3  53.7  69.3  62.2  1,276.3  154.4  2,281.3  2019 $’m 283.6  335.0  55.3  53.7  70.5  63.7  1,438.3  154.4  2,454.5  Transport Australia(i) Utilities Australia Rail Defence Downer NZ Services Building Projects NZ Spotless(i) (ii) EC&M Total (i) Included in this amount is the adjustment of goodwill for certain acquisitions made during the year ended 30 June 2019, for which the acquisition accounting has been finalised. (ii) FY20 balance is net of an impairment of $165.0 million. Refer to results of impairment testing section. Key estimate and judgement: Estimation of useful life 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. Key assumptions requiring judgement include projected cash flows, discount rates, budgeted EBIT growth rate and long-term growth rate. The estimation of the economic useful lives of software is initially determined based on historical experience. The useful lives of intangible assets recognised on business combinations is independently determined based on detailed reviews of similar assets and underlying factors. These useful lives are regularly reassessed for indicators of any change to the initial assessments. If the economic useful lives are determined to have changed, the amortisation of the assets is adjusted to reflect the new expected useful life, impacting the future amortisation recognised. Recoverable amount testing The recoverable amount of the identified CGUs has been assessed using the higher of “value in use” (“VIU”) and “fair value less costs of disposal” (“FVLCD”). In assessing VIU, the estimated future cash flows are discounted to their present value using a discount rate that uses current market assessments of the time value of money and the risks specific to the CGU. The carrying value of the Transport Australia, Utilities Australia, EC&M, Rail, Defence, Building Projects NZ and Downer NZ Services CGUs have been assessed using a VIU model, consistent with prior periods. As an impairment has been identified for the Spotless CGU, the recoverable amount of the Spotless CGU has been assessed based on both a ‘VIU’ and a ‘FVLCD’ methodology. The recoverable amount has been determined based on a FVLCD basis (2019: VIU) as this provided the higher recoverable amount. 86 Downer EDI Limited Notes to the consolidated financial statements – continuedfor the year ended 30 June 2020C7. Intangible assets – continued Recoverable amount testing – continued In determining the FVLCD, a discounted cash flow model is used. These calculations, classified as level 3 on the fair value hierarchy, are compared to valuation multiples, or other fair value indicators where available, to ensure reasonableness. Results of impairment testing All CGUs, except the Spotless CGU For all CGUs, with the exception of the Spotless CGU, the recoverable values (based on the present value of future cash flows) are greater than the carrying value of the operating assets and no impairment has been identified. Spotless CGU The forecast cash flows for the Spotless CGU have been adversely impacted by a number of issues, including declining margins and contract base, poor performance on certain contracts, and more recently, the impact of COVID-19 particularly on its Hospitality business. Consequently, the present value of future expected cash flows has reduced and no longer support the carrying value of the operating assets of the CGU. The recoverable amount of the Spotless CGU has been determined to be $1,721.0 million. As a result, an impairment of $165.0 million has been recognised against the goodwill allocated to the CGU. The impairment amount has been recognised in “Impairment of non-current assets” in the statement of profit or loss and disclosed as an individually significant item in Note B3. The reduction in the recoverable amount of the Spotless CGU was the result of: – An increase in the post tax discount rate from 8.1% to 8.3% applied to forecast cash flows – A reduction in the terminal growth rate from 2.5% to 2.25% due to the macro-economic environment – The impact of COVID-19 on future earnings particularly in Hospitality – A reduction in earnings from the Infrastructure & Construction (I&C) division (Nuvo and AE Smith) as that business repositions away from major construction exposure. Recoverable amount testing – Key assumptions The table below summarises the key assumptions utilised in the VIU and FVLCD calculations. 2020 2019 Budgeted EBIT(i) Long-term growth rate Discount rate (post-tax) Budgeted EBIT(i) Long-term growth rate Discount rate (post-tax) 4.7% (2.6)% 0.3% 16.8% 3.9% (2.0)% 1.8% 1.8% 2.25% 2.25% 2.25% 2.25% 2.25% 2.25% 2.25% 2.25% 9.0% 8.2% 9.1% 10.3% 8.3% 9.5% 8.3% 9.7% 5.4% (0.5)% (10.1)% 16.9% 2.5% (3.7)% 5.2% 7.8% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 8.9% 9.2% 9.8% 9.3% 9.2% 8.8% 8.1% 8.7% Transport Australia Utilities Australia Rail Defence Downer NZ Services Building Projects NZ Spotless EC&M (i) Budgeted EBIT for both 2019 and 2020 is expressed as the compound annual growth rates (CAGR) from FY19 actual to terminal year forecast based on the CGUs business plan. The impact of COVID-19 and return to a steady state of performance by the terminal year is a key assumption as detailed below for each CGU. The EBIT CAGR shown above is based on FY19 to terminal year to ‘normalise’ for the impacts of COVID-19 on the current year results. For all CGUs the FY21 budget and the business plan for FY22 and FY23 have included consideration of the impact of climate risk. The impact of climate risk is not a key assumption in the “value in use” or “fair value less cost of disposal” calculations. (i) Projected cash flows – budgeted EBIT and the impact of COVID-19 pandemic Value in use calculation The Group determines the recoverable amount, using three-year cash flow projections based on the FY21 budget (as approved by the Board) and the business plans for the years ending 30 June 2022 and 2023. For FY24 onwards, the Group assumes a long-term growth rate of 2.25% to reflect the organic growth expectations of the industry. Cash flow projections are determined utilising the budgeted Earnings Before Interest and Tax (EBIT) 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. Annual Report 2020 87 C7. Intangible assets – continued (i) Projected cash flows – budgeted EBIT and the impact of COVID-19 pandemic – continued COVID-19 Impact on projected cash flows Budgeted EBIT 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. The COVID-19 pandemic has impacted the Group business lines to varying degrees, with impacts including forced lockdown in New Zealand, event cancellations, travel restrictions, supply chain restrictions and general productivity constraints. Whilst the near-term future health and economic consequences of COVID-19 remain uncertain, the experience to date of the impacts of COVID-19 on FY20 has been taken into consideration in the preparation of the projected cash flows for the FY21 budget and the business plans for FY22 and FY23. Generally speaking, the Transport Australia, Utilities Australia, Rail and Defence CGUs were resilient with FY20 performance on or near budget, mainly as their customer base includes Government Agencies or Government-owned corporations. The Building Projects NZ and Downer NZ Services business units were supported through the level 4 restrictions in New Zealand through both wage subsidies and recognition that COVID-19 was a valid cause for delay and disruption claims. Through FY20 the EC&M CGU experienced several large contract losses in relation to construction contracts as well as some deferral of activity in relation to long term Asset Maintenance contracts as a result of COVID-19. Due to the critical nature of these maintenance activities this activity is anticipated to return in FY21. The above impacts have been considered in forming the FY21 budget in the discounted cash flow models. Ongoing cash flow forecasts The FY22 through to terminal year cash flow projections assume a return from the current economic position consistent with economic projections, with the terminal year reflecting a steady- state performance. Specifically for each CGU: – Transport Australia is expected to benefit from an increase in activity in the transport infrastructure sector due to population growth, increasing user expectation and higher Government spend. – Utilities Australia is expected to benefit from an increase in activity in fixed telecommunication networks, electricity and water sectors, partially offsetting the reduction in EBIT following completion of the current nbn construction contracts. – Rail is expected to be relatively stable over the medium term following the transition from construction to the Through Life Support (TLS) phase with the timing of overhauls impacting the short-term cash flows. – The Defence business has grown following acquisitions in 2018. From a low EBIT is expected to benefit from an 88 Downer EDI Limited increase in activity in the defence consulting sector and revenue growth through the integration of activities from building an end-to-end service offering and expanding its offering and services to current and new customers. A higher discount rate reflects the risk in achieving the growth projections and the relatively smaller CGU. – Downer New Zealand Services is expected to benefit from increased investment in infrastructure, particularly in transport and utilities. – Building Projects New Zealand is expected to continue to deliver on opportunities, particularly government-linked expenditure in the vertical build area. – EC&M revenue and EBIT growth assumptions has been normalised for contract losses incurred in 2019 as Downer has exited the resource based electrical and mechanical major construction market within the Engineering and Construction (E&C) business unit. Normalising for these losses, the business shows a stable growth assumption, reflecting the revised focus on Asset Maintenance Services long-term service agreements where ongoing growth is expected across Oil & Gas, Power Generation and Industrial sectors. Fair value less cost of disposal calculation In determining FVLCD for the Spotless CGU, a discounted cash flow model was used. Similarly to the other CGUs, a three-year cash flow projection, based on the EBIT as per the FY21 budget and the business plan for FY22 and FY23 was utilised. For FY24 onwards, the Group assumes a long-term growth rate of 2.25% to allow for organic growth on the existing asset base. Adjustments are made to these projections to include assumptions that a market participant would make, such as cash flows relating to restructuring and integration, following Downer obtaining 100% control of Spotless. The Spotless CGU has been the most acutely affected part of the Group through COVID-19 with all major Hospitality event venues and other customer premises either closed or running at a fraction of capacity, as well as a reduction in Laundries volumes through the deferral of elective surgeries. Spotless’ revenue and EBIT assumptions assume an ongoing decline in the Hospitality business unit through FY21 and FY22 due to anticipated reduction in events being held at key venues such as the Melbourne Cricket Ground and Perth Convention and Entertainment Centre. The model for Hospitality assumes a return to pre-COVID-19 levels of activity by FY23. The overall Spotless projections assume an overall EBIT compound annual growth rate from FY19 (i.e. pre-COVID-19 levels) to the terminal year of 1.8%, which is consistent with economic projections that COVID-19 will have a long term sustained impact on economic growth, and particular challenges in the Hospitality sector. Consistent with assumptions a market participant would make, the forecast also includes $10 million per annum (risk adjusted) of synergies that can be realised from 100% ownership of Spotless, offset by the premium paid to acquire the remaining interest in Spotless and costs of implementation. Notes to the consolidated financial statements – continuedfor the year ended 30 June 2020C8. Lease receivables Less than one year Between one and five years Greater than five years Future minimum lease receivables Less: unearned finance income Present value of minimum lease receivables Included in the financial statements as: Current Non-current 2020 $’m 20.6  50.9  –  71.5  (4.7) 66.8  2019 $’m 14.2  40.7  0.2  55.1  (4.0) 51.1  18.5  48.3  12.4  38.7  There were no guaranteed residual values of assets leased under finance leases at reporting date (2019: nil). However, some of the leased assets serve as a guarantee against these receivables. Recognition and measurement Some of the Group’s mining services contracts include arrangements whereby the customer will retain ownership of the assets at the end of the contract. The asset component of those contracts is recognised as lease receivables. A lease arrangement transfers substantially all the risks and rewards of ownership of the asset to the lessee. The Group’s net investment in the lease equals the net present value of the future minimum lease payments. Lease income is recognised to reflect a constant periodic rate of return on the Group’s remaining net investment in respect of the lease. C7. Intangible assets – continued (ii) Long-term growth rates The long-term annual growth rates, applicable for the periods after which detailed forecasts have been prepared, are based on the long term expected GDP rates for the country of operation, adjusted as necessary to reflect industry specific considerations including the impact that COVID-19 may have. (iii) Discount rates Post-tax discount rates of between 8.2% and 10.3% reflect the Group’s estimate of the time value of money and risks associated with 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. The post-tax discount rate is applied to post-tax cash flows that include an allowance for tax based on the affected respective jurisdiction’s tax rate. This method is used to approximate the requirement of the accounting standards to apply a pre-tax discount rate to pre-tax cash flows. (iv) Budgeted capital expenditure The expected 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 operating activity. Sensitivities For all CGUs, except the Spotless CGU, management believes that any reasonable change in the key assumptions would not cause the carrying value of the CGUs to exceed their recoverable value amount. For the Spotless CGU, as the recoverable amount is now equal to the carrying amount, any adverse movement in the key assumptions noted above would lead to further impairment. Annual Report 2020 89 C9. Other provisions 2020 $’m Balance at 30 June 2019 Opening balance adjustment on application of AASB 16 Balance at 1 July 2019 Additional provisions recognised Unused provisions reversed Utilisation of provisions Business acquisition adjustments Net foreign currency exchange differences Balance at 30 June 2020 Included in the financial statements as: Current Non-current Note G1 Decomm- issioning and restoration Warranties and contract claims Onerous contracts and other(i) 28.1 – 28.1 3.4 – (2.8) 0.5 (0.1) 29.1 8.9 20.2 23.7 – 23.7 24.0 (0.1) (9.9) – – 37.7 31.3 6.4 139.7 (37.1) 102.6 28.3 (22.3) (61.9) 1.0 (1.0) 46.7 33.9 12.8 Total 191.5 (37.1) 154.4 55.7 (22.4) (74.6) 1.5 (1.1) 113.5 74.1 39.4 (i) Onerous lease contracts as at 1 July 2019 have been reflected as Impairment to the opening right-of-use asset cost on adoption of AASB 16. 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, technology and estimates of inflation. (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. Any change in the assessment of provisions impacts the results of the business. 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 – The amount of the provision can be measured reliably. (i) Decommissioning and restoration Provisions for decommissioning and restoration are made for close down, restoration and environmental rehabilitation costs, including the cost of dismantling and demolition of infrastructure, removal of residual materials and remediation of disturbed areas. Future rectification costs are reviewed annually and any changes are reflected in the present value of the rectification provision at the end of the reporting period. The provision is discounted using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. (ii) Warranties and contract claims Provisions for warranties and contract claims are made for the estimated liability on all products still under warranty at balance sheet date and known claims arising under service and construction contracts. (iii) Onerous contracts and other Provisions primarily include amounts recognised in relation to onerous customer contracts and supply contracts. 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. 90 Downer EDI Limited Notes to the consolidated financial statements – continuedfor the year ended 30 June 2020C10. Contingent liabilities Bonding Note 2020 $’m 2019 $’m The Group has bid bonds and performance bonds issued in respect of contract performance in the normal course of business for controlled entities E2 1,439.8 1,323.2  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. v) Several New Zealand entities in the Group have been named as co-defendants in “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) Certain recent court decisions, not involving Spotless, regarding the correct application of various employee entitlements may have a financial impact on the Group. The Group does not consider the majority of the principles relating to these Court decisions directly apply to the Group’s employment arrangements. No provision has therefore been recognised in relation to these matters at 30 June 2020. Other contingent liabilities i) ii) The Group is subject to design liability in relation to completed design and construction projects. The Directors are of the opinion that there is adequate insurance to cover this area and accordingly, no amounts are recognised in the financial statements. 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 contractors’ and consultants’ 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. Annual Report 2020 91 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. Defined benefit plan D1. Employee benefits Employee benefits expense: – Defined contribution plans costs – Shared-based employee benefits expense – Employee benefits – Redundancy costs – Defined benefit plan costs Total Employee benefits provision: – Current(i) – Non-current(ii) Total 2020 $’m 2019 $’m 262.3  258.2  4.8  3,885.8  57.4  7.0  4,217.3 377.1  55.0  432.1  4.0  4,065.6  12.6  -  4,340.4  365.3  45.1  410.4  (i) June 2019 balances have been restated following review of the Group’s (ii) compliance with Enterprise Agreements (EAs) and Modern Award obligations. Included in the non-current employee benefit provision is the net obligation of the defined benefit plan (Refer to Note D2). D3. Key management personnel compensation D4. Employee discount share plan Payroll remediation costs During the year, Spotless commenced a review of the applicable Enterprise Agreements and Modern Awards, together with the assumptions regarding their interpretation and application in its payroll systems in order to validate the correct application of pay rates to employees as well as identify historical underpayments and overpayments. While the review to determine the extent of the remediation continues, the Group has estimated the likely underpayments relating to the period prior to 1 July 2018 was $24.8 million before tax. The annual amounts were not material to profit either cumulatively or for any of the individual years to which they related. Nonetheless, the Group has elected to restate opening retained earnings to enhance year on year comparability. As a result, the opening balance of the employee benefits provision has been increased by $24.8 million, with corresponding adjustments to retained earnings, deferred tax assets and to the non-controlling interest. The impact of these changes on the opening position for these balances has flowed through to the closing balances for the year ended 30 June 2019. The Consolidated Statement of Profit or Loss and Other Comprehensive Income, and the Consolidated Statement of Cash Flows comparatives for FY19 are unchanged. In addition, the Group has recognised an expense of $16.3 million before tax in 2020 relating to remediation costs and redundancy payments for employees made redundant on cessation of specific contracts (refer to Note B3). Critical estimates and judgements have been made in the calculations as to the impacted employees, allowance payments and assumed work patterns. Any revisions of the estimates will be recognised in the period the revisions are identified. 92 Downer EDI Limited Notes to the consolidated financial statements – continuedfor the year ended 30 June 2020The following table presents the impact of the 1 July 2018 restatement on the comparative information presented in the prior year’s Annual Report: Balances as at 30 June 2019: Employee benefits provision Deferred tax asset Other net assets Net assets Retained earnings Non-controlling interest Other equity balances Total equity Note B5(b) E6 As previously reported $’m (385.6) 93.5  3,342.3  3,050.2  496.7  155.9  2,397.6  3,050.2  Adjustment $’m As restated $’m (24.8) 7.4  –  (17.4) (15.3) (2.1) –  (17.4) (410.4) 100.9  3,342.3  3,032.8  481.4  153.8  2,397.6  3,032.8  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 – 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. For New Zealand employees the liability is discounted using long-term government bond rates given there is no deep corporate bond market. Interpretation of Enterprise Agreements (EAs) and Modern Awards Management estimates any potential expenses in relation to payroll remediation matters. Each identified matter is currently in the process of final validation and quantification. In the case of redundancy costs arising from Ordinary and Customary Turnover of Labour rate (OCTL), the quantification and ultimate liability will also be subject to the outcome of any appeal. The work involved in calculating the provision has been time consuming, complex and is the Group’s best estimate of its liability. The estimate is based on an assessment of substantial volumes of payroll data and where employee, payroll and/or rostering data has been missing or incomplete, assumptions have been made by the reviewing team in relation to known gaps. The estimate also relies upon the correct interpretation of the applicable EAs and Modern Awards in calculating the shortfalls, and for redundancy payments whether an employee should be considered casual or permanent. Changes to any of the variables (including the reviewing period and numbers of employees affected), assumptions (including the roles that employees were originally hired to perform in the case of redundancy payment) or inputs have the potential to result in further adjustments to the calculation of the shortfall, which would result in further provisioning being required in subsequent reporting periods. The Group is committed to ensuring its people are paid in accordance with their legal entitlements and will keep the dedicated reviewing team in place until it is satisfied that the above matters have been addressed. Annual Report 2020 93 D2. Defined benefit plan D3. Key management personnel compensation The Group participates in the Equipsuper Defined Benefit Scheme which provides participants (< 100 employees) with a lump sum benefit on retirement, death, disablement or withdrawal. The scheme operates under the Superannuation Industry legislation, and is governed by The Scheme Trustees, in compliance with Australian Prudential Regulation Authority framework. The scheme is closed to new employees. As at 30 June 2020, the fair value of plan assets (comprising Investment Funds) was $53.0 million. The plan obligation balance was $58.4 million. The net liability of $5.4 million is included in Employee benefits provisions (Refer to Note D1). These balances were subject to an independent actuarial review as at 30 June 2020. As part of a five-year contract with AusNet Services to provide operational and maintenance services on the electricity distribution network in Victoria, the Group recognised $51.1 million of assets and equal obligations with onboarding of new employees from a pre-existing plan, $7.0 million of service costs expensed to profit or loss, $0.7 million of actuarial gain on the obligation, and the Group contributions of $0.9 million. Key actuarial assumptions used in determining the values were a discount rate of 2.6% and an expected salary increase rate of 3.0%. Sensitivity analysis shows a 0.5 percentage point reduction in the discount rate would increase the obligation by 5.1% and a 0.5 percentage point increase in the expected salary increase rate would increase the obligation by 4.5%. Key estimate and judgement: Valuation of the defined benefit plan assets and obligations There are a number of estimates and assumptions used in determining the defined benefit plan assets, obligations and expenses. These include salary increases, future earnings, and the returns on fund investments. Any difference in these assumptions or estimates will be recognised in other comprehensive income and not through the income statement. The net of the plan assets and obligations recognised in the statement of financial position will be affected by any movement in the returns on the investment or the rate of interest. 2020 $ 2019 $ Short-term employee benefits Post-employment benefits Share-based payments Total 7,914,786  244,055  1,878,243  10,037,084  12,804,694 1,298,516 2,415,989 16,519,199 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 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. D4. Employee Discount Share Plan No shares were issued under the Employee Discount Share Plan during the years ended 30 June 2020 and 30 June 2019. 94 Downer EDI Limited Notes to the consolidated financial statements – continuedfor the year ended 30 June 2020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. E1. Borrowings E2. Financing facilities E3. Lease liabilities E4. Commitments E1. Borrowings Current Secured: – Lease liabilities(i) Unsecured: – Bank loans – USD private placement notes – Deferred finance charges Total current borrowings Non-current Secured: – Lease liabilities(i) Unsecured: – Bank loans – USD private placement notes – AUD private placement notes – AUD medium term notes – JPY medium term notes – Deferred finance charges Total non-current borrowings Total borrowings E5. Issued capital E6. Non-controlling interest (NCI) E7. Reserves E8. Dividends 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. 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 reporting date, the Group had the following facilities that were unutilised: Syndicated loan facilities Bilateral loan facilities Total unutilised loan facilities Syndicated bank guarantee facilities Bilateral bank guarantees and insurance bonding facilities Total unutilised bonding facilities 2020 $’m 960.0  310.0  1,270.0  2019 $’m 770.0  297.0  1,067.0  102.5  314.9  492.5  505.0  595.0  819.9  2020 $’m 2019 $’m –  2.8  5.4  –  (4.0) 1.4  1.4  6.1  10.0  (4.3) 11.8  14.6  –  7.4  982.2  145.7  30.0  762.8  135.3  (6.1) 2,049.9  2,049.9  2,051.3  833.4  142.6  30.0  550.0  132.4  (6.9) 1,681.5  1,688.9  1,703.5  Fair value of total borrowings(ii) 2,230.4  1,798.4  (i) Upon adoption of AASB 16 Leases, the 30 June 2019 lease liabilities that were disclosed as part of borrowings in the comparative figures above have been presented as part of the lease liability balances in Note E3. (ii) Excludes finance lease and hire purchase liabilities. Annual Report 2020 95 E2. Financing facilities – continued Summary of borrowing arrangements Bank loan facilities Bilateral loan facilities: The Group has a total of $477.4 million in bilateral loan facilities which are unsecured, committed facilities with maturities in financial years 2021, 2022 and 2023. Syndicated loan facilities: The Group has $1,780.2 million of syndicated bank loan facilities which are unsecured, committed facilities and comprised of Australian Dollar and New Zealand Dollar tranches with maturities in financial year 2022, 2023 and 2024. USD private placement notes USD unsecured private placement notes are on issue for a total amount of US$100.0 million with a maturity date of July 2025. The USD denominated principal and interest amounts have been fully hedged against the Australian dollar through cross-currency interest rate swaps. AUD private placement notes AUD unsecured private placement notes are on issue for a total amount of $30.0 million with a maturity date of July 2025. Medium Term Notes (MTNs) The Group has the following unsecured MTNs on issue: – $250.0 million maturing March 2022 – $500.0 million maturing April 2026 – JPY 10.0 billion maturing May 2033. The carrying value of the AUD MTN maturing April 2026 includes a premium of $12.8 million over face value owing to the differential between the coupon rate for that instrument and the prevailing market interest rate at the date of issue. The JPY denominated principal and interest amounts have been fully hedged against the Australian dollar through a cross-currency interest rate swap. The above loan facilities and note issuances are supported by guarantees from certain Group subsidiaries. The maturity profile of the Group’s borrowing arrangements by financial year is represented in the below table by facility limit: Maturing in the period ($’m) 1 July 2020 to 30 June 2021 1 July 2021 to 30 June 2022 1 July 2022 to 30 June 2023 1 July 2023 to 30 June 2024 1 July 2025 to 30 June 2026 1 July 2032 to 30 June 2033 Total Bilateral Loan Facilities Syndicated Loan Facilities USD Private Placement Notes AUD Private Placement Notes Medium Term Notes 5.4 145.0 327.0 – – – 477.4 – 200.0 1,120.2 460.0 – – 1,780.2 – – – – 145.7 – 145.7 – – – – 30.0 – 30.0 – 250.0 – – 500.0 135.3 885.3 Total 5.4 595.0 1,447.2 460.0 675.7 135.3 3,318.6  Covenants on financing facilities Downer Group’s financing facilities contain undertakings to comply with financial covenants and ensure that Group guarantors of these facilities collectively meet certain minimum threshold amounts of Group EBIT and Group Total Tangible Assets (for Downer) and Group EBITDA and Group Total Assets (for Spotless). The main financial covenants which the Group is subject to are Net Worth, Interest Service Coverage and Leverage. Financial covenants testing is undertaken monthly and reported at the Downer and Spotless Board meetings. Reporting of financial covenants to financiers occurs semi-annually for the rolling 12-month periods to 30 June and 31 December. Both Downer Group and Spotless were in compliance with all their financial covenants as at 30 June 2020. Bank guarantees and insurance bonds The Group has $2,034.8 million of bank guarantee and insurance bond facilities to support its contracting activities. $1,125.5 million of these facilities are provided to the Group on a committed basis and $909.3 million on an uncommitted basis. The Group’s facilities are provided by a number of banks and insurance companies on an unsecured and revolving basis. $1,439.8 million (refer to Note C10) of these facilities were utilised as at 30 June 2020 with $595.0 million unutilised. These facilities have varying maturity dates between financial years 2021, 2022 and 2023. The underlying risk being assumed by the relevant financier under all bank guarantees and insurance bonds is 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 loan facilities) which can at the election of the Group be utilised to provide additional bank guarantees capacity. 96 Downer EDI Limited Notes to the consolidated financial statements – continuedfor the year ended 30 June 2020E2. Financing facilities – continued Refinancing requirements The Group will negotiate with existing and, where required, with new financiers to extend the maturity date or refinance facilities maturing within the next 12 months. 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. As at 30 June 2020, the Group has no significant financings maturing within the 12 months to 30 June 2021. Refer to Note G2(f) for liquidity risk management including the Group’s response to the COVID-19 pandemic. Credit ratings The Group has an Investment Grade credit rating of BBB (Outlook Stable) from Fitch Ratings. Where the credit rating is lowered 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 all financing facilities, to reflect the weaker credit risk profile. E3. Lease liabilities Contractual undiscounted cash flows Less than one year One to five years More than five years Total undiscounted lease liabilities Current Non-current Total lease liabilities 2020 $’m 193.1  402.2 292.5  887.8  168.9  594.3  763.2  Included in the lease liabilities is $2.8 million of current and $7.4 million of non-current lease liabilities that had previously been disclosed as part of Secured Borrowings at 30 June 2019 (refer to Note E1). Lease liabilities The lease liability is initially measured at the present value of future lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or if this rate cannot be readily determined the Group’s incremental borrowing rate. Generally, the Group uses its incremental borrowing rate as the discount rate. Lease payments included in the measurement of the lease liability comprise: – Fixed payments (including in-substance fixed payments), less any lease incentives receivable – Variable lease payments that depend on an index or a rate – The exercise price of a purchase option if the lessee is reasonably certain to exercise that option – The amount expected to be payable under a residual value guarantee – Payments of penalties for termination of the lease, if the lease term reflects the lessee exercising an option to terminate the lease. Variable lease payments not included in the initial measurement of the lease liability are recognised directly in profit or loss. The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect the lease payments made. The Group remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever: – The lease term has changed or there is a significant event or change in circumstances resulting in a change in the assessment of exercise of a purchase option, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate – The lease payments change due to changes in an index or rate or a change in the amount expected to be payable under a residual value guarantee – A lease contract is modified, and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured based on the lease term of the modified lease by discounting the revised lease payments using a revised discount rate at the effective date of the modification. The expense charged to profit or loss for low value and short-term leases (excluded from lease liabilities) is analysed as: Lease expenses Land and buildings Plant and equipment Total lease expenses 2020 $’m 2.4  36.5  38.9  Where the Group is a lessor: The accounting policies applicable to the Group as a lessor are unchanged from those under AASB 117, and as such the Group is not required to make any adjustments on transition to AASB 16 for leases in which it acts as lessor. However, the Group has applied AASB 15 Revenue from contracts with customers to allocate consideration in the contract to each lease and non- lease component. Revenue from lease components has been classified within Other Revenue (refer to Note B2). Annual Report 2020 97 E3. Lease liabilities – continued Key estimate and judgement: Lease liabilities (i) Extension option In determining the lease term, the Group considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated). (ii) Incremental borrowing rate In determining the present value of the future lease payments, the Group discounts the lease payments using an incremental borrowing rate (IBR). The IBR reflects the financing characteristics and duration of the underlying lease. Once a discount rate has been set for a leased asset (or portfolio of assets with similar characteristics), this rate will remain unchanged for the term of that lease. When a lease modification occurs, and it is not accounted for as a separate lease, a new IBR will be assigned to reflect the new characteristics of the lease. E4. Commitments Capital expenditure commitments Plant and equipment and other Within one year Between one and five years Greater than five years Total Catering rights Catering rights relates to exclusive secured catering rights arrangements with customers. Within one year Between one and five years Greater than five years Total 2020 $’m 2019 $’m 72.1  15.5  0.4  88.0  24.3  35.2  3.7  63.2  103.5  24.3  1.3  129.1  27.8  55.5  5.9  89.2  98 Downer EDI Limited Notes to the consolidated financial statements – continuedfor the year ended 30 June 2020E5. Issued capital Ordinary shares Unvested executive incentive shares Distributing Securities (ROADS) Total Jun 2020 No. 594,702,512  2,231,632  200,000,000  $’m 2,263.1  (12.0) 178.6  2,429.7  Jun 2019 No. 594,702,512  3,385,446  200,000,000  (a) Fully paid ordinary share capital Fully paid ordinary shares carry one vote per share and carry the right to dividends. Fully paid ordinary share capital Balance at the beginning of the financial year Balance at the end of the financial year (b) Unvested executive incentive shares Balance at the beginning of the financial year Vested executive incentive share transactions(i) Balance at the end of the financial year 2020 m’s $’m 594.7  594.7  2,263.1  2,263.1  3.4  (1.2) 2.2  (16.6) 4.6  (12.0) 2019 m’s 594.7  594.7  4.2  (0.8) 3.4  $’m 2,263.1  (16.6) 178.6  2,425.1  $’m 2,263.1  2,263.1  (19.8) 3.2  (16.6) (i) June 2020 figures relate to the 2016 LTI plan, second deferred component of the 2017 STI award and first deferred component of the 2018 STI award totalling 1,153,814 vested shares for a value of $4,608,778. June 2019 figures relate to the 2015 LTI plan, second deferred component of the 2016 STI award and first deferred component of the 2017 STI award totalling 821,912 vested shares for a value of $3,166,042. 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 2020 99 E5. Issued capital – continued 2020 m’s $’m 2019 m’s $’m (c) Redeemable Optionally Adjustable Distributing Securities (ROADS) Balance at the beginning and at the end of the financial year 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 2020 is 4.32% per annum (2019: 5.49% per annum) which is equivalent to the one-year swap rate on 15 June 2020 of 0.27% per annum plus the step-up margin of 4.05% per annum. Share options and performance rights During the financial year nil performance rights (Jun 2019: 1,044,363) 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. E6. Non-controlling interest (NCI) The following table summarises the NCI in relation to the Group’s subsidiaries: Current assets Non-current assets(i) Current liabilities(i) Non-current liabilities Net assets NCI percentage Net assets attributable to NCI Jun 2020 Jun 2019 Spotless(ii) $’m 563.9  2,407.3  (738.3) (1,087.4) 1,145.5 12.198% 139.7 Other $’m 18.4  0.3  (1.4) (0.1) 17.2 26.0% 4.5 Total $’m Spotless(i) $’m 582.3  2,407.6 (739.7) (1,087.5) 1,162.7 144.2 566.6  2,290.7  (627.3) (1,004.5) 1,225.5 12.198% 149.5 Other $’m 22.3  1.2  (7.0) (0.1) 16.4 26.0% 4.3 Total $’m 588.9  2,291.9  (634.3) (1,004.6) 1,241.9 153.8 (i) June 2019 balances have been restated following review of the Group’s compliance with Enterprise Agreements (EAs) and Modern Award obligations (Refer to Note D1). (ii) Consistent with Group policy the goodwill impairment loss has been recognised on consolidation and does not impact the NCI. 100 Downer EDI Limited Notes to the consolidated financial statements – continuedfor the year ended 30 June 2020E7. Reserves 2020 $’m Foreign currency translation reserve Hedge reserve Employee benefits reserve Fair value through OCI reserve Total attributable to the members of the Parent Balance at 1 July 2019 Foreign currency translation difference Change in fair value of cash flow hedges (net of tax) Actuarial movement on defined benefit plan obligations Income tax effect of actuarial movement on defined benefit plan obligations 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 2020 (24.0) –  (5.4) –  –  (5.4) –  –  –  (29.4) (16.7) (13.9) –  –  –  (13.9) –  –  –  (30.6) 15.8  –  –  0.7  (0.2) 0.5  (4.6) 4.8  (1.6) 14.9  (2.6) –  –  –  –  –  –  –  –  (2.6) (27.5) (13.9) (5.4) 0.7  (0.2) (18.8) (4.6) 4.8  (1.6) (47.7) 2019 $’m Balance at 1 July 2018 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 2019 Foreign currency translation reserve Hedge reserve Employee benefits reserve Fair value through OCI reserve Total attributable to the members of the Parent (13.0) –  (11.0) (11.0) –  –  –  (24.0) (26.8) 10.1  –  10.1  –  –  –  (16.7) 15.5  –  –  –  (3.2) 4.0  (0.5) 15.8  (2.6) –  –  –  –  –  –  (2.6) (26.9) 10.1  (11.0) (0.9) (3.2) 4.0  (0.5) (27.5) Hedge reserve The hedge reserve comprises the effective portion of the cumulative net change in the fair value of 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. This reserve also includes the actuarial gains or losses arising on the defined benefit plan (Refer to Note D2). Fair value through OCI reserve The fair value through OCI reserve comprises the cumulative net change in the fair value of equity investments designated as FVOCI. Until the assets are derecognised or reclassified, this amount is reduced by the amount of loss allowance. Annual Report 2020 101 E8. Dividends (a) Ordinary shares Dividend per share (in Australian cents) Franking percentage Cost (in $’m) Dividend record date Payment date 2020 Final –  –  –  –  –  2020 Interim 14.0  0% 83.3 26/2/20 25/9/20 2019 Final 14.0 50% 83.3 4/9/19 2/10/19 2019 Interim 14.0  50% 83.3 21/2/19 21/3/19 Recognition and measurement A liability is recognised for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the entity, before or at the end of the financial year but not distributed at balance date. There will be no final dividend declared/paid for the year ended 30 June 2020. Downer has deferred the unfranked interim dividend which was originally due to be paid on 25 March 2020. This will now be paid on 25 September 2020 and has been recorded as dividend payable in Note C4. (b) Redeemable Optionally Adjustable Distributing Securities (ROADS) 2020 Quarter 1 Quarter 2 Quarter 3 Quarter 4 Dividend per ROADS (in Australian cents) New Zealand imputation credit percentage Cost (in A$’m) Payment date 2019 Dividend per ROADS (in Australian cents) New Zealand imputation credit percentage Cost (in A$'m) Payment date 0.92  100% 1.8  16/9/19 0.95  100% 1.9  16/12/19 0.96  100% 1.9  16/3/20 0.92  100% 1.8  15/6/20 Quarter 1 Quarter 2 Quarter 3 Quarter 4 1.01  100% 2.0  17/9/18 1.05  100% 2.1  17/12/18 1.06  100% 2.1  15/3/19 1.06  100% 2.1  17/6/19 Total 3.75  100% 7.4  Total 4.18  100% 8.3  (c) Franking credits The franking account balance as at 30 June 2020 is nil (2019: nil). 102 Downer EDI Limited Notes to the consolidated financial statements – continuedfor the year ended 30 June 2020F Group structure This section explains significant aspects of Downer’s Group structure, including joint arrangements where the Group has interests 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. Related party information F2. Acquisition of businesses F3. Controlled entities F5. 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 Interest in joint venture acquired 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 Acquisition of MHPS Plant Services Pty Ltd Interest in associates at the end of the financial year 2020 $’m 31.5  18.2  (17.2) –  (0.4) 32.1  77.3  1.2  –  –  78.5  2019 $’m 21.2  17.1  (15.6) 8.5  0.3  31.5  74.8  13.3  (6.8) (4.0) 77.3  Interest in joint ventures and associates 110.6  108.8  Annual Report 2020 103 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 Asphalt plant Joint ventures Allied Asphalt Limited Bitumen Importers Australia Joint Venture Construction of bitumen storage facility Bitumen Importers Australia Pty Ltd Bama Civil Pty Ltd & Downer EDI Works Pty Ltd(i) Eden Park Catering Limited EDI Rail-Bombardier Transportation Pty Ltd Sale and maintenance of railway rolling stock Emulco Limited Isaac Asphalt Limited Repurpose It Holdings Pty Ltd RTL Mining and Earthworks Pty Ltd Waanyi Downer JV Pty Ltd ZFS Functions (Pty) Ltd Emulsion plant Manufacture and supply of asphalt Waste recycling Contract mining; civil works and plant hire Contract mining services Catering for functions at Federation Square Bitumen importer Civil Infrastructure design and/or construction activities Catering for functions at Eden Park Ownership interest Country of operation 2020 % 2019 % New Zealand Australia Australia Australia New Zealand Australia New Zealand New Zealand Australia Australia Australia Australia 50  50  50  50  50  50  50  50  50  44  50 50 50  50  50  –  50  50 50  50  50 44  50  50 Associates Keolis Downer Pty Ltd Operation and maintenance of Gold Coast light rail, Melbourne tram network and bus operation Australia 49  49  (i) Joint venture entered into during the year ended 30 June 2020. There are no material commitments held by joint ventures or associates. All joint ventures and associates have a statutory reporting date of 30 June. The Group’s share of aggregate financial information from joint ventures and associates is presented below. The Group does not disclose the details of the individual joint ventures and associates on the basis these are individually immaterial. The Group’s share of the carrying amounts: Current assets Non-current assets Current liabilities Non-current liabilities Net assets Goodwill Adjustment to align accounting policies Carrying amount Profit for the year Total comprehensive income 104 Downer EDI Limited 2020 $’m 229.1 149.0 (144.7) (132.7) 100.7 7.0 2.9  110.6 19.4  19.4  2019 $’m 209.2  153.5  (115.0) (146.9) 100.8 7.0 1.0 108.8 30.4 30.4  Notes to the consolidated financial statements – continuedfor the year ended 30 June 2020F1. Joint arrangements and associate entities – continued (a) Interest in joint ventures and associates – continued 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. (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 2020 % 2019 % Enabling works for Carrapateena Project Building construction Enabling works for Auckland City Rail Link Road maintenance Sydney Water services Parramatta Light Rail construction Construction of the City Rail Link Alliance Project Highway construction and design Management of run of mine and ore rehandling services Traffic control infrastructure Major civil and roadworks Design and build of the New Zealand National War Memorial Park Design and build of the Mt Messenger Project Design and build on Americas Cup Project Road construction Tramline extension Downtown infrastructure development program Ausenco Downer Joint Venture China Hawkins Construction JV City Rail JV Concrete Paving Recycling Pty Ltd Confluence Water JV(iii) CPB Downer Joint Venture CRL Construction Joint Venture Dampier Highway Joint Venture Downer-Carey Mining JV(ii) Downer Electrical GHD JV(i) Downer FKG JV Downer HEB Joint Venture (Memorial Park Alliance) Downer HEB Joint Venture (Mt Messenger Project) Downer MCD Wynyard Edge JV (Americas Cup Project) Downer Seymour Whyte JV Downer York Joint Venture Downtown Infrastructure Development Project JV Gumala Downer Joint Venture Hatch Downer JV HCMT Supplier JV John Holland Pty Ltd & Downer Utilities Australia Pty Ltd Partnership Macdow Downer Joint Venture (Connectus) Rail construction Macdow Downer Joint Venture (CSM2) Macdow Downer Joint Venture (Russley Road) NEWest Alliance(iii) Road construction Road construction Contract mining services Australia Design and construction of solvent extraction plant Australia Australia Rail build supplier Australia Operation of water recycling plant at Mackay Australia New Zealand New Zealand Australia Australia Australia New Zealand Australia Australia Australia Australia New Zealand New Zealand New Zealand Australia Australia New Zealand New Zealand New Zealand New Zealand 50  50  50  49  43  50  30  50  46  90  50  50  50  50  50  50 33  50  50  50  50  50  50  50  50  50  50  49  –  50  30  50  46  90  50  50  50  50  50  50  33  50  50  50  50  50  50  50  Construction activities as part of Perth’s METRONET program Australia 50 – Annual Report 2020 105 F1. Joint arrangements and associate entities – continued (b) Interest in joint operations – continued Name of joint operation North Canterbury Transport Infrastructure Economic Recovery Alliance “NCTIER” JV Safety Focused Performance JV Thiess VEC Joint Venture Utilita Water JV VEC Shaw Joint Venture Waanyi ReGen JV WDJV Unit Trust Wiri Train Depot Joint Venture Principal activity Kaikoura earthquake works Water and sewerage capital works Highway construction Plant maintenance Road construction Rehab contract services Contract mining services Construction of the Wiri train depot (i) Contractual arrangement prevents control despite ownership of more than 50% of this joint operation. (ii) Joint operation is currently undergoing liquidation / de-registration. (iii) Joint operation entered into during the year ended 30 June 2020. F2. Acquisition of businesses Cash outflow in relation to acquisitions Gross purchase consideration Deferred consideration paid(i) Less: Net cash acquired Less: Deferred and contingent consideration Total cash consideration (i) The deferred consideration paid relates to acquisitions made prior to 1 July 2019. 2020 acquisitions There were no new acquisitions during the year. Ownership interest Country of operation New Zealand Australia Australia Australia Australia Australia Australia New Zealand 2020 % 25  45  50  50  50  50  50  50  2020 $’m –  29.8 –  –  29.8  2019 % 25  45  50  50  50  50  50  50  2019 $’m 100.7  15.6  (35.9) (17.4) 63.0  2019 acquisitions MHPS Plant Services On 30 August 2018, the Group acquired the remaining 73.33% of MHPS Plant Services Pty Ltd (“MHPS”) for consideration of $5.6 million. The acquisition was provisionally accounted for as at 30 June 2019 and has now been finalised in the current year, with no material changes. Rock N Road On 3 October 2018, the Group acquired 100% of the shares of Rock N Road Bitumen Pty Ltd (“RNR”) for total consideration of $17.9 million. RNR is a road surfacing business based in Mackay and operates in the central and northern regions of Queensland. The acquisition was provisionally accounted for as at 30 June 2019 and has now been finalised in the current year, with no material changes. 106 Downer EDI Limited Notes to the consolidated financial statements – continuedfor the year ended 30 June 2020F2. Acquisition of businesses – continued 2019 acquisitions – continued KHSA Limited On 21 December 2018, the Group executed a Share Sale Deed to acquire 100% of the shares in the DM Roads Joint Venture partner KHSA Limited (“KHSA”) for consideration of $43.7 million, including cash of $19.5 million. As KHSA Limited has a 50% interest in the Downer Mouchel Roads Joint Venture (alongside Downer’s existing 50% interest), Downer Mouchel Roads Joint Venture became 100% controlled. On acquisition of the remaining 50% interest, the initial investment was re-measured to fair value in accordance with Australian Accounting Standards and compared to the existing carrying value. As a result, $17.0 million fair value gain on re-measurement was reported as other income in the statement of profit or loss in the year ended 30 June 2019. The acquisition was provisionally accounted for as at 30 June 2019 and has now been finalised in the current year. Boleh Consulting On 7 December 2018, the Group acquired the net assets of Boleh Consulting (“Boleh”) for total consideration of $1.4 million. The business provides a range of engineering services to the railway industry that include design of train control and signalling systems, systems engineering, systems assurance and project management. The acquisition was provisionally accounted for as at 30 June 2019 and has now been finalised in the current year, with no material changes. Envar Group On 28 February 2019, The Group acquired 100% of the shares of Envar Group (“Envar”) through Spotless for a total consideration of $24.9 million. The primary purpose of this acquisition is to continue to build a market leading integrated mechanical and electrical business. The acquisition accounting for Envar has been finalised with an additional $3.0 million of goodwill being recognised. The Roading Company Limited On 1 May 2019, the Group acquired the net assets of The Roading Company Limited for a total consideration of $5.4 million. The Roading Company is a roading and civil construction business based in New Zealand. The acquisition was provisionally accounted for as at 30 June 2019 and has now been finalised in the current year, with no material changes. FH Lismore On 22 March 2019, the Group acquired the net assets of Fulton Hogan’s surfacing business in Lismore, New South Wales for a total consideration of $1.8 million. The assets provide Downer access to the surfacing market in and around Lismore to enhance the road maintenance capabilities in the area. The acquisition was provisionally accounted for as at 30 June 2019 and has now been finalised in the current year, with no material changes. Annual Report 2020 107 F2. Acquisition of businesses – continued Measurement of fair values The valuation techniques used for measuring the fair value of material assets / liabilities acquired were as follows: Asset / liability acquired Valuation technique Trade receivables and contract assets Cost technique – considers the expected economic benefits receivable when due. Property, plant and equipment Intangible assets Market comparison technique and cost technique – the valuation model considers quoted market prices for similar items when available and depreciated replacement cost when appropriate. 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 payables and contract liabilities 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. 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 in 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 to the fair value of assets are retrospective in nature and have an impact on goodwill recognised on acquisition. Goodwill from acquisitions The goodwill resulting from the above acquisitions represents 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. 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. 108 Downer EDI Limited Notes to the consolidated financial statements – continuedfor the year ended 30 June 2020F3. 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 ASPIC Infrastructure Pty Ltd Dean Adams Consulting Pty Ltd(iv) DMH Plant Services Pty Ltd DMH Maintenance and Technology Services Pty Ltd DMH Electrical Services Pty Ltd DM Road Services 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 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 Downer Mining Regional NSW Pty Ltd Downer PipeTech Pty Limited Downer PPP Investments Pty Ltd Downer Utilities Australia Pty Ltd Downer Utilities Holdings Australia Pty Ltd Downer Utilities Networks Pty Ltd(iv) Downer Utilities New Zealand Pty Limited Downer Utilities Projects Pty Ltd(iv) Downer Utilities SDR Australia Pty Ltd(iii) Downer Utilities SDR Pty Ltd Downer Victoria PPP Maintenance Pty Ltd EDI Rail PPP Maintenance Pty Ltd EDICO Pty Ltd Emoleum Partnership Emoleum Road Services Pty Ltd Emoleum Roads Group Pty Ltd Emoleum Services Pty Limited(iv) Envista Pty Limited Evans Deakin Industries Pty Ltd LNK Group Pty Ltd Lowan (Management) Pty. Ltd. Maclab Services Pty Ltd Mineral Technologies Pty Ltd Mineral Technologies (Holdings) Pty Ltd New South Wales Spray Seal Pty Ltd Otraco International Pty Ltd Otracom Pty Ltd Primary Producers Improvers Pty Ltd QCC Resources Pty Ltd Australia (continued) Rail Services Victoria Pty Ltd REJV Services Pty Ltd(iii) Roche Bros. Superannuation Pty. Ltd. Roche Services Pty Ltd Rock N Road Bitumen Pty Ltd RPC Roads Pty Ltd RPQ Asphalt Pty Ltd RPQ North Coast Pty Ltd RPQ Pty Ltd RPQ Services Pty Ltd RPQ Spray Seal Pty Ltd SACH Infrastructure Pty Ltd(iv) Smarter Contracting Pty Ltd Snowden Holdings Pty Ltd Snowden Mining Industry Consultants Pty Ltd Snowden Technologies Pty Ltd Southern Asphalters Pty Ltd Trico Asphalt Pty Ltd VEC Civil Engineering Pty Ltd VEC Plant & Equipment Pty Ltd New Zealand and Pacific AF Downer Memorial Scholarship Trust DGL Investments Limited Downer Construction (Fiji) Limited Downer Construction (New Zealand) Limited Downer EDI Engineering Power Limited Downer EDI Engineering PNG Limited Downer EDI Works Vanuatu Limited Downer New Zealand Limited Downer New Zealand Projects 1 Ltd Downer New Zealand Projects 2 Ltd Downer Utilities Alliance New Zealand Limited Downer Utilities New Zealand Limited Downer Utilities PNG Limited(iii) Green Vision Recycling Limited Hawkins 2017 Limited Hawkins Project 1 Limited ITS Pipetech Pacific (Fiji) Limited Richter Drilling (PNG) Limited Techtel Training & Development Limited The Roading Company Limited Underground Locators Limited Waste Solutions Limited Works Finance (NZ) Limited Africa Downer EDI Mining Ghana Ltd Downer Mining South Africa Proprietary Limited MD Mineral Technologies SA (Pty) Ltd. MD Mining and Mineral Services (Pty) Ltd(i) Otraco Botswana (Proprietary) Limited Otraco Southern Africa (Pty) Ltd(ii) Otraco Tyre Management Namibia (Proprietary) Limited Snowden Mining Industry Consultants (Proprietary) Ltd Annual Report 2020 109 Asia Chang Chun Ao Hua Technical Consulting Co Ltd Downer EDI Engineering (S) Pte Ltd Downer EDI Engineering Holdings (Thailand) Limited Downer EDI Engineering Thailand 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 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(iv) United Kingdom KHSA Limited Sillars (B. & C.E.) Limited Sillars (TMWD) Limited Sillars Holdings Limited Sillars Road Construction Limited Works Infrastructure (Holdings) Limited Works Infrastructure Limited Spotless(v) AE Smith & Son (NQ) Pty Ltd AE Smith & Son (SEQ) Pty Ltd AE Smith & Son Proprietary Ltd AE Smith Building Technologies Pty Ltd AE Smith Service (SEQ) Pty Ltd AE Smith Service Holdings Pty Ltd AE Smith Service Pty Ltd Airparts Holdings Pty Ltd Airparts Fabrication Pty Ltd Airparts Fabrications Units Trust Aladdin Group Services Pty Limited(vi) Aladdins Holdings Pty Limited(vi) Aladdin Laundry Pty Limited(vi) Aladdin Linen Supply Pty Limited(vi) Asset Services (Aust) Pty Ltd(vi) Berkeley Challenge (Management) Pty Limited(vi) Berkeley Challenge Pty Limited(vi) Berkeley Railcar Services Pty Ltd(vi) Berkeleys Franchise Services Pty Ltd(vi) Bonnyrigg Management Pty Limited(vi) Cleandomain Proprietary Limited(vi) Cleanevent Australia Pty Ltd(vi) Cleanevent Holdings Pty Limited(vi) Cleanevent International Pty Limited(vi) Cleanevent Middle East FZ LLC(iii) 110 Downer EDI Limited Spotless(v) (continued) Cleanevent Technology Pty Ltd(vi) Emerald ESP Pty Ltd Envar Installation Pty Ltd Envar Service Pty Ltd Envar Holdings Pty Ltd Envar Engineers & Contractors Pty Ltd Ensign Services (Aust) Pty Ltd(vi) Errolon Pty Ltd(vi) Fieldforce Services Pty Ltd(vi) Infrastructure Constructions Pty Ltd(vi) International Linen Service Pty Ltd(vi) Monteon Pty Ltd(vi) National Community Enterprises(iii) Nationwide Venue Management Pty Ltd(vi) NG-Serv Pty Ltd(vi) Nuvogroup (Australia) Pty Ltd(vi) Pacific Industrial Services BidCo Pty Limited(vi) Pacific Industrial Services FinCo Pty Limited(vi) Riley Shelley Services Pty Ltd(vi) Skilltech Consulting Services Pty Ltd(vi) Skilltech Metering Solutions Pty Ltd(vi) Sports Venue Services Pty Ltd(vi) Spotless Defence Services Pty Ltd(vi) Spotless Facility Services (NZ) Limited Spotless Facility Services Pty Ltd(vi) Spotless Financing Pty Limited(vi) Spotless Group Limited(vi) Spotless Group Holdings Limited(vi) Spotless Holdings (NZ) Limited Spotless Investment Holdings Pty Ltd(vi) Spotless Management Services Pty Ltd(vi) Spotless Property Cleaning Services Pty Ltd(vi) Spotless Securities Plan Pty Ltd(vi) Spotless Services Australia Limited(vi) Spotless Services International Pty Ltd(vi) Spotless Services Limited(vi) Spotless Treasury Pty Limited(vi) SSL Asset Services (Management) Pty Ltd(vi) SSL Facilities Management Real Estate Services Pty Ltd(vi) SSL Security Services Pty Ltd(vi) Taylors Laundries Limited Taylors Two Seven Pty Ltd(vi) Trenchless Group Pty Ltd(vi) UAM Pty Ltd(vi) Utility Services Group Holdings Pty Ltd(vi) Utility Services Group Limited(vi) (i) 70% ownership interest. (ii) 74% ownership interest. (iii) Entity is currently undergoing liquidation/dissolution. (iv) Entity dissolved/de-registered/liquidated during the financial year ended 30 June 2020. (v) The ownership interest in Spotless is 87.8% as at 30 June 2020. (vi) These Spotless controlled entities all form part of the tax consolidated group of which Spotless Group Holdings Limited is the head entity. Notes to the consolidated financial statements – continuedfor the year ended 30 June 2020F4. Related party information F5. Parent entity disclosures (a) Transactions with controlled entities Aggregate amounts receivable from and payable to controlled entities by the parent entity are included within total assets and liabilities balances as disclosed in Note F5. Other transactions which occurred during the financial year between the parent entity and controlled entities, as well as between entities in the Group, were 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 F3. Equity interests in joint arrangements and associate entities Details of interests in joint arrangements and associate entities are disclosed in Note F1. The business activities of a number of these entities are conducted under joint venture arrangements. Associated entities conduct business transactions with various controlled entities. Such transactions include purchases and sales, dividends and interest. All such transactions are conducted on the basis of normal arm’s length commercial terms. (c) Controlling entity The parent entity of the Group is Downer EDI Limited. (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 2020 $’m 2019 $’m 46.5  2,343.9  2,390.4  111.8  4.1  115.9  2,274.5  58.3  2,427.8  2,486.1  40.2  61.2  101.4  2,384.7  2,251.1  9.0  2,246.5  122.4  14.4 2,274.5 15.8  2,384.7  53.2  53.2  131.8  131.8  (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 2020 (2019: nil) other than those disclosed in Note C10. The parent entity does not have any commitments for acquisition of property, plant and equipment as at 30 June 2020 (2019: nil). Annual Report 2020 111 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 During the 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 2019, as follows: – AASB 16 Leases – AASB 2017-4 Amendments to Australian Accounting Standards – Uncertainty Over Income Tax Treatments – AASB 2017-6 Amendments to Australian Accounting Standards – Prepayment Features with Negative Compensation – AASB 2017-7 Amendments to Australian Accounting Standards – Long Term Interest in Associates and Joint Ventures – AASB 2018-1 Annual Improvements 2015-2017 Cycle – AASB 2018-2 Amendments to Australian Accounting Standards – Plan Amendment, Curtailment or Settlement – Interpretation 23 Uncertainty Over Income Tax Treatments Changes in significant accounting policies The impact of the adoption of AASB 16 Leases (AASB16) which resulted in a change in accounting policies is discussed in detail below. The other amendments listed above did not have an impact on the amounts recognised in the current or prior periods and are not expected to significantly impact future periods. AASB 16 – Leases The Group has adopted AASB 16 using the “modified retrospective approach” from 1 July 2019 and therefore the comparative information has not been restated as permitted under the specific transition provisions in the standard. Upon transition to AASB 16, the Group recognised right-of-use assets of $570.6 million and lease liabilities of $727.8 million as at 1 July 2019. The subsequent movements in the right-of-use assets as reflected in Note C6 includes $151.8 million depreciation charges for the year. The resulting lease liabilities (Refer to Note E3) gave rise to finance costs of $26.4 million for the year. For the impact of AASB 16 on segment assets and segment liabilities refer to Note B1. 112 Downer EDI Limited Notes to the consolidated financial statements – continuedfor the year ended 30 June 2020G1. New accounting standards – continued (a) New and amended accounting standards adopted by the Group – continued The table below presents the impact of the adoption on the balance sheet as at 1 July 2019: Property, plant and equipment Right-of-use assets Borrowings Lease liabilities (current and non-current) Other provisions Trade payables and contract liabilities Deferred tax balances Non-controlling interest Retained earnings Restated 30 June 2019(i) $’m AASB 16 Transition Adjustments $’m Opening Balance 1 July 2019 $’m 1,373.3  –  (1,703.5) –  (191.5) (2,456.8) (36.7) (153.8) (481.4) (9.0) 570.6  10.2  (727.8) 37.1  24.0  28.9  3.2  62.8  1,364.3  570.6  (1,693.3) (727.8) (154.4) (2,432.8) (7.8) (150.6) (418.6) (i) June 2019 balances have been restated following review of the Group’s compliance with Enterprise Agreements (EAs) and Modern Award obligations (Refer to Note D1). The total adjustment to equity upon transition to AASB 16 was $66.0 million including non-controlling interests. AASB 16 replaces previous lease accounting guidance and contains significant changes to the accounting treatment applied to leases. It requires a single accounting model to be applied to all types of leases, with the primary change being a requirement for lessees to recognise assets and liabilities for all leases, with the exception of short-term leases (with a duration of less than 12 months) and leases of low-value assets. At transition, for leases previously classified as operating leases under the superseded standard (AASB 117), lease liabilities were measured and recognised at the present value of the remaining lease payments, discounted at the Group’s incremental borrowing rate as at 1 July 2019. In applying AASB 16 for the first time, the Group has used the following practical expedients permitted by the standard: – Applying a single discount rate to a portfolio of leases with reasonably similar characteristics – Relying on previous assessments of whether leases are onerous as an alternative to performing an impairment review – Accounting for operating leases with a remaining lease term of less than 12 months as at 1 July 2019 as short-term leases – Excluding initial direct costs for the measurement of the right-of-use asset at the date of initial application – Using hindsight in determining the lease term where the contract contains options to extend or terminate the lease. The reconciliation between the operating lease commitments presented in the 30 June 2019 financial statements and the lease liability recognised as at 1 July 2019 is as follows: Disclosed operating lease commitments at 30 June 2019 Lease commitments for which lease liability arises after 1 July 2019 Recognition exemption for: Short-term leases Low value leases Recognition of leases embedded in customer contracts Extension options reasonably certain to be exercised Discounting using the incremental borrowing rate at 1 July 2019 Lease liabilities already recognised at 30 June 2019 Lease liabilities recognised at 1 July 2019 1 July 2019 $’m 795.6 (42.1) (11.1) (5.5) 0.7  119.0  (139.0) 10.2  727.8  Annual Report 2020 113 (b) Other new accounting standards that were adopted During the year, the Group has also chosen to adopt AASB 2020-4 Amendments to Australian Accounting Standards – Covid-19-Related Rent Concessions. The main impact of this amendment is that it exempts lessees from the need to account for COVID-19 related rent concessions as a lease modification. As such, lease concessions are treated as a remeasurement to the lease liability, with a corresponding adjustment to the right-of-use assets provided other terms of the lease agreement are materially unchanged. (c) 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. The following new or amended standards are not expected to have a significant impact on the Group’s consolidated financial statements: – Amendments to References to Conceptual Framework in IFRS Standards – Definition of Business (Amendments to AASB 3) – Definition of Material (Amendments to AASB 101 and AASB 8). G1. New accounting standards – continued (a) New and amended accounting standards adopted by the Group – continued On adoption of AASB 16, the Group: – Recognised Lease liabilities measured at the present value of future minimum lease payments, discounted using the incremental borrowing rate. The weighted average rate was 3.5% – Recognised the associated right-of-use assets at the carrying amounts as if AASB 16 had always been applied, discounted using the incremental borrowing rates at the date of initial application – Ensured that payments made before the commencement date and incentives received from the lessor are included in the carrying amount of the right-of-use asset – Recognised depreciation on right-of-use assets and interest on lease liabilities in the Consolidated Statement of Profit or Loss and Other Comprehensive Income – Recognised the principal portion of the lease payment as a financing cash flow and the interest portion of the lease payment as an operating cash flow in the Consolidated Statement of Cash Flows. Impact of new definition of a lease The Group assesses whether a contract is or contains a lease, at the inception of the contract. The Group recognises a right-of- use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short- term leases (defined as leases with a lease term of 12 months or less) and leases of low value assets. For these leases, the Group recognises the lease payments as an operating expense on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed. The Group has also elected not to reassess whether a contract is or contains a lease at the date of initial application of AASB 16. Instead, for contracts entered into before the transition date, the Group relied on its assessment made applying AASB 117 and Interpretation 4 Determining whether an Arrangement Contains a Lease. 114 Downer EDI Limited Notes to the consolidated financial statements – continuedfor the year ended 30 June 2020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, maintain an appropriate capital structure to optimise its cost of capital and maintain an investment grade credit rating 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 financial counterparty credit risk. The Group enters into a variety of derivative financial instruments to manage its exposures including: – Forward foreign exchange contracts to hedge the exchange rate risk arising from cross-border trade flows, foreign income and debt service obligations – Cross-currency interest rate swaps to manage the interest rate and currency risk associated with foreign currency denominated borrowings – Interest rate swaps to manage interest rate risk – Commodity forward contracts to manage commodity price movements in contracts. 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. (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 unhedged foreign currency denominated financial assets and financial liabilities at the reporting date are as follows: US dollar (USD) (i) The above table shows foreign currency financial assets and liabilities in Australian dollar equivalent. Financial assets(i) Financial liabilities(i) 2020 $’m 2.7  2019 $’m 10.1 2020 $’m 1.2 2019 $’m 5.5 Annual Report 2020 115 G2. Capital and financial risk management – continued (c) Foreign currency risk management – continued Foreign currency forward contracts The following table summarises, by currency pairs, the Australian dollar value (unless otherwise stated) of forward exchange contracts outstanding as at the reporting date: Outstanding contracts 2020 2019 Weighted average exchange rate Foreign currency Contract value Fair value 2020 FC’m 2019 FC’m 2020 $’m 2019 $’m 2020 $’m 2019 $’m Buy USD / Sell AUD Less than 3 months 3 to 6 months Later than 6 months Sell USD / Buy AUD 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 Sell EUR / Buy AUD Less than 3 months 3 to 6 months Later than 6 months Buy JPY / Sell AUD Less than 3 months 3 to 6 months Later than 6 months Sell JPY / Buy AUD Less than 3 months Later than 6 months Buy NZD / Sell AUD Less than 3 months Buy GBP / Sell AUD Less than 3 months 3 to 6 months Later than 6 months Buy CAD / Sell AUD Less than 3 months Sell CAD / Buy AUD Less than 3 months 3 to 6 months Buy EUR / Sell NZD Less than 3 months Buy ZAR / Sell AUD Less than 3 months Buy CNY / Sell AUD Less than 3 months Total 116 Downer EDI Limited 0.6552  0.6670  0.6403  0.6955  0.7142  0.7101  0.6949 0.6846 0.6814 0.6985 0.7073 0.7194 0.5960 0.6060 0.5902 0.6210 0.6147 0.6188 0.5987 0.5973 0.6081 73.46 73.75 68.92 70.96 73.32 –  –  –  77.68 77.88 76.95 76.40 – 76.40  52.3  29.2  10.5  92.0  33.9  34.1  4.8  72.8  3.7  7.1  5.2  16.0  0.2  0.6  1.6  2.4  5.2  1.3  0.9  7.4  12.1  0.8  37.1  50.0  0.3  3.0  3.4  6.7  –  –  –  –  770.8  46.9  64.5  882.2  31.9  98.8  130.7  1,648.3  255.9  215.2  2,119.4  289.5  – 289.5  79.9  43.9  16.4  140.2  48.8  50.0  7.0  105.8  6.2  11.6  8.8  26.6  0.4  1.1  2.6  4.1  10.5  0.6  0.9  12.0  0.4  1.3  1.7  7.5  1.8  1.3  10.6  17.3  1.1  51.6  70.0  0.5  4.9  5.5  10.9  –  –  –  –  21.2  3.3  2.8  27.3  3.8  – 3.8  (3.7) (1.3) (1.1) (6.1) (0.5) 0.3  –   (0.2) (0.1) –  (0.2) (0.3) –  –  –  –  –  –  (0.1) (0.1) –  –  –  1.0659 1.0493  112.0  18.0  105.1  17.2  (0.4) 0.4812 0.5367 0.5511 0.5532 –  –  0.2  0.5  0.4  1.1  0.9182 –   3.7  0.9052 0.9093 –  0.5717 11.83 –  –  –   –   5.1  5.1  10.2  0.5  24.3  1.2  –  –  1.2  –   –  –  –   –   –   –  4.9383  –  6.0  0.4  0.9  0.7  2.0  4.0  5.7  5.6  11.3  0.9  2.1  –  2.2  –  –  2.2  –   –  –  –   –   –   1.2  (0.1) –  –  (0.1) (0.1) 0.2  0.2  0.4  –  –  –  (6.9) (0.1) –  –  (0.1) 0.1  –   (0.9) (0.8) –  –  0.1  0.1  –  –  –  –  0.6  0.1  0.1  0.8  –  – –  0.1  –  –  –  –  –   –  –  –   –   –   –   0.1  Notes to the consolidated financial statements – continuedfor the year ended 30 June 2020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 AUD equivalent interest rate (including credit margin) 2020 % 2019 % Weighted average exchange rate 2020 2019 Contract value Fair value 2020 $’m 2019 $’m 2020 $’m 2019 $’m –  –  5.9  7.8  –  5.9  –  –  0.7739  0.7168  –  0.7739 –  –  129.2  129.2  9.8  –  129.2  139.0  –  –  13.2  13.2  0.2  –  2.5  2.7  5.2  5.2  83.12  83.12  120.3  120.3  (12.4) (6.3) Outstanding contracts Buy USD / Sell AUD Less than 1 year 1 to 5 years 5 years or more Buy JPY / Sell AUD 5 years or more The above cross-currency interest rate swaps are designated as effective cash flow hedges. Foreign currency sensitivity analysis The Group is mainly exposed to the movement in United States dollar (USD), Euro (EUR), Japanese Yen (JPY), New Zealand dollar (NZD) and Canadian dollar (CAD). 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. Annual Report 2020 117 G2. Capital and financial risk management – continued (c) Foreign currency risk management – continued Foreign currency sensitivity analysis – continued 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 JPY impact – 15% rate change + 15% rate change NZD impact – 15% rate change + 15% rate change CAD impact – 15% rate change + 15% rate change Profit / (loss)(i) 2020 $’m 2019 $’m Equity(ii) 2020 $’m 0.3  (0.2) 0.8  (0.6) –  –  –  –  –  –  –  –  –  –  –  –  –  –  –  –  6.0 (4.5) 4.4  (3.3) 1.9  (1.4) 18.5  (13.7) (1.2) 0.9  2019 $’m (10.4) 7.7  (1.6) 1.6  4.3  (3.2) 3.0  (2.2) –  –  (i) This is mainly as a result of the changes in the value of unhedged foreign currency denominated financial asset and liabilities. (ii) This is as a result of the changes in the value of forward foreign exchange contracts designated as cash flow hedges. 118 Downer EDI Limited Notes to the consolidated financial statements – continuedfor the year ended 30 June 2020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. Management of this risk is governed by a Board approved Treasury Policy and is managed by maintaining an appropriate mix between fixed and floating rate borrowings and hedging is undertaken through cross-currency interest rate swaps, 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 private placement notes(i) AUD private placement notes Medium term notes(i) Finance lease and hire purchase Total fair value exposure Weighted average AUD equivalent interest rate (including credit margin) Liability / (asset) 2020 % 2019 % 2020 $’m 1.3  0.8  2.6  5.9  5.8  3.9  –   2.8  1.1  3.6  6.0  5.8  4.3  5.5  333.7  (588.5) (254.8) 662.3  132.5  30.0  910.4  –  1,735.2  2019 $’m 288.0  (710.7) (422.7) 556.4  149.9  30.0  688.7  10.2  1,435.2  (i) The values of the interest rate and cross-currency swaps have been included in the debt amounts. All interest rates in the above table reflect rates in the currency of the relevant loan other than USD private placement notes and JPY medium term notes, where the AUD rates under the relevant 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 cross-currency interest rate swaps and interest rate swap contracts to manage interest rate exposures. Under these contracts, the Group commits to exchange the difference between fixed and floating rate interest amounts calculated on notional principal amounts. The fair values of interest rate swaps are based on market values of equivalent instruments at the reporting date. The following table details the interest rate swap contracts and related notional principal amounts as at the reporting date: Outstanding floating to fixed swap contracts AUD interest rate swaps Less than 1 year 1 to 2 years 2 to 3 years 3 years or more NZD interest rate swaps Less than 1 year 1 to 2 years 2 to 3 years Weighted average interest rate 2020 % 2019 % 1.2  1.2  1.3  –  – 1.5  – 2.1  1.2  1.2  1.3  2.2  –  1.5  Notional principal amount Fair value 2020 $’m 150.0  270.0  135.0  – 555.0  – 100.0  – 100.0  2019 $’m 2020 $’m 2019 $’m 450.0  150.0  270.0  135.0  1,005.0  100.0  – 100.0  200.0  (0.2) (3.7) (2.9) –  (6.8) – (1.7) – (1.7) (2.4) (0.2) (0.9) (0.7) (4.2) (0.3) –  (0.3) (0.6) Annual Report 2020 119 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 rates of 100 basis points across the yield curve of the relevant currencies. The selected basis point 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. An increase in interest rates of 100 basis points on the unhedged position (mostly cash and cash equivalents) will generate a profit of $2.5 million (2019: $4.6 million profit) to the profit or loss; a similar decrease in interest rates will generate a loss of $2.5 million (2019: $4.6 million loss) to the profit or loss. For hedged positions designated as cash flow hedges, an increase and decrease in interest rates of 100 basis points will generate an increase and decrease in equity of $6.9 million (2019: $10.7 million) and $6.6 million (2019: $10.4 million) respectively. (e) Credit risk management Credit risk refers to the risk that a financial counterparty will default on its contractual obligations in respect of a financial instrument, resulting in a potential loss to the Group. Trade receivables and contract assets arise from a large number of customers, spread across diverse industries and geographical areas. A credit evaluation is performed at the onset of material contracts to assess the financial condition of the counterparty and a credit evaluation is maintained over the life of the contract to take account of any changes in the risk profile of the counterparty. Where possible, a bank guarantee or performance bond, or parent guarantee from creditworthy counterparty is sought to secure a counterparty’s contractual payment obligations. Refer to Note C2 for details on credit risk arising from trade receivables and contract assets. Financial counterparty credit limits and the related credit acceptability of financial counterparties are set by a Board approved Treasury Policy that is subject to annual review to ensure it remains relevant to the external environment and reflects the Group’s risk appetite at all times. The Treasury Policy sets clear parameters for determining acceptable financial counterparties and limits the exposure the Group may have at any one time to any individual financial counterparties to mitigate financial loss due to a default by a counterparty. No material exposure is considered to exist by virtue of the non-performance of any financial counterparty. Credit risk on derivative financial instruments and cash balances held with financial counterparties is managed by Group Treasury with transactions only made with approved counterparties that have a minimum investment grade rating from Standard & Poor’s of A- (or equivalent from Moody’s or Fitch rating agencies). In limited circumstances, surplus cash may be held in foreign jurisdictions with financial counterparties that do not meet the minimum rating threshold where there is no other alternative. 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 is the risk that the Group is unable to meet its financial obligations as and when they fall due. The Group’s liquidity risk is managed under a Board approved Treasury Policy that sets clear parameters governing the Group’s continued access to liquidity. The Group manages liquidity risk by ensuring a minimum level of liquidity is available to meet the Group’s financial obligations in the form of available liquid cash balances and access to committed undrawn debt facilities and other forms of capital, monitoring forecast and actual cashflows and matching the maturity profile of financial assets and liabilities. The Group seeks to mitigate its exposure to liquidity risk by ensuring that debt facilities are provided by strong and investment grade rated financial counterparties and by the early refinancing of debt facilities to ensure continued access to capital over the medium term. During the year ended 30 June 2020, the Group was successful in renegotiating the maturity dates of a significant portion of its debt facilities and establishing $787.8 million of new committed debt facilities, $500 million of which was established in direct response to the global COVID-19 pandemic to ensure the Group’s liquidity strength was maintained during a period of heightened global uncertainty and volatility. In addition, the Group deferred payment of the 2019 interim dividend of $83.3 million to further augment its strong liquidity position. On 21 July 2020, the Group announced the launch of a $400 million equity raising to support the acquisition of the remaining shares in Spotless and provide flexibility for continued investment in Downer’s core business. The Group now has no material debt facilities maturing in the 12 months to 30 June 2021 and a strong liquidity position which will assist in mitigating any further market volatility. The Group’s debt facility maturities will continue to be monitored and refinanced in advance subject to credit market conditions and the support of its financial counterparties. Included in Note E2 is a summary of committed undrawn bank loan facilities. 120 Downer EDI Limited Notes to the consolidated financial statements – continuedfor the year ended 30 June 2020Liquidity risk tables The following tables detail the contractual maturity of the Group’s financial liabilities. The tables are based on the undiscounted cash flows of financial liabilities and include both interest and principal cash flows. 2020 $’m Trade payables Dividend payable Shareholder class action payable Lease liabilities Bank loans USD notes AUD notes Medium term notes Total borrowings including interest Cross-currency interest rate swaps Interest rate swaps Foreign currency forward contracts Total derivative instruments(i) Total 2019 Trade payables Finance lease and hire purchase liabilities Bank loans USD notes AUD notes Medium term notes Total borrowings including interest Cross currency interest rate swaps Interest rate swaps Foreign currency forward contracts Total derivative instruments(i) Total (i) Includes assets and liabilities. Less than 1 year 1 to 2 years 2 to 3 years 3 to 4 years 4 to 5 years 697.7 83.3 34.0 193.1  10.9  6.7  1.7  31.3  50.6  5.7  5.8  7.1  18.6  –  –  –  139.9  153.1  6.7  1.7  281.3  442.8  5.7  3.7  –  9.4  –  –  –  105.8  532.3  6.7  1.7  20.0  560.7 5.7  0.3  –  6.0  –  –  –  86.4  300.0  6.7  1.7  20.0  328.4  5.7  –  –  5.7  –  –  –  70.1  – 6.7  1.7  20.0  28.4  5.7  –  –  5.7  More than 5 years –  –  –  292.5  – 149.1  30.9  665.8  845.8  6.9  –  –  6.9  1,077.3 592.1  672.5 420.5  104.2  1,145.2  810.6  3.2  18.4  16.8  1.7  23.8  60.7  5.7  3.5  (0.6) 8.6  – 6.9  540.1  6.5  1.7  23.8  572.1  5.9  1.4  0.5  7.8  – 0.4  315.4  6.5  1.7  273.8  597.4  5.9  0.4  –  6.3  – 0.1  –  6.5  1.7  12.6  20.8  5.9  –  –  5.9  – – –  6.5  1.7  12.6  20.8  5.9  –  –  5.9  – – –  152.3  32.6  467.6  652.5  19.4  –  –  19.4  883.1  586.8  604.1  26.8  26.7  671.9  Annual Report 2020 121 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 AASB 9 aligns the accounting for hedging instruments more closely with the Group’s risk management objectives and strategy and applies a more qualitative and forward-looking approach to assessing hedge effectiveness. The Group has elected to adopt the general hedge accounting model in AASB 9. AASB 9 introduced new requirements on rebalancing hedge relationships and prohibiting voluntary discontinuation of hedge accounting. Under the new model, it is possible that more risk management strategies, particularly those involving hedging a risk component (other than foreign currency risk) of a non- financial item, will be likely to qualify for hedge accounting. 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. 122 Downer EDI Limited Notes to the consolidated financial statements – continuedfor the year ended 30 June 2020G3. Other financial assets and liabilities 2020 $’m At amortised cost: Other financial assets Advances to/from joint ventures and associates Deferred consideration At fair value: Level 2 Foreign currency forward contracts – Cash flow hedge Commodity forward contracts – Fair value through profit or loss Cross-currency and interest rate swaps – Cash flow hedge Level 3 Unquoted equity investments – Fair value through OCI Total 2019 $’m At amortised cost: Other financial assets Advances to/from joint ventures and associates Deferred consideration 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 – Fair value through OCI Contingent consideration Total Reconciliation of Level 3 fair value measurements of financial assets Level 3 investments remained unchanged from prior year (2019: no change). Financial assets Financial liabilities Current Non-current Current Non-current 19.0 4.5 – 23.5  1.7  1.0  – 2.7  – – 26.2  5.7 – – 5.7  – – 13.7  13.7  2.0 2.0 21.4 – 15.6 14.4 30.0  8.6  – 7.2  15.8  – – 45.8  – – 0.2 0.2  – – 14.2  14.2  – – 14.4  Financial assets Financial liabilities Current Non-current Current Non-current 23.7  9.8  –  33.5  1.3  0.2  1.5  –  –  –  35.0  –  –  –  –  –  3.2  3.2  2.0  –  2.0  5.2  –  13.1  22.1  35.2  1.0  8.0  9.0  –  3.2  3.2  47.4  –  –  15.3  15.3  0.2  3.8  4.0  –  0.7  0.7  20.0  Annual Report 2020 123 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) – 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. 124 Downer EDI Limited Notes to the consolidated financial statements – continuedfor the year ended 30 June 2020Directors’ Declaration for the year ended 30 June 2020 In the opinion of the Directors of Downer EDI Limited: (a) The financial statements and notes set out on pages 60 to 124 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, 12 August 2020 Annual Report 2020 125 Sustainability Performance Summary 2020 Downer’s sustainability approach To Downer, sustainability is delivering financial growth and value to its customers through its supply chain, looking after the wellbeing of its people, having a diverse and inclusive workforce, minimising its impact on the environment and enhancing the liveability of the communities in which it operates. 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 is intrinsically linked to Downer’s business strategy because the sustainability of Downer’s activities is fundamental to the Company’s future success. Downer’s sustainability strategy is shaped by its four Pillars: Safety; Delivery; Relationships and Thought Leadership. Downer’s commitment to sustainability is outlined on the Downer website and within the Sustainability Report located at www.downergroup.com/sustainability Downer makes a positive contribution in industry sectors such as utilities, renewables, public transport, infrastructure, facility management, mining services and production of road pavement products. Downer’s strategy focuses on improving efficiencies in existing operations, investing in growth, and adapting as industry and customer needs and preferences change. Downer’s business diversity allows it to leverage emerging opportunities such as increasing and ageing populations, infrastructure renewal requirements and the increased need for inter-connected smart cities and regional city hubs. As an integrated service provider, Downer’s contribution to sustainability is achieved by providing its customers with industry-leading solutions that drive and provide efficiency and reduce their impact on the environment. Downer works closely with the local communities in which it operates to achieve better social inclusion outcomes, implementing a range of strategies focusing on social responsibility, local and indigenous employment, cultural heritage management and stakeholder engagement. Downer’s success is a direct result of the experience, capability and engagement of Downer’s people. Downer aims to employ the best people and bring thought leadership to support its customers to plan, create and sustain. Downer achieves this by embracing diversity and inclusiveness in the workplace. Downer continues to strengthen its focus on recruiting strategically to increase workforce participation across a range of demographics. Downer’s ESG reporting approach Downer prepares its Sustainability Report with reference to the Global Reporting Initiative’s (GRI) Standards to provide investors with comparable information relating to environmental, social and governance (ESG) performance. Specifically, Downer’s approach takes into consideration the GRI’s principles for informing report content: materiality, completeness, and sustainability context 126 Downer EDI Limited and stakeholder inclusiveness. A key focus is to demonstrate how Downer delivers sustainable returns while managing risk and being responsible in how it operates. Downer seeks to identify the issues that have the greatest potential to impact its future success and returns to shareholders. Last year Downer revisited its materiality assessment in line with the GRI Standards via a rigorous independent lead process to formally engage internal and external stakeholders to understand what they believe are the material sustainability issues for Downer and inform the identification of its material issues by economic, social, environmental and governance. The materiality assessment provided key sustainability insights for Downer’s strategy and frames the content for this year’s Sustainability Report. The results were positive with strong alignment between internal and external stakeholder views. The material issues ranked in order of business impact for Downer consisted of: 1. Health, safety and wellbeing 2. Governance and ethics 3. Contractor management 4. Operational performance 5. Financial performance 6. Attraction and retention of skilled people 7. Partnerships and stakeholder engagement 8. Customer expectations and adding value 9. Business resilience 10. Climate change 11. Diverse and inclusive workforce Further information including the process undertaken is available on Downer’s website and within the 2019 Sustainability Report located at www.downergroup.com/sustainability Governance and risk management The Downer Board, through its oversight functions has verified that Downer appropriately considers Environmental Social and Governance (ESG) risks including those related to climate change. In fulfilling this function, the Downer Board also receives oversight from Downer’s Audit and Risk Committee, Zero Harm Committee, Zero Harm Board Committee, Tender Risk Evaluation Committee and Disclosure Committee. ESG related risks and opportunities are incorporated into Downer’s broader corporate strategy, planning and risk management. The Downer Board recognises that an integrated approach to managing ESG risks and opportunities is essential. This has been reflected in the strengthening of Downer’s governance structure and increased focus on this risk in both Board and executive forums throughout the financial year ended 2020. ESG risks and opportunities are governed as part of Downer’s Group Risk and Opportunity Management Framework and Downer’s commitment is enhanced by strong leadership from senior leaders within the business, who actively engage, enable and empower its people to work safely, and maintain safe working environments for themselves and the community. Downer has a mature safety culture, it is proud of its people’s support and commitment to its Zero Harm principles and practices. Downer’s strategic program for health and safety has focused on: – Critical risk management including the evaluation and assurance of critical controls by multiple layers of management and frontline leaders. The goal is to eliminate all preventable significant harm and establish Downer as a leader in critical risk management – Streamlining and harmonising critical risk controls and embedding them into management systems and continuing to further frontline leadership capability. The goal is to have an aligned approach to managing Zero Harm – Technology and innovation. The goal is to collect better data to better anticipate future risks and opportunities and innovate via use of technology – Business resilience, including mental health. The goal is to proactively respond to emerging strategic Zero Harm issues that impact the sectors it operates in and reinforce the positioning of Downer as a thought leader. Downer 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 2.00 1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0 LTIFR TRIFR 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0 0.87 0.66 0.55 0.78 0.67 0.57 2015 2016 2017 2018 2019 2020 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 Project Risk Management Framework. Downer identifies, manages and discloses material climate-related risks as part of Downer’s standard business practices, and, in accordance with the Group and Divisional strategies, which apply to everyone at Downer. Downer’s Zero Harm Management System Framework sets the Company’s Zero Harm and sustainability governance requirements. Downer has been certified (as a minimum) to the following standards: AS/NZS 4801 or OHSAS 18001 (for occupational health and safety management systems); ISO 14001 environmental management systems; and IS0 9001 quality management systems. During the 2021 financial year, Downer will transition to certification to ISO45001 for health and safety. The Board’s Zero Harm Committee oversees the strategy and monitors the development and implementation of Downer’s Zero Harm management systems, improvement and performance reporting systems, and monitors Downer’s Zero Harm performance. Effective monitoring occurs 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. The method for measuring the Company’s performance is clearly set out in its governance framework. Short-term remuneration incentives are offered to senior managers in relation to the Company’s performance against environmental sustainability targets. These targets include the management of critical environmental risks and GHG emissions reduction. Downer’s Zero Harm performance during 2020 is summarised below. More comprehensive information is provided in Downer’s 2020 Sustainability Report which will be available on the Downer website. Health and safety Downer’s business is founded on a deeply held value of Zero Harm. Health and safety is Downer’s highest priority, its top material issue and the first of its strategic pillars. Zero Harm is embedded in Downer’s culture and is fundamental to future success. Downer’s managers, supervisors and employees bring this core principle to fruition and actively live it every day, vigilantly protecting the health and safety of themselves and others in and around its workplaces. Downer’s approach to health and safety is built on leading, innovating, managing risk, rethinking processes, applying lessons learnt, and adopting and adapting practices that aim to achieve zero work-related injuries. Downer’s integrated lifecycle approach is a market differentiator, and enables its people to work safely in industry sectors that may be inherently hazardous. In everything it does, the health and safety of its people and communities that it works within is always its top priority. Annual Report 2020 127 Sustainability Performance Summary 2020 – continued 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: – Continuing to focus on the resilience and assurance of environmental risk controls – Incorporating sustainability rating tools and initiatives into major projects – Improving environmental workforce capability – Engaging with customers regarding Downer’s environmental capability – Preparing the business as markets transition to a low carbon economy. Downer achieved its Group-wide target of zero Level 51 or Level 62 environmental incidents. There were no significant environmental incidents3 (≥ Level 4) during financial year 2020. In FY20, Downer incurred three penalty infringement notices for environmental breaches. These consisted of two fines totalling AUD $5,338 relating to the same event in its Australian Operations. The breaches consisted of connecting to water infrastructure without written consent and withdrawal of water from an un-approved source without approval. The other fine occurred in New Zealand, for the amount of NZD $750. This fine was issued for exceeding turbidity limits specified within a Resources Consent whilst carrying out work activities within a creek. At the time of writing this report the Downer Seymour Whyte Joint Venture was in the process of finalising an Enforceable Undertaking with the New South Wales Environment Protection Authority for three consecutive pollute waters licence breaches that occurred from August to September 2019 on the Berry to Bomaderry Princes Highway upgrade project. Noteworthy achievements for FY20 include: – Recognised by the Australasian Reporting Awards with a Bronze Award for Downer’s 2019 Annual Report and Sustainability Report – Improved Carbon Disclosure Project (CDP) score to a B which puts Downer higher than the Oceania regional and industrial support services sector average of C. – Awarded an “Excellent” Infrastructure Sustainability (IS) “As Built” rating by the Infrastructure Sustainability Council of Australia (ISCA) for the Newcastle Light Rail Project. – Achieved the first Infrastructure Sustainability (IS) Operations rating for a road maintenance contract for the Northwest Tasmanian Road Maintenance contract which achieved a “Commended Operations” rating by ISCA. – In an Australian-first, Downer’s road surfacing material, Reconophalt, which incorporates recycled soft plastics, has been approved for use by the NSW Environment Protection Authority (EPA) under a resource recovery order and exemption. Climate change and Downer’s TCFD Response Climate change presents a challenge to sustaining the modern environment, enhancing livability, the natural environment and Downer’s business. While Downer’s business portfolio is diverse, it has limited exposure to the effects of climate change through fixed, long lived capital assets. Downer’s diverse portfolio allows it to be flexible and agile to redeploy its assets to high growth areas as markets change. This diversity of portfolio strongly positions Downer to mitigate and manage its exposure to climate risks and to maximise the business opportunities it presents. Downer accepts the Intergovernmental Panel on Climate Change (IPCC) assessment of the science related to climate change and supports the Paris Agreement in transitioning to net-zero emissions by 2050. Downer considers climate change to be one if its material issues – refer to the materiality assessment. In FY19, Downer implemented the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) in assessing the financial implications of climate change on Downer. In its implementation of the TCFD recommendations, Downer used climate scenario analysis as a key step to understand the resilience of the business under different climatic futures. Global scenarios were used to inform a top-down assessment of how the physical climate might change, the hazards that its workforce might be exposed to, and how the services provided to key sectors and markets may change. This was particularly important to Downer as its purpose is to create and sustain the modern environment by building trusted relationships with customers. The scenario analysis informed strategic planning processes by looking longer-term to critically assess the products and services provided by the business in changing markets. The scenario analysis was fed directly into Board strategy sessions and to Executive forums, where it remains a permanent consideration of the Board strategy. Further to the scenario analysis outcomes, broader sustainability issues are discussed at Board level. From a tactical perspective, Downer undertakes an annual exercise to test its strategic position on the back of the scenario analysis. 1 2 3 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. 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. 128 Downer EDI Limited The outcomes of the scenario analysis contributed to the change in the overall strategy of the business. In February 2020, Downer announced it would shift investment in high-capital intensive activities to lower-intensive and lower-carbon activities. Climate change and sustainability was also elevated to retain market share and to secure new customers. This strategic shift will support Downer’s decarbonisation pathway and market position in a low-carbon economy. GHG emission reduction target Downer acknowledges that climate change mitigation is a shared responsibility and to support the transition to a low-carbon economy in an equitable manner, Downer recognises the need to develop emissions reduction targets that align with the 2015 Paris Agreement goals to “pursue efforts to limit the temperature increase to 1.5°C” by the end of this century. To demonstrate Downer’s commitment, in 2019 Downer set an ambitious science-based target (aligned to a 1.5°C pathway) and committed to the decarbonisation of its absolute Scope 1 and 2 GHG emissions by 45-50 percent by 2035 from a FY18 base year and being net zero in the second half of this century. Downer will track its progress towards its emissions reduction target and review its emission reduction approach in line with Intergovernmental Panel on climate change (IPCC) updated scientific reports, whilst considering other developments in low-emissions technology, to ensure a practical and affordable transition towards this commitment. Downer recognises the uncertainties, challenges and opportunities that climate change presents and despite the recent impacts of COVID-19, Downer remains committed to partnering with its customers and supply chain to achieve its long-term GHG emission reduction target. Refer to Downer’s Sustainability Report located at www.downergroup.com/sustainability for further disclosures on Downer’s response to climate change and how it has specifically addressed the TCFD recommendations. Annual Report 2020 129 Corporate Governance for the year ended 30 June 2020 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 – 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 – Reviewing, ratifying and monitoring systems of risk management and internal control, codes of conduct and legal compliance. Before appointing a Director or senior executive, the Board undertakes appropriate checks. The Board 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 2020, 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 formalised through the Downer Diversity and Inclusion (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 and Inclusion Policy is available on the Downer website at www.downergroup.com. ASX diversity recommendations – diversity statement This diversity statement outlines Downer’s performance throughout 2020 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 2020 – An outline of Downer’s measurable gender diversity objectives for 2021. Gender representation metrics As at 30 June 2020, Downer’s female gender representation metrics were as follows: – Board – Senior Executive1 – Management2 – Workforce 29% 22% 23% 35% 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, “Management” refers to CEO, KMP, Other Executives/General Managers, Senior Managers and Other Managers as defined in the WGEA Reference Guide. 130 Downer EDI Limited Looking back: 2020 measurable objectives Focus Area Objective Targets Outcome Flexibility, Diversity and Inclusion To continue developing Downer’s commitment to representing the businesses and communities in which we serve through a focus on D&I. Report quarterly to the Executive Committee on progress towards targets and objectives. Achieved: – Partnership with Work180 as an endorsed employer continues, with utilisation of job boards for targeted roles. In FY20 there were 133 female applicants. Progressing: – An induction review project is underway with the Welcome to Downer module having been refreshed. Gender Diversity To improve opportunities for women to reach their potential through an inclusive work environment while positioning Downer Group as a preferred employer for women in our industry. 37% women in the workforce by 2020. 23% women in management by 2020. 22% women in executive positions by 2020. 30% women on Board. Suspended: – Divisional Diversity Committees were disbanded following an organisational restructure during 2020. Governance resides with the Executive General Managers and General Managers of People and Culture of the new organisation. Steering Committees and Tactical Plans are being established under their leadership with Group Divisional Steering Committee oversight and governance. Achieved: – A Flexible Working Arrangements pilot program where all employees, except for field staff, in a business unit worked from home was conducted. Results included no loss in productivity along with positive anecdotal results. This case study is shared with all participants of the Lead a Remote Team training program – Various manager guides have been created, including Lead a Remote Team and Inclusive Language guides. Progressing: – A manager toolkit for supporting primary carers on parental leave before, during and as part of return to work was developed and will be launched in 2021 – On-track to meet Downer’s WGEA Pay Equity Ambassador commitments. Aspects of this involved face to face events scheduled for March which were delayed due to COVID-19. These are planned to be completed in 2021 – The development of an unconscious bias online learning module will be prioritised in 2021 Suspended: – A second intake of the Downer mentoring program was planned for late 2020. Due to COVID-19 disruptions, this program was put on hold. – The development and launch of a Female Network also did not commence but will be progressed in 2021. Annual Report 2020 131 Focus Area Objective Targets Outcome 3% Aboriginal and Torres Strait Islander employees by 2020. Achieved: – Progress on Downer’s Innovate Reconciliation Action Plan (RAP) endorsed by Reconciliation Australia, which outlines Downer’s reconciliation vision, strategy and targeted initiatives, continues with completion due in 2021 Cultural Diversity To build on Downer Group’s commitment to closing the gap by increasing Indigenous workforce participation and developing strategic partnerships with Indigenous organisations and community groups. – Spotless is currently consulting with Reconciliation Australia on its Stretch RAP – Downer has exceeded RAP commitments by establishing relationships with labour hire companies, employment agencies and other Indigenous organisations. 2020 spend in this regard increased by 40% compared with 2019 – An Indigenous Cultural Awareness Training module for Australian employees was developed and rolled-out – Evolved the Maori Leadership program, Te Ara Whanake, into a program specifically designed for non-Maori leaders, with 63 leaders from across Downer NZ completing Te Ara Maramatanga, a cultural competence program which includes an overnight on a Marae. Progressing: – Downer’s Indigenous Cultural Awareness Training program continues to be progressively rolled-out and allocated to Supervisors and above, with 77% of this cohort in Downer Australia having completed the training – Partnerships have been developed and continue with market specialists for placing migrant workers in employment along with Job Active agencies. Achieved: – Downer continues to build its pipeline of talent by investing in youth through the Downer Graduate program, which is now well embedded with a robust and unified attraction, selection, development and management framework. Progressing: – Full implementation of a governance structure and framework for the Downer Apprentice and Trainee program is planned for 2021 – Partnerships have been developed with market specialists to explore opportunities for ex-Veteran employment along with Job Active agencies. Generational Diversity To establish Downer Group as a sought- after employer for all age-groups and as an organisation that builds a talent pipeline of thought leaders and continues to value experience. Maintain or increase the number of graduate employees year- on-year until 2021. 132 Downer EDI Limited Corporate Governance – continuedfor the year ended 30 June 2020Looking ahead: 2021 measurable objectives Focus Area Objective Targets Initiatives Flexibility, Diversity and Inclusion To continue developing Downer’s commitment to representing the businesses and communities in which we serve through a focus on D&I. Report quarterly to the Executive Committee on progress towards targets and objectives. – Governance structure embedded through Group Diversity Steering Committee and business Steering Committees and Tactical Plans. Reporting via Quarterly Business Report to the Executive Committee – Launch the Own Different campaign across the business to celebrate our commitment to Inclusion – Report on Flexible Working Arrangements trial and further operational pilots. Share learnings broadly – Maintain endorsed referral programs (i.e. refer a female friend and refer an Indigenous friend) – Establish strategic partnerships with human resource organisations to enable attraction of diverse, disadvantaged and/or minority groups – Establish strategic supplier relationships with social enterprises to participate in contracted works. Gender Diversity Cultural Diversity Generational Diversity To improve opportunities for women to reach their potential through an inclusive work environment while positioning Downer Group as a preferred employer for women in our industry. 40% women in the workforce by 2023. – Extend the talent management and succession planning framework cohort from CEO-2 to CEO-3 for females 25% women in management positions by 2023. – Investigate partnership opportunities with organisations that support women into trades-based employment in skilled trades that are male-dominated, with a view to a formal partnership and pilot 25% women in executive positions by 2023. – Build the unconscious bias capability of operational managers and recruitment specialists via an online learning module 30% women on the Board. – Develop and launch a Female Network to highlight opportunities and networking – Women in Leadership programs (Australia and New Zealand). To build on Downer’s commitment to Aboriginal and Torres Strait Islander peoples and the Maori people, through the development of strategic partnerships with Indigenous organisations and community and increased workforce participation. To establish Downer Group as a sought- after employer for all age-groups and as an organisation that builds a talent pipeline of thought leaders and continues to value experience. 3% Aboriginal and Torres Strait Islander employees. – Close out actions and report on Downer’s Innovate RAP and consult to develop and obtain endorsement for Downer’s Stretch RAP. Maintain or increase the number of graduate employees year-on-year. – Share learnings and coordinate where practicable from Downer and Spotless RAPs – Review, consult and enhance the current Aboriginal and Torres Strait Islander Employment and Retention Strategy through identifying barriers and implementing recommendations for improvement – Work with Indigenous NGO networks to further develop opportunities for Aboriginal and Torres Strait Islander employees, apprentices and trainees. Continue to build a talent pipeline by investing in entry level programs that align to our generational diversity focus and priority areas, including: – The Downer Graduate development program. – Cadets and further undergraduate programs. – Harmonisation of processes across Australia for Apprentices and Trainees that supports strategic attraction, selection, development, management and retention. Annual Report 2020 133 Principle 2: Structure the Board to be effective and add value Throughout the 2020 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), four 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 4 to 50 and are also available on the Downer website at www.downergroup.com. The composition of the Board is reviewed and 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 their 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 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 the 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. 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. Board Committee Audit and Risk Zero Harm Chairman N M Hollows P L Watson Nominations and Corporate Governance R M Harding Remuneration Disclosure Rail Projects T G Handicott T G Handicott P S Garling Tender Risk Evaluation P L Watson 134 Downer EDI Limited Members T G Handicott P L Watson G A Fenn P S Garling T G Handicott N M Hollows P S Garling R M Harding G A Fenn R M Harding G A Fenn T G Handicott R M Harding G A Fenn R M Harding N M Hollows Corporate Governance – continuedfor the year ended 30 June 2020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 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 and executive experience across engineering, construction and scientific disciplines as well as services activities and professional services when considering the appointment of a new Director. 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 20. 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 four members, including the Group CEO. Meetings of the Tender Risk Evaluation Committee are convened as required to review tender opportunities. The Board has established the Nominations and Corporate Governance Committee to oversee the practices for selection and appointment of Directors of the Company. The Nominations and Corporate Governance Committee’s primary purpose is to support and advise the Board on fulfilling its responsibilities to shareholders by ensuring that the Board is comprised of individuals who are best able to discharge the responsibilities of Directors having regard to the law and leading governance practice. The Nominations and Corporate Governance Committee has a charter which sets out its roles and responsibilities, composition, structure, membership requirements and the procedures for inviting non-committee members to attend meetings. The Nominations and Corporate Governance Committee Charter gives the Nominations and Corporate Governance Committee access to internal and external resources, including advice from external consultants and specialists. The Nominations and Corporate Governance Committee Charter is available on the Downer website at www.downergroup.com. 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, Board Committees 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) – Recommending the engagement of nominated persons as Directors. Annual Report 2020 135 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 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 candidates as part of the appointment process. Professional qualifications Business, finance 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 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 and Downer intends to undertake a review in 2021, which will include consideration of the skills and knowledge of Directors. 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: Transport and infrastructure – Downer’s financial position, strategies, operations and risk management policies 0.0 1.0 2.0 3.0 4.0 5.0 – The respective rights, duties and responsibilities and roles of the Board and senior executives – 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. *Includes banking, finance and legal. Tenure 9+ 6–9 3–6 0–3 0.0 1.0 2.0 3.0 4.0 Gender diversity Gender diversity 2 4 Male Female 136 Downer EDI Limited Corporate Governance – continuedfor the year ended 30 June 2020Principle 3: Instil a culture of acting lawfully, ethically and responsibly Downer’s Purpose is to create and sustain the modern environment by building trusted relationships with our customers. Its Promise is to work closely with our customers to help them succeed, using world-leading insights and solutions. Downer’s Purpose and Promise are founded on the Pillars of Zero Harm, Delivery, Relationships and Thought Leadership and define the way it manages its business and are the foundations that support Downer’s culture. An overview of the Purpose, Promise and Pillars can be found on the Downer website at www.downergroup.com. 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 – 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 Board is informed of material breaches of the Standards of Business Conduct through reporting of incidents under the whistleblower policy, investigations of allegations of fraud and breaches of Downer’s Zero Harm Cardinal Rules. 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 – 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. The Board is informed of material breaches of the Anti-Bribery and Corruption Policy. 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. Principle 4: Safeguard the integrity of corporate reports The Company has in place a structure of review and authorisation which independently verifies and safeguards the integrity of its financial reporting. An external limited assurance engagement is performed on selected sustainability information in Downer’s annual Sustainability Report. Downer also follows a comprehensive internal verification process to ensure the integrity of the Sustainability Report and other periodic corporate reports which are not audited or reviewed by the external auditor, including the Directors’ Report, Corporate Governance Statement, and Information for Investors. This process involves review of reporting by relevant subject matter experts across the organisation to ensure it is materially accurate, balanced and provides investors with appropriate information. 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 – 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) – Has at least three members. The Audit and Risk Committee comprises only independent Directors, includes members who are financially literate and has at least one member who has relevant qualifications and experience. Annual Report 2020 137 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 FY20, together with the individual attendances of members at the meetings, is set out in the Directors’ Report on page 20. The Audit and Risk Committee Charter is available on the Downer website at www.downergroup.com. 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. It includes that new and substantive investor or analyst presentations are released on the ASX Market Announcements Platform ahead of the presentation. 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. The Board receives copies of all material market announcements promptly after they have been made. 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 security holders 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 138 Downer EDI Limited – Making it easy for shareholders to participate in general meetings – Giving shareholders the option to receive communications from, and send communications to, the Company and its security registry electronically. 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 members meetings 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. All substantive resolutions at meetings of shareholders are conducted by poll. 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 review of the Risk Management Framework was completed in 2020. The Board reviews the Group risk profile twice each year 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 and social risks. The 2019 Sustainability Report is available on the Downer website at www.downergroup.com/sustainability. The Company’s internal audit function objectively evaluates and reports on the existence, design and operating effectiveness of Corporate Governance – continuedfor the year ended 30 June 2020Retirement benefits are not paid to Non-executive Directors. 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, as set out in the Securities Trading Policy. A copy of the Securities Trading Policy is available on the Downer website at www.downergroup.com. Further details about the remuneration of Executive Directors and senior executives are set out in the Remuneration Report on page 24 and details of Downer shares beneficially owned by Directors are provided in the Directors’ Report on page 6. internal controls. Downer’s internal audit team is independent of the external auditor and reports to the Audit and Risk Committee. Downer’s Audit and Risk Committee assists the Board in its oversight of Downer’s risk profile and risk policies, the effectiveness of the systems of internal control and Risk Management Framework and Downer’s compliance with applicable legal and regulatory obligations. The Audit and Risk Committee Charter is available on the Downer website at www.downergroup.com. Management reports regularly to the Audit and Risk Committee on the effectiveness of Downer’s management of its material business risks and on the progress of mitigation treatments. Principle 8: Remunerate fairly and responsibly The Board has established a Remuneration Committee and has adopted the Remuneration Committee Charter which sets out its role and responsibilities, composition, structure and membership requirements and the procedures for inviting non-committee members to attend meetings. The Remuneration Committee is responsible for reviewing and making recommendations to the Board about: – Executive remuneration and incentive policies – The remuneration, recruitment, retention, performance measurement and termination policies and procedures for all senior executives reporting directly to the Group CEO – Executive and equity-based incentive plans – 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 – Has at least three members. The Executive Director is not 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 on page 24. Annual Report 2020 139 Information for Investors for the year ended 30 June 2020 Downer shareholders Share registry Downer had 25,023 ordinary shareholders as at 30 June 2020, of which 23,113 shareholders had a registered address in Australia. The largest shareholder, HSBC Custody Nominees (Australia) Limited, held 31.23% of the 594,702,512 fully paid ordinary shares issued at that date. 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 a foreign exempt 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. Dividends are paid in Australian dollars, other than for shareholders with a registered address in New Zealand, who receive dividends in New Zealand dollars unless an election is made to receive payment in Australian dollars by providing Australian bank account details. 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 3 60 Carrington Street Sydney NSW 2000 GPO Box 2975 Melbourne VIC 3001 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. 140 Downer EDI Limited 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 2020 Number of holders of equity securities: Ordinary share capital 594,702,512 fully paid listed ordinary shares were held by 25,023 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 2020 Shareholders FIL Limited Sumitomo Mitsui Trust Holdings L1 Capital Pty Ltd T Rowe Price The Vanguard Group Ordinary shares held 38,754,631 37,739,692 32,003,849 29,770,913 29,745,101 % of issued shares 6.52 6.35 5.38 5.00 5.00 Distribution of holders of quoted equity securities Shareholder distribution of quoted equity securities as at 30 June 2020 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 14,246 8,394 1,444 888 51 25,023 1,343 Shareholders % 56.93 33.55 5.77 3.55 0.20 Ordinary shares held 6,214,042 19,231,319 10,413,910 19,296,143 539,547,098 594,702,512 Shares % 1.04 3.23 1.75 3.24 90.73 100.00 Annual Report 2020 141 Information for Investors – continued for the year ended 30 June 2020 Twenty largest shareholders Downer’s 20 largest shareholders of ordinary fully paid shares as at 30 June 2020 are as follows. Shareholders HSBC Custody Nominees (Australia) Limited Chase Manhattan Nominees Limited Citicorp Nominees Pty Limited National Nominees Limited BNP Paribas Noms Pty Ltd BNP Paribas Nominees Pty Ltd Argo Investments Ltd HSBC Custody Nominees (Australia) Limited Citicorp Nominees Pty Limited CPU Share Plans Pty Limited Sandhurst Trustees Ltd Netwealth Investments Limited BNP Paribas Nominees Pty Ltd Mr Grant Fenn Mr Barry Sydney Patterson + Mrs Glenice Margaret Patterson CPU Share Plans Pty Ltd AMP Life Ltd BNP Paribus Noms (NZ) Ltd BNP Paribus Nominees Pty Ltd Navigator Australia Limited Total for top 20 shareholders Shares held 185,717,949 146,284,045 81,954,474 62,359,874 20,792,447 10,611,149 6,159,538 5,626,345 3,895,289 2,561,695 2,266,995 1,716,354 1,158,794 961,478 891,642 773,889 395,728 353,490 318,956 311,618 535,111,749 % of issued shares 31.23 24.60 13.78 10.49 3.50 1.78 1.04 0.95 0.65 0.43 0.38 0.29 0.19 0.16 0.15 0.13 0.07 0.06 0.05 0.05 89.98 142 Downer EDI Limited Annual Report 2020 143 This page has been intentionally left blank.144 Downer EDI Limited This page has been intentionally left blank.Sovereign A2 Silk is proudly made FSC® certified by Hankuk paper which also carries the ISO 14001 EMS accreditation and it’s manufactured with elemental chlorine-free pulps. D o w n e r A n n u a l R e p o r t 2 0 2 0 www.downergroup.com 

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