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ERM Power Limited
Annual Report 2011
Vision Statement
ERM Power aspires to be the electricity supplier of
choice to Australia’s large business customers.
Contents
About ERM Power
Chairman’s and Managing Director’s Report
ERM Sales
ERM Generation Assets
ERM Generation and Operations
ERM Gas
Carbon Tax
Environment
People and Safety
Community
2
4
8
11
13
16
18
19
20
21
Directors’ Report
Remuneration Report
Corporate Governance Statement
Auditor’s Independence Declaration
Annual Financial Statements
Directors’ Declaration
Independent Auditor’s Report
Share and Shareholder Information
Glossary
22
31
40
45
46
105
106
108
110
Corporate Directory
Inside Back Cover
About ERM Power
ERM Power is an integrated energy company
which operates electricity sales, generation
and gas procurement businesses.
long-term off-take contracts, have long-term, limited-recourse
project debt facilities in place and are expected to have
a significant useful operating life after current off-take
arrangements end.
Founded in 1980 as a specialist energy advisory firm, the
Company grew through deregulation and privatisation to
become one of Australia’s largest private energy sector
companies before listing on the Australian Securities
Exchange (ASX) on 10 December 2010.
ERM Power has four key business units – ERM Sales,
ERM Generation Assets, ERM Generation Development
and Operations, and ERM Gas.
ERM Power aspires to be the electricity supplier of choice to
Australia’s large business customers through a differentiated
service offering tailored to the specific needs of the customer.
ERM Sales
ERM Power’s electricity sales business, ERM Sales, was
established in 2007.
ERM Sales sells electricity to large business customers which
typically spend more than $75,000 per annum on electricity
and, on average, spend about $1.5 million per annum.
The business provides large corporate and industrial energy
users with tailored energy solutions.
ERM Sales’ customers operate in a wide range of industries
including manufacturing, mining, education, healthcare,
infrastructure, retailing, government and consumer staples.
ERM Sales is one of the largest electricity providers (by load)
to business customers in Queensland and has a growing
business in New South Wales, the Australian Capital Territory,
Victoria, Tasmania, South Australia and Western Australia.
ERM Generation Assets
The ERM Generation Assets business consists of ERM
Power’s interests in low emission gas-fired peaking power
stations at Oakey in Queensland and Neerabup in Western
Australia.
These power stations are strategically located close to
energy resources and infrastructure in regions that are
forecast to experience high growth in electricity demand.
ERM Power owns a 62.5% effective interest in the Oakey
power station and a 50% interest in the Neerabup power
station. The power stations are fully contracted through
Oakey power station
Oakey is a 332 MW two unit peaking power station with
dual fuel capability (gas and distillate) that is located at
Oakey, about 150 km west of Brisbane.
ERM Power led the development of Oakey, which was
commissioned in December 1999.
Oakey has a long-term power purchase agreement (PPA)
with AGL that runs until the end of 2014 when the current
project debt is scheduled to have been repaid. Most of the
power station’s operation has been fuelled by natural gas
supplied by AGL under an agreement that expires at the
same time as the PPA.
The off-take contract has been structured such that the plant
is usually dispatched at times of peak electricity demand
and high prices, such as on the hottest days of summer.
Neerabup power station
Neerabup is a 330 MW two unit peaking power station at
Neerabup, about 40 km north of Perth and incorporates a
30 km high-pressure gas pipeline and gas compressor
station that provides a connection to the Dampier to Bunbury
Natural Gas Pipeline and linepack storage of gas to allow for
generation at peak price periods.
Neerabup was commissioned in October 2009 with a
long-term, 20 year off-take contract with Synergy, a
Western Australian State Government-owned corporation.
The off-take contract is structured so that the plant is
mostly dispatched in times of peak electricity demand
and high prices.
ERM Generation Development and Operations
ERM Generation Development and Operations is responsible
for delivering power generation solutions, from the initial
concept stage through to development and operations.
ERM Power has managed the development of six power
stations with a capacity of 2,669 MW since 1999.
2 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
During that time, the Company has raised almost $1 billion in
limited-recourse project finance and brought into operation
more than 290 km of high pressure gas pipelines, 18 km
of high voltage power transmission lines, a major electrical
sub-station and two gas compression plants.
In the six years to 30 June 2011, ERM Power led the
development of five major gas-fired power stations in three
states (Braemar 1 and 2 in Queensland, Uranquinty in
New South Wales and Kwinana and Neerabup in Western
Australia) and in two different electricity markets (National
Electricity Market in the eastern states and the Wholesale
Electricity Market in Western Australia).
ERM Generation Development and Operations partners with
industry-leading companies to implement its development
strategy. The business provides services to partnerships
where ERM Power is a partner, and also to third parties where
ERM Power has divested its interest for strategic reasons.
The business is also responsible for the management and
operation of electricity generation and gas pipelines for the
Neerabup and Kwinana power stations.
ERM Power has a land bank around key energy hubs in
Australia’s high-growth regions and is targeting development
of more than 4,500 MW of additional generation capacity
and more than 1,300 km of gas pipelines.
The business has development approval for 1,210 MW
of generation in the proposed Braemar 3 and Wellington
1 power station projects in Queensland and New South
Wales, along with environmental approval for the 330 MW
Three Springs Project in Western Australia. ERM Power is
ready to commit to a development when it is required by the
electricity sales market.
ERM Gas
ERM Gas was established in 2007 and focuses on procuring
long-term gas supplies for future ERM Power projects through
commercial gas supply contracts and exploration.
More than $3 billion of gas has been procured across all of
ERM Power’s generation developments.
ERM Gas has joint venture equity interests in more than
10,400 km2 of gas exploration acreage in Western
Australia’s on-shore Perth Basin. It has evolved from a
small, complementary and developing business into an
emerging business with the potential to deliver profits in its
own right over the next few years following two consecutive
exploration successes.
The Red Gully-1 gas and condensate discovery in
exploration permit EP 389 in the on-shore Perth Basin of
Western Australia in March 2011 followed the success of the
nearby Gingin West-1 well in the same permit in April 2010.
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
Neerabup power station
Chairman’s and Managing Director’s Report
Almost 12 months ago new investors were
invited to join us, our fellow directors, senior
management and other employees as
shareholders of ERM Power Limited, a
company with 30 years of operating history,
Fortunately ERM Power is on track to exceed its prospectus
forecasts and remains focused on value creation for
shareholders. We are confident this value will be recognised
in the market in time as the Company pursues its vision of
being the electricity supplier of choice to Australia’s large
business customers.
through an initial public offer (IPO) and listing
FY2011 results
on the ASX.
Our new investors gained direct exposure to the forecast
growth of the Australian electricity industry through ERM
Power’s businesses spanning electricity sales, generation
and gas procurement.
Over the past year, our management and employees have
worked hard through turbulent times to achieve and exceed
the goals and forecasts we set for ourselves.
Outlook
ERM Power is tracking well for FY2012 and increased its
forecasts for FY2012 by 34% for EBITDAIF1 and 7% for
Underlying NPAT2.
The EBITDAIF1 forecast for FY2012 is $83.5 million,
compared with the prospectus forecast of $62.4 million.
Underlying NPAT2 for FY2012 is forecast to be $27 million,
compared with the prospectus forecast of $25.2 million.
Highlights since the start of FY2012 include:
• Upgraded FY2012 Revenue forecast;
• acquiring an additional 50% of the Oakey power
station, which settled on 1 July 2011;
• starting the electricity supply contract with the
Commonwealth Government in New South Wales
and the Australian Capital Territory.
• signing a Gas Sale Agreement with Alcoa in
Western Australia for gas supply from the EP 389
•
discoveries; and
receiving promising seismic results from the Charger
and Garibaldi oil and gas prospects in Western Australia.
As major shareholders in the Company we understand
if other shareholders have been disappointed with the
share price, which has not tracked the strong operational
improvement in the business since listing on the ASX.
We are pleased to report that ERM Power exceeded
prospectus forecasts for revenue, EBITDAIF¹ and
Underlying Net Profit After Tax (Underlying NPAT²)
for the financial year ending 30 June 2011 (FY2011).
Revenue of $549.8 million, including other income and
asset sales, was 15% higher than the prospectus forecast of
$478.9 million and 32% higher than revenue of $418.4 million
in FY2010.
EBITDAIF¹ of $46.4 million was 2% higher than the
prospectus forecast of $45.7 million and 32% lower than
EBITDAIF¹ of $68.7 million in FY2010, which included a
profit of $36.4 million from an asset sale.
Underlying NPAT² was $6.3 million, 80% higher than the
prospectus forecast of $3.5 million (FY2010: $10.3 million).
Financial
Highlights
($ million)
Revenue
EBITDAIF1
Underlying NPAT2
Statutory NPAT
Underlying EPS³
Dividend per share
FY2011
Actual
FY2011
Prospectus
Forecast Change
549.8
478.9
46.4
6.3
16.2
4.5
3.5
45.7
3.5
26.5
2.2
3.5
15%
2%
80%
-39%
106%
-
These results were achieved despite extreme weather
including floods and cyclones in Queensland and
heatwaves in the southern states, which affected the
Company’s electricity sales business, ERM Sales.
This strong result demonstrates the robustness of ERM
Power’s business model and risk management and is a
testimony to the skills and dedication of our people and
the ongoing spirit and culture of the Company.
1 EBITDAIF – earnings before interest, tax, depreciation, amortisation, goodwill impairment and net fair value gains/losses on financial
instruments designated at fair value through profit and loss and gains/losses on onerous contracts, and including profit of associate and
non-controlling interests.
2 Underlying NPAT – excludes marked-to-market changes recognised on financial instruments and onerous contracts from NPAT and
includes profit of associate and non-controlling interests.
3 Underlying EPS – calculation of underlying EPS is based on Underlying NPAT.
4 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
ERM Sales, which sells electricity to large commercial and
industrial customers, achieved 70% growth in sales and
138% growth in earnings compared with the previous year.
ERM Sales has most of its forecast FY2012 electricity sales
volumes covered by existing sales contracts and is forecast
to achieve 56% growth in revenue to $759 million in the
FY2012 financial year, which is well above the prospectus
forecast.
The ERM Sales business has also achieved significant
geographic diversification with the percentage of sales
from Queensland falling from 86% to 59% in 12 months.
ERM Power’s gas-fired power stations, Oakey in Queensland
and Neerabup in Western Australia, performed reliably and
above expectations, and exceeded prospectus earnings
forecast by 10%.
Operational performance and asset utilisation were also
above expectations.
The generation operations business produced higher
profits than forecast from services to the Braemar 2,
Neerabup and Kwinana power stations, largely as a
result of bonus payments.
The generation development business had a productive
year, advancing future projects including Braemar 3 in
Queensland, Wellington 1 in New South Wales and
Three Springs in Western Australia, which will allow
ERM Power to remain a leader in the Australian
electricity development market.
The gas procurement business, ERM Gas, exceeded
expectations with its second consecutive oil and gas
discovery in Western Australia along with an increasing
interest in prospective exploration acreage.
Other highlights included:
•
the signing of major Commonwealth and State
Government electricity sales contracts in Queensland,
New South Wales and Tasmania;
•
the acquisition of a controlling interest in the 332 MW
gas-fired Oakey power station (after year end); and
• securing additional strategic development sites
in New South Wales and Western Australia.
A fully franked dividend of 3.5 cents per share was declared
for the FY2011 period as proposed in the prospectus.
revenue15%
higher than
forecast
70%
growth in
electricity sales
power stations
exceeded forecasts by
10%
25%
geographical
sales diversification
FY2012
forecast revenue
$853 million
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
5
Chairman’s and Managing Director’s Report continued...
Looking further ahead we expect to see significantly more
demand-side response to higher electricity prices and
potentially a significant electric vehicle presence.
ERM Power has evolved because of, and thrives on, a
dynamic market.
We believe ERM Power is well positioned to anticipate,
prepare for and respond to these changes as they arise.
People and community
ERM Power’s achievements also reflect its focus on
all stakeholders, including customers, shareholders,
employees, suppliers, governments and, importantly,
members of the communities in which it operates.
The Company maintained its life-time record of no
permanent injuries over more than 30 years of business.
Community sponsorship activities included regional tours
by the Queensland Symphony Orchestra, Camerata of
St John’s Chamber Orchestra and Queensland Ballet
performances in Toowoomba, and other community
activities at Wellington in New South Wales.
ERM Power sponsors indigenous education through the
Trevor St Baker and Richard Wilkes Indigenous Scholarship
Foundation with the first two scholars successfully completing
their five-year secondary education at Guildford Grammar
School in Perth in 2010.
Finally, we would like to thank our staff, fellow directors,
partners, customers and investors, and the communities in
which we operate, who have all helped to make our first year
as a publicly listed company, a positive and successful one.
Trevor St Baker
Non-Executive Chairman
Philip St Baker
Managing Director
IPO
In December 2010, ERM Power brought to market a
company that had grown organically over 30 years to
become one of Australia’s largest private sector energy
companies, with expansion opportunities that were beyond
its capital limitations.
The purpose of the IPO was to raise funds for immediate
growth and provide access to capital markets for additional
growth.
ERM Power’s existing shareholders did not sell any shares in
the IPO and the funds raised were deployed in accordance
with the prospectus.
The ability of ERM Power as a publicly-listed company to
use its capital to take up a controlling interest in Oakey
power station in July 2011 affirmed the benefits of the IPO.
The increase in revenue and profit forecasts for FY2012
represents a significant return to the new shareholders
who showed faith by investing in the Company.
Industry overview
ERM Power operates in an energy industry which is
experiencing an unprecedented level of change.
The Federal Government’s carbon policy is a significant
‘x-factor’ which is hard to predict. However, ERM Power
is favourably positioned with low-emission gas and gas
generation assets.
Privatisation of government-owned electricity assets and
businesses is expected to continue.
Mining and liquefied natural gas (LNG) industries are
expected to drive significant electricity demand growth
in Queensland and Western Australia.
An industry-wide reluctance to commit to new electricity
generation leaves ERM Power well positioned with approved
short lead-time projects ready to meet market shortfalls in
electricity supply when they arise.
Subsidised intermittent and unscheduled wind and solar
is another ‘x-factor’ that is hard to predict but ERM Power’s
planned low-emission peaking gas projects are likely to be
needed in any scenario.
Export LNG has driven large increases in gas prices on the
west coast of Australia and this is expected to occur on the
east coast as LNG trains come on line. These LNG driven
gas price increases will affect Australia’s electricity markets
going forward.
6 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
E R M P O W E R A N N U A L R E P O R T 2 0 1 1 7
ERM Sales employee with a customer
ERM Sales
ERM Sales exceeded its prospectus forecasts
for FY2011 as it continued to grow strongly in its
fourth year of operation as an electricity retailer
Volumes were 6% below the prospectus forecast of
6,010 GWh because severe flooding in central Queensland
in December 2010 and January 2011 affected customer
loads, particularly in the mining and rail sectors.
focused on large commercial and industrial
customers across Australia.
In the last financial year, ERM Sales entered the South
Australian and Western Australian markets to complement
its increasing presence in Queensland, New South Wales
(NSW), the Australian Capital Territory (ACT), Victoria and
Tasmania.
The new markets and existing markets represent excellent
growth potential for ERM Sales.
Growth was particularly strong in NSW and well above
historical levels and expectations.
Key customers signed in the financial year were the
Commonwealth of Australia, Tasmanian Government
agencies, Westfield (Queensland), Myer, Woolworths
(Queensland and Tasmania), Bunnings (Victoria), Hungry
Jacks (Victoria), Regal Cream Products (Bulla Dairy Foods),
Tassal Operations, Hellyer Mill Operations and Norton Gold
Fields Limited (Paddington Operations).
The four-year $300 million contract with the Commonwealth
of Australia covers 82 departments and agencies, including
the Department of Defence, at 406 sites in the ACT and a
further 83 Department of Defence sites in NSW.
Outlook
Despite its exceptional growth, the business has a relatively
small share of its target market and offers strong growth
potential as it taps a range of opportunities.
Financial performance
Revenue was $486.7 million in FY2011, which was 13%
ahead of the prospectus forecast of $429.3 million and
70% more than FY2010 of $286.7 million.
Sales volumes were 5,646 gigawatt hours (GWh), which
was 39% more than the previous year due to growth in
customer numbers in all segments of the target market
across Australia.
EBITDAIF1, which excludes the impact of unrealised
marked-to-market changes to the values of financial
instruments, increased by 138% to $22.5 million (FY2010:
$9.5 million), which was 3% higher than the prospectus
forecast of $21.9 million.
Revenue Growth
759
487
287
800
700
600
500
400
300
200
100
0
n
o
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i
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$
FY2010A
FY2011A
FY2012F
“ ERM Power has a thorough understanding of our business
so they can provide the expert advice we need, allowing
us to save money on our energy costs and valuable time
when dealing with energy related matters for our day-to-
day business.
ERM Power provides QAL with excellent account
management and customer service and we rely on them to
offer us more than just a retail product. We trust ERM Power
for their advice and their service.”
Peter Mouna, Principal Buyer Raw Materials and Energy,
Queensland Alumina Limited (QAL)
1 EBITDAIF – earnings before interest, tax, depreciation, amortisation, goodwill impairment and net fair value gains/losses on financial
instruments designated at fair value through profit and loss and gains/losses on onerous contracts, and including profit of associate and
non-controlling interests.
8 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
National growth
ERM Sales continued to diversify its customer base by sector
and geographically, further strengthening the business.
ERM Sales has been working to diversify its retail customer
portfolio in terms of both industry classification and
geographic region (State). The charts below show the
progress made in both of these areas over the last year.
In terms of industry, customers have been aggregated into
four major industry classifications:
• government, education and healthcare;
• heavy industry and manufacturing;
•
retail, wholesale, tourism, property and primary
industries (agriculture); and
• mining and major infrastructure (such as pipelines
and airports).
The customer portfolio in July 2011 (compared to July
2010) illustrates how the dependency on the mining and
major infrastructure industry has been reduced relative
to the other three industry classifications. The focus is on
balancing industry representation as this provides improved
load stability.
In terms of sales volume by State, 2011 represented an
increased presence in the other states and hence a
reducing reliance on Queensland. New South Wales as a
percentage of the total sales portfolio has increased from
4% to 17% and Victoria has increased from 6% to 8%. In
addition, an increasing presence in South Australia and
Western Australia will further reduce the concentration,
and therefore the reliance on Queensland market.
Sales by Industry in July 2010
Sales by Industry in July 2011
52%
21%
15%
12%
Government,
Education
and Healthcare
Heavy Industry,
Manufacturing
Retail, Property,
Tourism, Primary
Industries
Mining, Major
infrastructure
24%
24%
35%
17%
Government,
Education
and Healthcare
Heavy Industry,
Manufacturing
Retail, Property,
Tourism, Primary
Industries
Mining, Major
infrastructure
Sales (GWh) by State in July 2010
Sales (GWh) by State in July 2011
4%
6%
4%
QLD
NSW
VIC
TAS
86%
2%
1%
59%
8%
13%
17%
QLD
NSW
VIC
TAS
SA
WA
FY2010: 4,065 GWh
FY2011: 5,646 GWh
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
9
10 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
ERM Sales employees
ERM Generation Assets
The ERM Generation Assets business,
Oakey results
consisting of a 12.5% effective interest (62.5%
from 1 July 2011) in the 332 MW Oakey power
station in Queensland and a 50% interest in the
330 MW Neerabup power station in Western
Australia, performed reliably, safely and better
than forecast in the prospectus. ERM Power sold
its 30% interest in the 320 MW Kwinana power
station in Western Australia in October 2010.
Financial performance
Revenue2, based on the Group’s proportionate interests
in the Neerabup and Kwinana power stations, was
$47.1 million (FY2010: $83.7 million), which was higher than
the prospectus forecast of $37.4 million because the interest
in Kwinana was held for a month longer than expected and
Neerabup was called to operate by the system operator
more than forecast.
EBITDAIF1 (including share of associates) was also higher
at $28.9 million (FY2010: $36.4 million) compared with the
forecast of $26.2 million.
The FY2011 results include a contribution from ERM Power’s
30% interest in Kwinana until it was sold in October 2010.
The previous year’s results included a contribution from the
Company’s 25.05% interest in the Braemar 2 power station
in Queensland, which has been sold.
The Group has maintained its interest in Neerabup and
increased its interest in Oakey. These power stations are
high-quality, low-risk generation assets that deliver solid
and predictable returns while steadily appreciating in value
and positioning ERM Power for future strategic value-
adding opportunities through expansion, recontracting,
redevelopment and optimisation.
Revenue, based on ERM Power’s 12.5% interest in
FY2011, was $4.3 million (FY2010: $4.1 million), which
was higher than the prospectus forecast of $4.0 million
for the same period.
The proportionate share of EBITDAIF1 of $3.1 million
(FY2010: $3.1 million) was below the forecast of $3.3 million.
ERM Power’s share of Oakey’s NPAT was $1.4 million
(FY2010: $1.3 million), which was also lower than the
forecast of $1.6 million.
Distributions to ERM Power were $0.6 million (FY2010:
$0.5 million), which were above the forecast of $0.5 million.
The power station’s record of no lost time injuries over its
11 year life was maintained in the last year.
Oakey acquisition
On 1 July 2011 ERM Power lifted its effective interest in
the Oakey power station to 62.5% when it acquired a 50%
interest from Redbank Energy Ltd (formerly Alinta Energy Ltd)
for $61.7 million.
The acquisition of the additional 50% interest was
consistent with ERM Power’s strategy of building a
portfolio of high-quality, low-emission power generation
assets in high-growth regions.
The purchase price was less than 50% of the estimated
replacement cost and the asset is in near-new condition
because it is a peaking power station that has operated
less than 5% of the time over its 11 years of operation.
In addition to these benefits, ERM Power has the skills,
experience and complementary businesses to exploit
substantial potential upside from this asset.
1 EBITDAIF – earnings before interest, tax, depreciation, amortisation, goodwill impairment and net fair value gains/losses on financial
instruments designated at fair value through profit and loss and gains/losses on onerous contracts, and including profit of associate and
non-controlling interests.
2 Revenue does not include Oakey power station, which was equity accounted in FY2011.
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
11
ERM Generation Assets continued...
Neerabup power station at sunset
Neerabup results
Revenue in FY2011 was $26.3 million (FY2010: $13.6 million),
based on ERM Power’s 50% interest, compared with the
prospectus forecast of $24.0 million. Neerabup’s results in
FY2010 were for a part year only as the power station was
commissioned in October 2009.
The Company’s share of EBITDAIF1 of $21.8 million (FY2010:
$11.6 million) was higher than the forecast of $20.5 million
because the station was called to operate by the system
operator more than forecast.
Net cash flow after project debt service was $3.3 million
(FY2010: $1.7 million), compared with $2.8 million in the
prospectus.
Neerabup power station performed reliably and safely with
no lost time injuries.
Given its highly contracted nature, the business produces
predictable revenues and cashflows.
Braemar 2 divestment
On 30 September 2010, ERM Power exercised a put
option to sell its remaining 25.05% interest in the 519 MW
Braemar 2 power station in Queensland to Arrow Energy
for $66.1 million.
ERM Power led the development of Braemar 2, an open
cycle gas peaking power station and a 110 km high-pressure
gas pipeline about 30 km west of Dalby which began
commercial operations in July 2009.
The sale of the 25.05% interest was completed on 30 June
2011 when Arrow Energy took over operations of the power
station following the sale of a 24.95% interest to Arrow
Energy in September 2009 for $45 million. The total profit of
$36.4 million on the sale of the combined 50% interest was
recognised in FY2010.
Kwinana divestment
ERM Power sold its 30% interest in the 320 MW Kwinana
power station to ANZ Specialist Asset Management Limited
for a $4.7 million profit in October 2010.
ERM Power led the development of Kwinana, a combined
cycle gas turbine power plant which is located about 30 km
south of Perth in the Kwinana Industrial Estate. It was
commissioned in October 2008.
The consideration was $39.9 million in gross terms, before
the redemption of the notes used to fund the initial equity
investment.
The Company continues to operate the Kwinana power
station on behalf of its new owners.
1 EBITDAIF – earnings before interest, tax, depreciation, amortisation, goodwill impairment and net fair value gains/losses on financial
instruments designated at fair value through profit and loss and gains/losses on onerous contracts, and including profit of associate and
non-controlling interests.
12 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
ERM Generation Development
and Operations
Overview
As the dominant form of new generation in Australia over
the last decade, gas-fired electricity has proven itself as the
most affordable, low-emission power solution in Australia.
ERM Generation and Operations is at the forefront of gas-fired
electricity development, having built more than one quarter of
Australia’s scheduled new power projects since 2005.
ERM Power’s strategic thinking and wealth of industry
knowledge allows it to identify, design, build and operate
low-emission power stations in locations with great potential.
A key competitive advantage is a bank of land assets at
key energy hubs in high-growth regions, close to gas and
infrastructure.
ERM Power is targeting the development of more than
4,500 MW of additional generation capacity and more
than 1,300 km of gas pipelines.
In the past year, the Wellington 1 power project in New
South Wales received approval for a modification of its
original development approval and the development
application for the Braemar 4 project in Queensland
was submitted.
The business has developed an effective community
engagement process for ensuring people living around
ERM Power projects are fully informed of the process that
goes into developing gas-fired power stations and the
benefits for the economy and the environment.
Projects
Critical to ERM Generation and Operations’ development
strategy is long-term electricity supply and demand planning.
The business identifies deficiencies in the electricity supply-
demand mix, new generation requirements and optimal plant
types to fulfil these needs.
Power generation opportunities are identified up to 10 years
into the future, positioning the business to deliver generation
projects to meet growth in electricity demand.
Three Springs
ERM Generation and Operations secured an option over a
strategic land parcel at Three Springs in Western Australia
in September 2010. This land has space for two generation
sites which will be ideally positioned next to Western Power’s
future 330kV substation.
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
13
Kwinana power station employee
ERM Generation and Operations continued...
This substation will be a major distribution point for electricity
to the region’s growing mining community, and ERM Power’s
site will be at the epicentre of the transmission network.
ERM Generation and Operations has been communicating
with local land owners, indigenous groups and regional
councils, ensuring full disclosure and transparency of
development plans. The development has received a
positive reception from the local community with local
councils providing support.
ERM Power received environmental approval for the project
from the Western Australian Government in September 2011.
ERM Power is the lead developer, project manager,
construction manager and financial arranger for Three
Springs and owns 100% of the project. The Company
plans to retain at least 50% after introducing an equity
partner prior to financial close and expects to be the
power station’s operator.
Wellington 1
Wellington 1 is a proposed open-cycle gas-fired power
station of up to 660 MW capacity combined with an
integrated high-pressure gas pipeline. The proposed power
station is strategically located with access to conventional
gas and emerging gas reserves and is close to the largest
load growth region in New South Wales.
In September 2010 the New South Wales Government
approved a modification of the original development
approval to enable Wellington 1 to be developed as a
peaking or intermediate power station.
In March 2011 the New South Wales Planning Assessment
Commission granted environmental approval for the 203 km
Young to Wellington pipeline which will transport gas to the
power station.
ERM Generation and Operations has undertaken extensive
community engagement to ensure land owners and
members of the community are aware and informed
about ERM Power’s proposals to reinvigorate the region.
ERM Power is the lead developer, project manager,
construction manager and financial arranger for
Wellington 1 and owns 100% of the project. The Company
plans to retain at least 50% after introducing an equity
partner prior to financial close and expects to be the
operator of the power station.
Demand for new generation has softened in New South
Wales and, in response, ERM Power has reforecast the
financial close of Wellington 1 to the 2014 calendar year
from FY2013 previously, with commissioning expected to
occur in the 2016 calendar year.
Braemar 3
The Braemar 3 power station development is a proposed
open-cycle gas-fired power station of up to 550 MW
capacity at ERM Power’s Braemar land hub in Queensland.
ERM Power has executed an engineering procurement
and construction contract with a Siemens-John Holland
joint venture and a long-term maintenance agreement
with Siemens.
In addition, ERM Power has executed a connection and
access agreement with PowerLink Queensland’s Braemar
sub-station located adjacent to ERM Power’s land holdings,
which will provide a high degree of transmission security,
being on the main interconnector between Queensland and
New South Wales.
ERM Power is the lead developer, project manager,
construction manager and financial arranger for
Braemar 3 and owns 100% of the project. The Company
plans to retain at least 50% after introducing an equity
partner prior to financial close and expects to be the
operator of the power station.
ERM Power has also reforecast the financial close of
Braemar 3 from FY2012 to FY2013 because of softer
demand for new generation in Queensland, with
commissioning expected to occur in FY2015.
Braemar 4
ERM Generation and Operations also acquired additional
land near the Braemar power stations and submitted a
development application for a 500 MW power station on
the site.
Wollar
ERM Generation and Operations secured an option over a
strategic 2000-acre parcel of land at Wollar in New South
Wales in November 2010.
This site will provide future base load power when coal-fired
power stations across the National Electricity Market (NEM)
retire and electricity supply falls short of demand.
The Wollar site is near the 500,000 volt (500kV) transmission
system.
14 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
Kwinana power station employee
Operating performance
Financial performance
ERM Generation and Operations has service agreements
with the Neerabup and Kwinana power stations in Western
Australia for the comprehensive management of those
respective businesses and had a service agreement with
Braemar 2 until 30 June 2011.
ERM Generation and Operations generated revenue before
asset sales of $8.7 million in FY2011 which was higher
than the prospectus forecast of $3.4 million because of an
operator bonus from Kwinana and additional operating fees
from the Braemar 2 power station.
Management services to Braemar 2 concluded with the sale
of the remaining ERM Power interest in this power station.
All power stations performed reliably and safely with no lost
time injuries.
As forecast, no development fees were received in FY2011.
EBITDAIF1 was $0.1 million, compared with the prospectus
forecast of a $1.7 million loss.
Asset sales generated a gain of $4.7 million (FY2010:
$36.4 million), which differs from the prospectus forecast
of $6.6 million because of a balance sheet tax credit
related to the Kwinana power station sale which is
included in tax expense.
1 EBITDAIF – earnings before interest, tax, depreciation, amortisation, goodwill impairment and net fair value gains/losses on financial
instruments designated at fair value through profit and loss and gains/losses on onerous contracts, and including profit of associate and
non-controlling interests.
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
15
ERM Gas
The evolution of ERM Gas from a small,
complementary and developing business
into an emerging business with the potential
to deliver profits in its own right continued with
a second exploration success.
The Red Gully-1 gas and condensate discovery in
exploration permit EP 389 in the onshore Perth Basin of
Western Australia in March 2011 followed the success of the
nearby Gingin West-1 well in the same permit in April 2010.
The discoveries reinforced ERM Power’s decision to expand
across the electricity supply chain by creating a separate
gas business to procure long-term gas supplies for future
generation projects in 2007.
ERM Gas owns 21.25% of EP 389, which covers 1,500 km2,
and has various interests in approximately another 8,900 km2
of exploration acreage in the on-shore Perth Basin. The
acreage is ideally positioned near markets, transmission
pipelines, power stations, compression stations and
linepack facilities.
The ERM Gas strategy is to increase the value of its acreage
through technical analysis, exploration, commercialisation
and farm-out activities.
Financial performance
ERM Gas spent $4.9 million on exploration in FY2011
compared with the forecast for capital expenditure of
$5.4 million.
Red Gully-1 well
The success of the ERM Gas strategy was demonstrated
in March 2011 when the Red Gully-1 well recorded the
largest gas and condensate flow from a Jurassic reservoir
in onshore Western Australia. ERM Gas actively contributed
to the technical assessment of the prospects in co-operation
with the operator of EP 389, Empire Oil Company (WA)
Limited (Empire), using ERM Gas staff’s deep upstream
petroleum expertise across a wide range of Australia’s
petroleum provinces in reservoir engineering, geophysics,
engineering and production.
The production test of the ‘D’ Sand Cattamarra Formation
achieved a gas flow rate of 11.748 million cubic feet per day
(mmcfd) on a 38/64 inch choke with associated condensate
production of 888 barrels per day (bbl/d).
The Red Gully-1 discovery followed the successful Gingin
West-1 well completed in an adjacent structure in April 2010.
Gingin West-1 delivered a maximum gas flow rate of
8.04 mmcfd on a 40/64 inch choke during clean up
with a peak condensate rate of 376 bbl/d recorded in
an extended test.
The Red Gully-1 discovery significantly enhanced the
prospects of the combined development of both fields.
Empire has estimated the combined fields could contain
20 billion to 30 billion cubic feet of recoverable gas plus
associated condensate.
The wells are ideally located, about 80 km north of Perth,
less than 3 km from the Dampier to Bunbury and Parmelia
gas pipelines, and about 45 km north of the Neerabup
power station.
The joint venture parties are advancing the development
of gas and condensate production facilities through
engineering design work and sub-surface reservoir
modelling.
On 4 October 2011, Empire and the EP 389 Joint Venture
announced they had negotiated an agreement with
Alcoa of Australia Limited for the supply of gas from
the Red Gully and Gingin West fields.
The proposed production facility for Gingin West and Red
Gully is also well located for condensate sales, being only
two hours by road tanker from the BP Kwinana Refinery.
EP 454
In April 2011, about 90 line km of 2D seismic over the large
Garibaldi gas prospect in exploration permit EP 454 was
acquired and processed. Interpretation and mapping is now
being progressed with a view to identifying drilling targets.
ERM Gas has a 50% interest in the permit, which is
operated by the other 50% joint venture partner, Empire.
ERM Gas lifted its interest in the permit from an initial 12.5%
by funding the seismic approval process and program.
The prospect has a large gas trap potential. The Garibaldi
prospect is delineated as being 12 square kilometres. The
top Permian reservoir objectives have been estimated at
2,000 metres.
The permit is about 220 km north of Perth, 40 km from the
Dampier to Bunbury and Parmelia gas pipelines, and
50 km south of the Three Springs development site.
16 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
2D seismic interpretation and mapping Garibaldi gas prospect
Other acreage
Eastern Star Gas MOU
ERM Gas continues to review other opportunities in existing
acreage in Western Australia and new acreage in Western
Australia, Queensland, New South Wales and Victoria.
Negotiations continued with Eastern Star Gas over a gas
supply agreement for the proposed Wellington power station
development in New South Wales.
An extension of the ERM Gas strategy to the east coast is
a mid-term focus. ERM Gas plans to build an expanded
portfolio of gas interests and to de-risk those interests through
the application of rigorous technical and geological work.
In 2010, ERM Power signed a non-binding memorandum
of understanding with Eastern Star Gas, operator of the
Narrabri Coal Seam Gas Project in New South Wales, for the
supply of 20 petajoules (PJ) of gas per year over 20 years.
ERM Power’s generation development business is expected
to benefit from the ERM Gas business as a result of more
informed site identification and improved fuel supply
negotiations.
Shale gas
Some of the ERM Gas exploration permits are prospective
for shale gas, a fuel which is the focus of increasing global
interest because of recent discoveries, acquisitions and
other corporate activity.
This activity has increased the attractiveness and potential
value of the onshore Perth Basin.
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
17
Carbon Tax
On 10 June 2011 the Australian Government
released its climate change plan, Securing a
Clean Energy Future, under which around 500
However, these costs will be potentially offset by pass-
through of direct and indirect carbon and credit costs,
and higher revenue from an increase in electricity pool
and financial product prices.
of the highest carbon emitters in Australia will
need to buy and surrender a permit for every
tonne of carbon emitted to the Government.
The carbon price will be fixed for the first three years,
starting at $23 per tonne on 1 July 2012, and escalating
at the consumer price index (CPI) rate plus 2.5% for the
following two years.
After 1 July 2015, the price will be set by the market under
an emissions trading scheme (ETS).
A price floor ($15 per tonne) and price ceiling ($20 per tonne
above the expected international price at 1 July 2015) will
apply in the first three years of the ETS. The price floor will
escalate at CPI + 4% and the price ceiling will escalate at
CPI + 5%.
Preliminary analysis has been undertaken on the likely
impact of the Government’s proposals on the current
ERM Power business. This analysis and the resulting
conclusions are based on a fairly broad set of assumptions
and are therefore subject to further detailed assessment.
In general, gas generation is considered a beneficiary of
any carbon pricing scheme as it has a lower emissions
intensity than both coal and the electricity ‘pool’ average.
Gas generation incremental costs (for carbon permits)
are therefore expected to be less than incremental
revenues (higher pool and contract revenues), resulting in
higher operating margins and increased demand for gas
generation capacity and energy.
The major impacts on ERM Power will be through the direct
cost of carbon permits, the indirect cost of permits through
higher input costs such as gas, and higher prudential, credit
and working capital costs.
ERM Sales contracts are structured to pass on the cost
of carbon policies.
The Oakey power station in Queensland and the Neerabup
power station in Western Australia are likely to be modest
beneficiaries of the tax given they are low emission gas-
fired power stations.
The carbon package is considered to be marginally
beneficial to the Braemar 3 and Wellington 1 projects but it
is not expected to materially impact on the supply-demand
balance in the short to medium term. It is not expected to
have a material impact on ERM Power’s gas exploration or
construction businesses.
Future opportunities
The potential closure of 2,000 MW of brown coal plants in
Victoria and South Australia by 2020 would create additional
new development opportunities.
Replacement plants are expected to be a mix of closed
cycle gas turbine (CCGT) and open cycle gas turbine.
The combination of a carbon price and higher black coal
prices could accelerate the retirement of some New South
Wales and Queensland coal plants and create opportunities
for replacement CCGT plant.
The full benefit of a carbon price will flow directly through
to renewables projects, although a price of $23 per tonne
is unlikely to have a substantial impact on the commercial
viability of these technologies.
The proposal also includes funding assistance for energy
consumers to reduce their energy consumption (through
activities such as co-generation), which may prove
beneficial to ERM Power’s demand-side response capability.
18 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
Environment
ERM Power is proud to be a leader in
producing cleaner electricity for Australia
and strives to perform in a safe and
environmentally responsible manner which
is consistent with its core values of people,
planet and performance.
The Company develops power stations fuelled by
natural gas, which is a cleaner fossil fuel than oil
or coal.
Gas produces about half of the greenhouse gas
emissions of coal when burned and, unlike most
renewable energy options, can be available 24 hours
a day to generate electricity when required.
Low emissions
ERM Power has estimated that the power stations it has
developed will produce about 100 million fewer tonnes
of greenhouse gas than their coal counterparts over their
working lives.
ERM Power developed the Neerabup power station in
Western Australia, which began commercial operations
in October 2009.
Neerabup is an open cycle power station which boasts
significantly lower CO2 emissions per MWh of power
than the average in Western Australia, as the table below
demonstrates.
State average CO2 production rate
Neerabup CO2 production rate
0.82t/MWh
0.61t/MWh
Neerabup emitted about 20,000 tonnes less CO2 last year
than an equivalent coal-fired power station would have
emitted to produce the same amount of energy.
ERM Power has a Health, Safety, Environment and
Sustainability Committee that assists it to operate safely,
responsibly and sustainably and is committed to playing
a major role in reducing Australia’s carbon footprint.
Water efficiency
Power stations developed by ERM Power are cooled by
air or sea water and use little domestic fresh water for
cooling. This is in contrast to many of Australia’s coal-fired
power stations, which use significant amounts of fresh
water for cooling.
ERM Power has estimated the power stations it has
developed will use approximately 9 billion litres less water
over their working lives than the average of the Australian
electricity generation sector.
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
19
Native flora (Oakey Power Station in background)
People and Safety
ERM Power has an un-compromising
ERM Power safety initiatives
approach to safety.
• Hazard and near-miss reporting to help identify risks.
Employees identify risks and take action to prevent loss or
harm to people, communities and environment.
The Company has a life time record of no permanent injuries
covering more than 30 years of business, more than five
million exposure hours and the construction of six major gas-
fired power stations and three high pressure gas pipelines.
The Company’s safety record is a testament to the
effectiveness of its hazard reporting systems, positive safety
culture and management commitment to safety. Managers
promote a safe culture by encouraging open incident
reporting and discussion of safety issues and hazards in
leadership meetings.
Senior managers regularly visit work sites and participate in
condition inspections and planned job observations, further
demonstrating the Company’s commitment to safe work.
• Active investigation of hazards.
• Safety training across the business.
• Staff rewarded for showing safety initiative.
• Dedicated on-site safety officers for projects.
• Mandatory on-site alcohol testing.
• Monitoring of industry incident reports.
Results
• 73 improvement actions implemented across
three sites.
• More than 4,000 alcohol tests conducted.
• 336 staff safety briefings.
• Zero lost-time injuries.
Neerabup power station employee
Kwinana power station employees
Case study
ERM Power’s commitment to safety is demonstrated by
Anyone who tests positive is re-tested shortly after the first
its practice of alcohol testing all people entering its
test and if the second test is positive, they are escorted
industrial sites every day to ensure they are fit for work.
from the site and cannot return for 24 hours. If they return
This applies to the Neerabup and Kwinana power
a positive test within three months, they are refused entry
stations and the Neerabup compressor facility and
until ERM Power is satisfied they are fit for work.
pipeline right-of-way. This screening regime covers
everyone including employees, contractors and visitors.
20 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
Community
ERM Power is committed to playing a part in
building strong and vibrant communities in the
regions where it operates.
The Company’s partnership and community sponsorship
programs are aimed at forming active and mutually
beneficial relationships, not merely through financial
support, but also through contributing and transferring
skills, expertise and knowledge.
In the past 12 months, ERM Power has supported gifted
students in Toowoomba by sponsoring academic events
such as the Opti-MINDS Challenge, a creative problem-
solving competition among students.
In allocating sponsorship funding, ERM strives to achieve
a balance among projects that complement its corporate
values of people, performance and planet.
It has also assisted the Surat Basin Work Placement Program
in south east Queensland by offering work experience
opportunities to young Australians starting out in the gas,
mining and energy sectors.
ERM Power is dedicated to giving everyone the opportunity
to experience the arts and continues to work with partners
to bring music to the people of Queensland.
It brought the Queensland Symphony Orchestra to
students of the Darling Downs in March and sponsored
the Queensland Ballet to perform at the Empire Theatre
in Toowoomba in June.
A highlight of the year was sponsorship of the Queensland
Music Festival’s Opera at Jimbour, and Paul Kelly and Randy
Newman performances, which saw 14,000 people gather in
Brisbane and Jimbour to enjoy unforgettable shows.
ERM Power is also heavily invested in the Wellington region
and often undertakes local sponsorships. The Company
was a major supporter of the Wellington Golf Club Pro
Am Championships in 2011, sponsored the Wellington
Eisteddfod and was heavily involved in Wellington Council’s
‘Building Our Future Together’ community initiative.
Trevor St Baker and Richard Wilkes Indigenous
Scholarship Foundation
ERM Power sponsors indigenous education through the
Trevor St Baker and Richard Wilkes Indigenous Scholarship
Foundation, which was established by ERM Power Chairman
Trevor St Baker and the senior Elder of the Nyoongar people
of southern Western Australia, Richard Wilkes.
The Foundation provides secondary and tertiary educational
support for indigenous students in communities near ERM
Power’s projects in Western Australia, as well as offering
them ongoing career support to enhance their futures.
The recipients of the first scholarships, Gerald Ugle
and Corey McGuire, graduated from secondary college
Guildford Grammar School in Perth in 2010 and were each
awarded $10,000 for their ongoing career development.
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
21
Centre (from left): Richard Wilkes, Corey McGuire, Gerald Ugle, Trevor St Baker and his wife Judith
Directors’ Report
for the year ended 30 June 2011
In accordance with the Corporations Act
2001, the directors of ERM Power Limited
(“Company”) report on the Company and
the consolidated entity ERM Power Group
(“Group”), being the Company and its controlled
entities for the year ended 30 June 2011.
1. PRINCIPAL ACTIVITIES
The principal activities of the Group during the financial
year were:
•
•
•
•
its electricity sales;
electricity generation development;
generation asset ownership and operation; and
gas exploration and development.
2. OPERATING RESULTS FOR THE YEAR
2.1. Revenue
Total revenue in FY2011 was $550 million, which was 15%
above the prospectus forecast of $479 million and 32%
above FY2010. Additional revenue was earned from holding
the interest in the Kwinana power station for a month longer
than forecast together with higher revenue earned in the rest
of the Group.
Electricity sales business, ERM Sales, continued its
strong growth with revenue 70% above the previous year
at $487 million, which was 13% above the prospectus
forecast of $429 million. This was despite the impact of
severe flooding in Queensland, which left electricity sales
volumes 6% below the forecast. Forward electricity sales
are tracking to expectations and, as of 12 August 2011,
93% of the FY2012 electricity sales forecast of 8,499
gigawatt hours (GWh) was covered by existing sales
contracts. This compares with 94% at the end of September
2010 in respect of the FY2011 sales forecast of 6,010 GHz,
as reported in the prospectus.
Revenue from the Generation Assets business was
$47 million, which was 26% above the prospectus forecast
of $37 million. However it was 32% below the previous year
because of the sale of the Group’s interests in the Braemar
2 power station (“Braemar 2”) in Queensland, and the
Kwinana power station (“Kwinana”) in Western Australia.
2.2. Profit
ERM Power’s statutory profit after tax includes both gains
from the sale of assets and the impact of unrealised
changes in values of financial instruments, in both years.
The FY2011 year includes $4.7 million made from the sale
of the interest in Kwinana and the FY2010 year, $36.4 million
from the sale of the interest in Braemar 2.
The Group is required to value its forward electricity
purchase contracts at market prices at each reporting
date with changes between reporting dates recognised as
unrealised gains or losses in the particular reporting period.
The market value of corresponding sales contracts to which
these purchase contracts relate are not permitted to be
recognised, unless those contracts are regarded as onerous.
Accordingly, the directors of ERM Power believe that both
EBITDAIF (earnings before interest, tax, depreciation,
amortisation, goodwill impairment and net fair value gains/
losses on financial instruments) and Underlying Net Profit
after tax (statutory profit after tax adjusted for the impact of
unrealised changes in fair values of financial instruments)
provide the most meaningful indicators of its underlying
business performance. EBITDAIF is one of the principal
metrics used in the ERM Power prospectus dated
17 November 2010.
2.2.1. Statutory profit after tax for the year was $16.2 million
(FY2010: $15.8 million loss).
These figures include net unrealised fair value gains on
financial instruments of $9.9 million in FY2011 and net
unrealised fair value losses of $26.1 million in the previous
year, net of tax.
Note: The prospectus forecasts for statutory profit (NPAT)
do not assume that there are any fair value adjustments
during the forecast period.
The analysis of the major components of EBITDAIF below
provides details of the underlying performance of ERM
Power’s businesses.
2.2.2
EBITDAIF for the full year (including profit of associate) was
$46.4 million (FY2010: $68.7 million), which was 2% above
the prospectus forecast of $45.7 million.
The comparison with FY2010 is distorted by a net gain of
$36.4 million on the sale of the interest in Braemar 2 in the
previous year.
ERM Sales’ EBITDAIF increased by 138% to $22.5 million
(FY2010: $9.5 million), which was 3% above the forecast
of $21.9 million despite reduced electricity load due to
flooding in Central Queensland.
Generation Assets’ EBITDAIF (including profit of associate)
was $28.9 million (FY2010: $36.4 million), which was
10% above the forecast of $26.2 million. The comparative
period had some differences in the generation assets with
commissioning of new power stations and disposals of
others, as disclosed in the prospectus.
22 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
Group EBITDAIF was also affected by $0.9 million of IPO
costs that could not be deducted from equity as planned
and have been expensed.
The EBITDAIF gain on the sale of the Kwinana interest
differs from the prospectus ($4.7 million against prospectus
of $6.6 million) due to a balance sheet tax credit which
reported directly to the tax line.
2.2.3. Reconciliation of EBITDAIF and Underlying Profit
with Statutory Profit
Underlying Profit is Statutory Profit after tax adjusted for
the impact of unrealised changes in fair values of financial
instruments and reflects the ongoing performance of the
business. The following table reconciles EBITDAIF to
Statutory Profit and then shows the impact of adjustments
for financial instruments to arrive at Underlying Profit.
The reconciling items shown below are the unrealised
changes in market values of financial instruments that the
Group routinely enters into as part of risk management.
The Group enters into hedging arrangements that provide
protection from electricity spot price risk, and also interest
rate exposure. In respect of the financial instruments that
provide the electricity price hedges, a Group subsidiary
routinely enters into forward sales contracts (“Contracts”)
related to the provision of electricity in the Australian
National Electricity Market (“NEM”). The Contracts are
exclusively entered into with large industrial, commercial
and government entities under term contracts. All of the
electricity provided under these Contracts is traded in the
NEM spot market. The subsidiary also enters into a variety
of electricity derivative transactions (“Derivatives”), the
objective of which is to create an economic hedge for the
Contracts. Accounting standards have been interpreted to
preclude recognition of the marked to market value of the
Contracts in the financial statements and, as a result, only
the unrealised after tax effect of the Derivatives is reflected
in profit and loss.
$ million
EBITDAIF (incl. profit of associate)
Other Statutory Items
Interest
Tax
Depreciation and amortisation
Financial instruments
Statutory Profit after tax
Reconciling items
Increase / (decrease) in fair value of financial
instruments:
ERM Sales
Disposal of Kwinana
Other
Total (before tax)
Tax effect on reconciling items
Less total reconciling items
Underlying Profit after tax
Actual
FY2011A
46.4
Prospectus
FY2011F
45.7
Actual
FY2010A
68.7
(29.8)
(4.6)
(10.0)
14.2
(30.2)
16.2
20.6
(6.4)
-
14.2
(4.3)
9.9
6.3
(30.6)
(10.6)
(10.8)
32.8
(19.2)
26.5
32.8
-
-
32.8
(9.9)
23.0
3.5
(39.8)
5.3
(12.7)
(37.3)
(84.4)
(15.8)
(30.8)
-
(6.5)
(37.3)
11.2
(26.1)
10.3
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
23
Directors’ Report
for the year ended 30 June 2011 continued...
2.3. Depreciation and amortisation
2.4. Net borrowing costs
Total depreciation and amortisation charges for the year
were slightly lower than forecast. Depreciation charges for
the Neerabup power station (“Neerabup”) are dictated by
running time which varies depending on the extent to which
the power station is called into operation. The current period
charges were for Neerabup and Kwinana (part period) whilst
the previous corresponding period charges were for Neerabup
(part period), Kwinana and Braemar 2.
Net finance charges for the year were slightly lower than
forecast. The current and previous corresponding period
charges reflect the different asset ownership referred to in
the depreciation comment above and redemption costs on
the Kwinana equity notes.
2.5. Cash flow
The following table compares actual cash flows for the year
with those forecast in the prospectus.
$ million
EBITDAIF (before profit of associate)
Change in working capital
Disposal profit on Kwinana
Distributions from Oakey
Tax paid
Net operating cash flows
Proceeds from issue of shares
Borrowing received in advance (Oakey)
Capital expenditure - projects
Capital expenditure - exploration
Net capital expenditure cash flows
Repayment of project borrowings
Repayment of corporate borrowings
Net project cash flows
Net proceeds from assets sales - Braemar 2
Net proceeds from assets sales - Kwinana
Kwinana cash reserve accounts
Net cash acquired on acquisition
Net interest paid
Financing and investing cash flows
Actual
FY2011A
Prospectus
FY2011F
46.7
0.4
(4.7)
0.5
-
42.9
93.9
4.4
(13.1)
(4.9)
80.3
(3.3)
(8.0)
69.0
41.0
8.9
(10.2)
0.4
(28.2)
11.9
44.0
(2.9)
(6.6)
0.5
(1.1)
33.9
93.9
-
(25.4)
(5.4)
63.1
(3.4)
(8.0)
51.7
40.8
9.9
(8.8)
-
(28.3)
13.6
Net increase in cash
123.8
99.2
Closing cash balances
Free cash held in ERM Power
Free cash held in projects
Total free cash
Restricted cash
Total closing cash balances
24 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
105.1
5.1
110.2
76.2
186.4
69.2
8.1
77.3
84.5
161.8
Actual
FY2011A
Prospectus
FY2011F
109.3
(66.4)
42.9
100.4
(66.4)
33.9
3. BUSINESS STRATEGIES AND PROSPECTS
The Group’s business activities, strategies, underlying
performance, balance sheet and growth prospects are
consistent with the prospectus dated 17 November 2010.
During the last five years the Group has diversified and
strengthened its business model across the value chain.
The Group is now actively involved in gas exploration
and development, electricity generation development,
ownership and operation, and the sale of electricity to
commercial, industrial and government customers. It is
expected that the Group’s growth, diversification and
vertical integration will continue at a steady pace for the
foreseeable future. In FY2011 the Group’s gas business
had its second successive commercial gas discovery in
as many years; its electricity sales business grew by more
than [50%] as forecast, as it expands Australia wide; our
generation assets performed to expectation; the Group’s
generation development business continued to position
itself to maintain its leadership in Australia as the leading
developer of low emission gas fired power generation. In
FY2012, the Group expects to maintain growth rates in
electricity sales, advance major power generation projects,
increase ownership of generation assets and associated
earnings and profits, and advance commercialisation of the
two gas discoveries ready for gas sales to major customers.
The Group’s strategic intent over the next five years, as we
strengthen the business model though vertical integration,
is to continue to deliver growth, profits and long term value
creation for shareholders. The Group aims to emerge in
this time as one of Australia’s top five integrated energy
businesses and a preferred supplier to Australia’s large
commercial, industrial and government customers.
$ million
Operating cash flow on a statutory basis
Arrow Energy receivable included in receipts from customers
Operating cash flows above
The Group’s cash balances increased by $123.8 million to
$186.4 million over the financial year.
Net surplus operating cash flows show a $9.0 million
improvement in the prospectus forecast. The difference
is largely due to higher earnings, the use of tax losses
and changes in working capital. The statutory cash flow
contained in the Annual Financial Statements shows the
$66.4 million received from Arrow Energy as revenue as it
was received during the year. A reconciliation of operating
cash flows on a statutory basis to the operating cash flows
presented above is contained in the preceding table.
Capital expenditure was $12.8 million below prospectus
forecast principally due to development costs being
incurred at a slower rate. In addition, $4.4 million of a
$15.6 million facility arranged for the purchase of a
further 50% interest in the Oakey power station (“Oakey”)
in FY2012 was received in advance on the last day of the
current year.
2.6. Assets
During the year the Group disposed of its 30% interest in
Kwinana. The sale contributed $4.7 million to EBITDAIF.
The Group also received cash of $66.4 million in respect
of the sale of its interest in Braemar 2, the profit from which
was accounted for in FY2010.
The Group acquired a further 50% interest in Oakey for
$61.7 million subsequent to balance date, increasing
its interest to 62.5%. The results from Oakey will be
consolidated in FY2012, having been equity accounted
to date.
2.7. Debt
The Group’s total debt reduced by 51% to $211.7 million at
30 June 2011. $207.3 million of this is the Neerabup project
debt that has recourse only to Neerabup. $4.4 million is part
of a new facility arranged for part financing of the Oakey
acquisition.
Corporate loans of $33.1 million were repaid during the year
and Neerabup repaid a total of $5.3 million of its project
debt. The Kwinana project debt was eliminated on the sale
of that asset.
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
25
Directors’ Report
for the year ended 30 June 2011 continued...
4. SIGNIFICANT CHANGES IN THE STATE
7. PROCEEDINGS ON BEHALF OF THE COMPANY
OF AFFAIRS
The Company was admitted to the Official List of the
Australian Securities Exchange in December 2010 as
the result of an initial public offering that raised $100 million
in new capital.
No person has brought, or intervened in, on behalf of the
Company with, an application for leave under section 237
of the Corporations Act (2001).
8. DIVIDENDS
The Group sold its interests in the Kwinana and Braemar 2
power stations during the year, but continues to operate
Kwinana on behalf of its owners.
No dividends were declared or paid during the year (2010: nil).
Subsequent to year end, the directors have declared a final
dividend in respect of the 2011 financial year as follows:
5. EVENTS AFTER BALANCE DATE
On 1 July 2011, the Company completed the purchase
of an additional 50% interest in the 332 megawatt Oakey
Power Station (“Oakey”). With the completion of this
transaction, the Company’s beneficial interest in Oakey
has increased from 12.5% to 62.5%. A corporate facility
of $16 million was arranged to partly fund the acquisition.
6. LIKELY DEVELOPMENTS AND
EXPECTED RESULTS
The Federal Government announced their intention to
introduce a Carbon Tax from July 2012. As one of Australia’s
leading developers of low emission electricity solutions
and a successful gas explorer, the Group is favourably
positioned for a carbon signal:
• Our gas and gas generation businesses will get a
Amount:
Franking:
3.5 cents per share
Fully franked
Date payable:
19 October 2011
9. SHARE OPTIONS
9.1. Unissued shares
As at the date of this report, there were 11,444,518 options
to acquire fully paid ordinary shares on issue. The options
do not carry any entitlement to participate in any share
issue of the Company. All options expire on the earlier of
their expiry date, or for those showing a 2017 expiry date,
termination of the holder’s employment, or as otherwise
determined by the Board.
Expiry Date
Issue price
of shares
Number of
option
natural benefit from a carbon price as gas-fired; and
6 June 2013
80.6 cents
9,655,412
generation has approximately half the emissions of coal
• The electricity sales business is not expected to be
adversely affected due to our purchase and sales
contracts allowing for pass through of carbon policy
impacts.
In summary ERM Power’s business plan does not rely on
the introduction of a carbon signal but the Company is well
placed if one is introduced.
Apart from that provided above, information as to likely
developments in the operations of the Group and the
expected results of those operations in subsequent financial
years has not been included in this report because the
directors believe this could result in unreasonable prejudice
to the Group.
30 June 2013
80.6 cents
250,000
1 November 2017
275.0 cents
1,296,400
8 November 2017
275.0 cents
242,706
9.2. Shares issued on the exercise of options
209,203 ordinary shares were issued during the financial
year on the exercise of options which had been granted
in June 2008, with consideration of $0.806 per share.
No amounts are unpaid on any of the shares.
26 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
10. Directors and company secretaries
DIRECTORS
The directors of the Company during the financial year and
up to the date of this report are:
Trevor St Baker
Non-Executive Chairman
Anthony (Tony) Bellas
Martin Greenberg
Brett Heading
Independent Non-Executive
Director
Independent Non-Executive
Director
Independent Non-Executive
Director (appointed 12 October
2010)
Antonino (Tony) Iannello Independent Non-Executive
companies. Prior to joining the Seymour Group, Tony
held the position of CEO of Ergon Energy, a Queensland
Government-owned corporation involved in electricity
distribution and retailing in Queensland. Before that, was
CEO of CS energy, also a Queensland Government-owned
corporation and the State’s largest electricity generation
company, operating over 3,500 MW of gas-fired and coal-
fired plant at four locations.
He is a director of the listed companies shown below and
is also a director of Australian Water Queensland Pty Ltd,
Gasfields Water Management Pty Ltd and QIP Coal Pty Ltd.
Other listed company directorships in the last three years
Corporate Travel
Management Limited
Since June 2010
Director (appointed 19 July 2010)
Guilford Coal Limited
Since December 2010
Philip St Baker
Managing Director
Watpac Limited
(December 2007 –
October 2010)
INFORMATION ON DIRECTORS AND COMPANY SECRETARIES
Special Responsibilities
Trevor St Baker
BEng, BA, MAICD, FAusIMM, FIEAust, FAIE
Chairman of the Audit and Risk Committee, and a member of
the Remuneration Committee and the Nomination Committee.
Trevor founded the Group in 1980. He was Executive
Chairman from July 2006 and was appointed Non-Executive
Chairman in June 2009. He has more than 50 years of
experience in the electricity industry. He is the ERM Power
representative on the Electricity Supply Association of
Australia, Chairman of the Board of the National Generators’
Forum in Australia and is on the Board of the Queensland
Resources Council.
Trevor has been a Director of Oakey Power Holdings Pty Ltd
since 2000 and Chairman of the operating committees of
each of NewGen Neerabup since 2007, NewGen Braemar
2 since 2008 (until its divestment in June 2011) and
NewGen Power Kwinana since 2005 (until its divestment in
October 2010). In June 2010, Trevor accepted the position
of Non-Executive Chairman of Master Electricians Australia,
and in September 2010 co-founded the Trevor St Baker
& Richard Wilkes Indigenous Scholarship Foundation, of
which he is the Managing Director.
Anthony (Tony) Bellas
MBA, BEc, DipEd, CPA, FAIM, MAICD.
Tony was appointed as a Non-Executive Director in
December 2009, bringing to the business almost 25 years
of policy and operational experience in the energy industry.
Tony was previously CEO of the Seymour Group, one of
Queensland’s largest private investment and development
Martin Greenberg
BBus, DipCom, FCPA, JP
Martin was appointed as a Non-Executive Director in July
2007, bringing finance credentials and business experience
spanning 35 years. Martin has been a director of several
public companies in Australia and New Zealand and has an
extensive range of national and international contacts and
experience, accumulated over the past 35 years.
Martin is currently the Managing Director of Apollan
Investments Group, a Sydney based company specialising
in venture capital, corporate finance, securities, and general
investment. He is also the current Chairman of Selector
Funds Management Ltd, Aimedics Pty Ltd and Liquid
Capital Management (Australasia) Pty Ltd.
Special Responsibilities
Member of the Audit and Risk Committee, the Remuneration
Committee and the Nomination Committee.
Antonino (Tony) Iannello
BCom, FCPA, FAICD, SFFSIA, Harvard Business School
Advanced Management Program
Tony was appointed as a Non-Executive Director in July
2010, bringing to the business more than 30 years of
banking and energy experience.
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
27
Directors’ Report
for the year ended 30 June 2011 continued...
He is a director of the listed companies shown below, a
director of HBF Health Ltd and MG Kailis Group Intium
Energy Ltd, Harrier Resourcing People Pty Ltd and a member
of The Murdoch University Senate. Prior to embarking on a
career as a non-executive director, Tony was the Managing
Director of Western Power Corporation until its separation into
four separate businesses. Previously he held a number of
senior executive positions at BankWest.
Other listed company directorships in the last three years
Energia Minerals Limited
Since March 2010
SP Ausnet*
Since June 2006
Aviva Corporation Limited
(February 2008 –
November 2010)
*The SP Ausnet “stapled group” of companies comprises SP
Australia Networks (Distribution) Ltd, SP Australia Networks
(Transmission) Ltd & SP Australia Networks (Finance) Trust.
Special Responsibilities
Chairman of the Nominations Committee and the
Remuneration Committee and member of the Audit
and Risk Committee.
Brett Heading
BCom, LLB (Hons), FAICD
Brett was appointed as a Non-Executive Director in October
2010. He has specialized in corporate law for 25 years,
including mergers and acquisitions, capital raising, ASX
listings and advising boards of listed and unlisted public
companies and government-owned corporations. He has
been a partner of McCullough Robertson Lawyers since
1985 and was appointed Chairman of Partners in 2004.
Brett has been a director of the listed companies shown
below and a number of unlisted companies. He has also
held roles on Federal Government boards, having been
a longstanding member of the Takeovers Panel (1998 to
2009) and the Board of Taxation (2000 to 2009).
Other listed company directorships in the last three years:
ChemGenex
Pharmaceuticals Limited
Since June 2002
Trinity Limited
Since August 2009
Diversa Limited
(previously Ambri Limited)
(November 2006 – July 2008)
Capilano Honey Limited
(July 2008 – October 2008)
Australian Agricultural
Company Limited
(June 2008 – June 2009)
Special Responsibilities
Member of the Nominations Committee and the
Remuneration Committee
Philip St Baker
BEng, MAICD
Phil was appointed as Managing Director and CEO in
July 2006 and is focused on the long term growth and
prosperity of the Group. Phil has over 20 years of diversified
international experience in the resources and energy
industry including exploration, mining, processing, smelting,
refining, power and gas. Over the last five years, Phil
has utilized his extensive experience in transforming the
Group from an emerging power development business into
one of Australia’s leading diversified energy businesses.
Previously, Phil had a 15 year career with BHP, where he
progressed to the role of Global Maintenance Manager,
supporting BHP’s 100+ businesses worldwide. For five
years, Phil led an international team tasked with facilitating
operating business improvement across the entire group.
Prior roles also include Vice President of Queensland Nickel
QNI and CEO of NewGen Power.
Special Responsibilities
Chairman of the ERM Sales and ERM Gas subsidiary
Boards and chairman of the Heath, Safety, Environment
and Sustainability Committee of the ERM Power Board.
COMPANY SECRETARIES
Peter Jans
LLB (Hons), MA
Peter joined the Group in July 2007 and was appointed
as Company Secretary in March 2008. He is an affiliate
of the Institute of Chartered Secretaries, a member of the
Queensland Law Society, Barrister and a Solicitor of the
Supreme Court of Victoria and a Solicitor of the Supreme
Court of Queensland and the High Court of Australia. He
has practised as a lawyer for over 30 years in the corporate,
property, international investment, energy and resource
sectors. After an active career in private practice, Peter
became General Counsel of CS Energy in the late 1990s
and was involved in major electricity generation projects,
including Callide C, Swanbank E and Kogan Creek.
Peter was General Counsel and Company Secretary of
Queensland Gas Company Limited from April 2005 until
July 2007, during which period the company transformed
from junior explorer to a major gas producer.
28 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
Special Responsibilities
Peter’s role and responsibility covers the whole of ERM Power’s broader business plans and portfolios, including business
development, construction and operations, sales and gas activities. Peter is responsible for all aspects of ERM Power’s legal
dealings, and for compliance and corporate governance.
Graeme Walker
BCom, CA, CA (SA), FAICD
Graeme joined the Group in April 2009 and was appointed as joint Company Secretary in December 2009. As Chief
Financial Officer, Graeme is also responsible for the financial management and control of ERM Power.
Graeme has served as CFO of a number of major ASX-listed companies in the resources sector, including Normandy Mining
Limited and Ampolex Limited, where he was involved in significant business growth and corporate activity. He subsequently
provided consulting services to a number of companies, advising on financial and commercial services, as well as interim
management. During this time he was also involved in the listing of a number of resource companies, as a non-executive director.
11. MEETINGS OF DIRECTORS
The number of meetings of the Board of directors and each Board committee held during the financial year, and the
numbers of meetings attended by each director are as follows:
Director
Board Meetings
Audit & Risk
Committee
Nominations
Committee
Remuneration
Committee
Trevor St Baker
Tony Bellas
Martin Greenberg
Brett Heading
Tony Iannello
Philip St Baker
A
18
19
19
13
19
19
B
20
20
20
16
20
20
A
**
5
4
**
5
**
A = number of meetings attended
B
**
5
5
**
5
**
A
**
0
0
0
0
**
B
**
0
0
0
0
**
A
**
2
2
1
2
**
B
**
2
2
2
2
**
B = number of meetings held during the time the director held office during the year
** = not a member of the relevant committee
The Group has a Health, Safety, Environment & Sustainability Committee. Committee members include the Managing
Director and other senior management. This committee met four times during the financial year.
12. DIRECTORS’ INTERESTS
The relevant interest of each director in the share capital of the Company at the date of this report, as notified by directors to
the ASX in accordance with Section 205G of the Corporations Act, is a follows:
Director
Trevor St Baker
Tony Bellas
Martin Greenberg
Brett Heading
Tony Iannello
Philip St Baker
Ordinary shares
Options to acquire ordinary
shares
84,704,918
100,000
571,794
14,285
114,285
4,013,734
-
-
354,726
-
-
1,076,576
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
29
Directors’ Report
for the year ended 30 June 2011 continued...
13. ENVIRONMENTAL REGULATION
16. NON-AUDIT SERVICES
AND PERFORMANCE
The Group’s environmental obligations are regulated by
relevant federal, state and local government ordinances.
The Group’s policy is to comply with, but in most cases
exceed its environmental performance obligations.
No environmental breaches have been notified by any
governmental agency or local council authority during
the year ended 30 June 2011.
The Group is subject to the reporting requirements of the
Energy Efficiency Opportunities Act 2006 and shortly
expects to be subject to the National Greenhouse and
Energy Reporting Act 2007. The Energy Efficiency
Opportunities Act 2006 requires the Group to assess its
energy usage, including the identification, investigation
and evaluation of energy saving opportunities, and to report
publicly on the assessments undertaken, including what
action the Group intends to take as a result. The Group
continues to meet its obligations under this Act.
The National Greenhouse and Energy Reporting Act 2007
would require the Group to report its annual greenhouse gas
emissions and energy use. The Group has implemented
systems and processes for the collection and calculation of
the data required.
14. INDEMNIFICATION AND INSURANCE
OF OFFICERS
Insurance and indemnity arrangements are in place for
directors and officers of the Group. Disclosure of premiums
and coverage is not permitted by the contract of insurance.
To the extent permitted by law, the Group indemnifies every
person who is or has been an officer against:
• any liability to any person (other than the Company,
related entities or a major shareholder) incurred whilst
•
acting in that capacity and in good faith; and
costs and expenses incurred by that person in that
capacity in successfully defending legal proceedings
and ancillary matters.
For this purpose, “officer” means any company secretary
or any person who makes, participates in making decisions
that affect the whole, or a substantial part of the business of
the Company or Group.
15. AUDITOR’S INDEPENDENCE DECLARATION
A copy of the auditor’s independence declaration as
required under section 307C of the Corporations Act 2001
is set out on page 45.
30 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
Non-audit services provided by the Group’s auditors
PricewaterhouseCoopers were in relation to advice and
certain agreed-upon procedures. The directors are satisfied
that the provision of non-audit services is compatible with
the general standard of independence for auditors imposed
by the Corporations Act 2001.
Amounts received or
due and receivable by
PricewaterhouseCoopers
Australia for non-audit services:
Investigating accounts report
Due diligence services
Other agreed-upon procedures in
relation to the entity and any other
entity in the consolidated Group
2011
$
630,000
60,000
115,002
805,002
2010
$
-
-
-
17. CHANGE IN COMPANY NAME
On 17 September 2010, ERM Power Pty Ltd changed its
name to ERM Power Limited.
18. ROUNDING OF AMOUNTS
The amounts contained in this report and in the financial
report have been rounded to the nearest thousand dollars
(where rounding is applicable) under the option available
to the Group and the Company under ASIC Class Order
98/0100. The Group and the Company are entities to which
the class order applies.
19. REMUNERATION REPORT
The Remuneration Report is attached and forms part
of this report.
This report is made in accordance with a resolution
of directors.
Tony Bellas
Director
Brisbane
25 August 2011
Remuneration Report
for the year ended 30 June 2011
The directors present the Remuneration Report
1.2.1. Non-Executive directors
for ERM Power Limited (“Company”) and its
Trevor St Baker
Chairman
consolidated entities (“Group”) for the year
Tony Bellas
Independent
ended 30 June 2011.
Martin Greenberg
Independent
1. REMUNERATION FRAMEWORK
1.1. Role of the Remuneration Committee
The Remuneration Committee ensures that the remuneration
of directors and senior executives is consistent with market
practice and sufficient to ensure that the Company can
attract, develop and retain the best individuals. The committee
reviews directors’ fees, and remuneration of the Managing
Director and senior executives against the market and
against Group and individual performance.
The committee oversees governance procedures and
policy on remuneration including:
Brett Heading
Tony Iannello
Independent
(appointed 12 October 2010)
Independent
(appointed 19 July 2010)
1.2.2. Executive director
Philip St Baker
1.2.3. Senior executives
Managing Director and
Chief Executive Officer
William (Mitch) Anderson Chief Executive Officer –
• General remuneration practices;
Peter Jans
•
•
•
Performance management;
Equity plans and incentive schemes, and
Recruitment and termination.
Derek McKay
ERM Sales
Group General Counsel &
Company Secretary
Chief Executive Officer –
Generation Operations
Through the committee, the Board ensures the company’s
remuneration philosophy and strategy continues to be
designed to:
• attract, develop and retain top class Board and
executive talent,
• create a high performance culture by driving and
rewarding executives for achievement of the Company’s
strategy and business objectives, and
link incentives to the creation of shareholder value.
•
In undertaking its work, the committee seeks the advice of
external remuneration consultants.
1.2. Key Management Personnel
Key Management Personnel (“KMP”) are those persons
having authority and responsibility for planning, directing
and controlling the activities of the entity, directly or indirectly,
including any director of that entity. The term KMP refers to
the following persons who were KMPs during the financial
year, and who were also the five highest remunerated
executives. Unless otherwise indicated, they were KMPs for
the entire year.
Graeme Walker
Chief Financial Officer
2. REMUNERATION
2.1. Fees payable to Non-Executive Directors
Fees paid to non-executive directors reflect the demands
which are made on, and the responsibilities of, directors.
Directors’ fees are reviewed annually by the Board.
Directors who chair or are members of a committee
receive additional fees for these services.
The Board considers the advice of independent
remuneration consultants to ensure directors’ fees are
appropriate and in line with the market. The Chairman’s
fees are determined independently to the fees of directors
and are based on comparative roles in the market. The
Chairman is not present at any discussions relating to the
determination of his remuneration.
The current fees were reviewed prior to the IPO. During the
year, the responsibilities of the ERM Power Retail Pty Ltd
Board were assumed by the full Board – the fees of $10,000
per annum previously paid to each non-executive director
of the ERM Power Retail Pty Ltd Board were eliminated, and
base fees to directors of the ERM Power Board increased
by $5,000 per annum. Directors’ fees are determined within
an aggregate fee pool limit approved by shareholders. This
is currently set at $800,000 per annum and was approved
by shareholders at the annual general meeting held on
7 June 2010.
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
31
Remuneration Report
for the year ended 30 June 2011 continued...
The annual fee structure for non-executive directors,
excluding superannuation, is as follows:
Base fee
Chairman
Non-executive directors
Additional fees
Audit Committee - Chairman
Audit Committee - Member
Remuneration Committee - Chairman
Remuneration Committee - Member
Chairman of Partnership Committee or subsidiary
$
205,000
105,000
$
20,000
10,000
10,000
5,000
10,000
The tables at the end of this report provide details of fees
paid during the financial year to each non-executive director.
2.2. Managing Director and Senior Executives
The objective of the Company’s executive remuneration
framework is to ensure that reward for performance is
competitive and appropriate for the results delivered.
The framework aligns executive remuneration with the
achievement of strategic objectives and the creation of the
value for shareholders, and conforms with market practice.
The Board ensures that executive reward satisfies the
following key criteria for good reward governance practices:
• Competitiveness and reasonableness;
• Acceptability to shareholders;
• Performance linkage/alignment of executive
remuneration; and
• Transparency.
Senior executives are remunerated by way of a mix of fixed
and variable remuneration in a manner that motivates them
to pursue the long term growth and success of the Group.
The components of remuneration are:
• Base pay and benefits, including superannuation;
• Short-term performance incentives;
• Long-term incentives; and
• Other cash or equity based discretionary incentives.
As detailed in the remuneration table, incentives were
awarded in the current financial year in respect of financial
results and the delivery of key outcomes in the 2010
financial year. Additional incentives were also awarded
containing continuity of service vesting conditions, targeting
employee retention beyond the IPO period. Future long
term incentives to be offered will incorporate performance
conditions to be set by the Board to reflect the competitive
market and business conditions when it is in the interest of
the company and shareholders to do so. As the Company’s
shares were listed for the first time on the ASX in December
2010, no incentive award has yet been made that contain
performance conditions linked to share price.
2.3. Base Pay and benefits
External remuneration consultants provide analysis and
advice to ensure executive remuneration is set to reflect
the market for comparable roles. Remuneration is reviewed
annually to ensure that it is competitive with the market.
Remuneration is also reviewed on promotion or change of
role. There are no guaranteed base pay increases included
in executive contracts. Executive remuneration includes
salary continuance insurance.
The tables at the end of this report provide details of
remuneration paid during the financial year to the Managing
Director and each of the named executives.
2.4. Incentive schemes
Variable remuneration is in the form of short (“STI”) and long
term (“LTI”) incentives which represent “at risk” remuneration.
STI remuneration is paid annually against agreed and
objective KPIs which are designed to align the interests of
the Company and its shareholders. LTI remuneration will
be accrued over a number of years and earned through
satisfaction of performance and service conditions.
Achievements are assessed annually using the ERM
Performance Appraisal and Development Review process.
STI payments are in the form of cash or equity, or a
combination of these. LTI payments are in the form of equity.
The trading of equities which vest under STI or LTI are
required to comply with the Company’s Securities Trading
Policy. This policy also prohibits any employees or directors
from entering into any scheme, arrangement or agreement
under which the economic benefit derived by the employee
or director, in relation to an equity–based incentive award
or grant made by the Company is altered, irrespective of
the outcome under that incentive award or grant, other than
as permitted in any approved share or option plan, or as
authorized by the Board.
For employees, benefits associated with the incentive
scheme include:
• Provision of clear targets, stretch targets and structures
for achieving rewards;
• Recognition and reward for achievement, capability and
experience; and
• Delivery of reward for contribution to growth in
shareholder wealth.
32 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
For shareholders, benefits associated with the incentive
scheme include:
• A clear focus on performance improvement at all levels
of the Group, with year-on-year profit growth a core
component;
• A focus on sustained growth in shareholder wealth,
consisting of dividends and share price growth and
delivering the greatest returns on assets; and
• The ability to attract and retain high calibre executives.
Key performance indicators (“KPI”) for both short and long
term incentives are annually assessed and approved by the
Board. The KPIs include both financial and non-financial
conditions under a balanced scorecard approach, and
reflect the key measures of success as determined by the
Board. These may include, but are not limited to, a range of
measures such as:
• Zero Harm – safety and environment performance
STIs are assessed annually using the ERM Performance
and Development Review process. They are paid following
completion of the Group’s audited accounts, and may
be offered by way of cash or equity (through an equity
incentive plan), or a combination of the two. They are only
payable to individuals who are employees at the time
that the STI is payable. Employees whose employment is
terminated during the financial year due to retrenchment,
retirement on the grounds of age or invalidity, or death may
be paid on a pro-rata basis, and in other circumstances, at
the discretion of the Board.
In respect of the FY10 incentives, paid in the 2011 financial
year, KPIs were set and paid prior to listing on the ASX.
They were focused on aligning employees with the strategic
goals and performance of the Group. The Group KPIs were
in the following categories:
• Safety;
• Profit;
measures, including lost time and medically treated
• Value (based on movement in annual independent
injury frequency rates;
• Financial Measures – including earnings before interest,
tax, depreciation, amortisation and net fair value
changes in financial instruments (EBITDAF), cash flow
management etc.; and
• Market based – shareholder returns, earnings per
share, share price improvement, etc.
2.4.1. Short term incentives
Short term incentives (“STI”) are provided to Senior
Executives and most employees.
At the beginning of each year, the remuneration committee
determines the Group key performance indicators (“KPI”),
and sets target and stretch target levels. KPIs and target
and stretch targets are also set at this time for business
units and individuals.
A weighting is applied to each of the target components
(Group, business unit and individual performance) with
the average performance against target and stretch
target measured at the end of the year to provide a
target achievement score. The target achievement score
is applied to an STI opportunity level. STI opportunity
levels are predetermined percentages of average fixed
remuneration set by the remuneration committee with
the levels determined by employees’ roles and relative
influence on the Group’s performance.
STI opportunity levels are currently set in range of 10% to 40%
of average fixed remuneration, with the stretch target potential
to achieve up to 150% of these levels (i.e. 15% to 60%).
valuations); and
• Cash levels.
The performance categories established post listing have
continued to focus on the achievement of strategic objectives
and the creation of value for shareholders. The weighting
given to each performance objective category will vary for
each executive depending upon their role within the Group.
For the FY11 incentives to be paid in the 2012 financial year,
KPIs were established within the following categories:
• Operational (safety and compliance);
• Financial and prospectus forecasts;
• Growth:
• People; and
• Strategic.
All executives had as an objective, the achievement by the
Group of the forecast strategies and results as outlined in the
Prospectus. The ERM P&DR is used to measure the actual
level of achievement of each objective in the financial year.
2.4.2. Other incentives
Prior to listing, the Company awarded a discretionary
incentive award to certain employees for achieving the
successful Initial Public Offering (“IPO”). The vesting
conditions are targeted at the retention of those employees
through to at least September 2012, being the prospectus
forecast period.
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
33
Remuneration Report
for the year ended 30 June 2011 continued...
Also prior to listing, the Company awarded a discretionary incentive to key staff, to encourage retention beyond the
IPO forecast period.
Neither of the above awards included performance conditions and were awarded by way of participation in the long term
equity plans (the LTIST and LTIOT).
2.4.3. Long-term incentives
The Company may issue long-term incentives to certain employees to provide incentives to focus on long term shareholder returns.
These incentives will be in the form of equity which will only vest if certain performance measures, yet to be established are
met and the employees are still employed at the end of the vesting period.
The first issue under the long term incentive scheme is anticipated to occur in the 2012 financial year with vesting to be
subject to the achievement of appropriate performance measures to be set by the Board, and time.
3. Service agreements
On appointment, all non-executive directors are issued with a letter of appointment which summarises board policies and terms.
Remuneration and other terms of employment for the Managing Director and the other key management personnel are
formalized in service agreements. Each of these agreements specify the components of remuneration to which they
are entitled and outline base salary, the provision of incentives, and other benefits including superannuation and salary
continuance insurance.
Service terms for the Managing Director and senior executives are as follows:
Name
Term of agreement
Base salary excluding
superannuation @ 9%* Termination benefits **
Philip St Baker (Managing Director & CEO)
On-going (no fixed term)
$494,400
12 months base salary
Mitch Anderson (CEO - ERM Sales)
On-going (no fixed term)
$325,000
6 months base salary
Peter Jans (Group General Counsel and
Company Secretary)
On-going (no fixed term)
Derek McKay (CEO – Generation Operations) On-going (no fixed term)
Graeme Walker (Chief Financial Officer)
On-going (no fixed term)
$325,686
$325,000
$283,250
6 months base salary
6 months base salary
6 months base salary
* Base salaries quoted are for the year ended 30 June 2011; they are reviewed annually by the remuneration committee.
** Termination benefits are payable at the option of the company in lieu of notice, other than termination for cause.
4. Share price and consequences of performance on shareholder wealth
ERM’s executive remuneration is directly linked to the performance of the Company across a range of measures. The STI is
focused on achieving annual profit and operational targets, while the LTI is focused on achieving long term growth and retention
of talented executives. The Board considers this combination an effective way to align incentives to shareholder value.
The Company’s shares were listed on the ASX in December 2010 at a listing price of $1.75. The table below shows ERM’s
operating revenue, EBITDAIF, and NPAT for the current reporting year vs prospectus, and the effect of ERM’s performance
on shareholder value.
Revenue and other income
EBITDAIF1
Net Profit After Tax (NPAT)
Underlying Net Profit After Tax
Basic Earnings per Share
Dividends in respect of financial year
Closing share price as at 30 June 2011
($’000)
($’000)
($’000)
($’000)
2011 Actual
2011 Prospectus Forecast
549,814
46,407
16,219
6,288
11.72 cents
3.5c per share
$1.57
478,916
45,665
26,474
3,488
16.6 cents
3.5c per share
1. EBITDAIF (after profit of associate) includes profits from ERM Power’s ownership interest in the Oakey power station.
34 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
5. Remuneration and other tables
5.1 Remuneration table for year ended 30 June 2011
Details of the remuneration of directors and key management personnel of the Group for the financial year, which include the five
highest remunerated executives, are set out in the following table:
Short term benefits
Post-
employment
benefits
Long term
benefits
Long term equity
based benefits
Cash
salary
and fees
$
Additional
fees1
$
Cash
bonus2
$
Non
monetary
benefits3
$
Super-
annuation
$
Termination
Benefits
$
Shares4
$
Options5
$
Total
$
Non-executive directors
Trevor St Baker
Tony Bellas
Martin Greenberg
Brett Heading
(appointed 12 October
2010)
229,792
127,292
121,875
78,905
-
27,523
9,174
-
Tony Iannello
123,541
9,174
(appointed 19 July 2010)
Total
681,405
45,872
-
-
-
-
-
-
-
-
-
-
-
-
20,681
13,933
11,794
-
11,944
54,225
Executives
Philip St Baker
494,400
(Managing Director & CEO)
Mitch Anderson
Peter Jans
Derek McKay
Graeme Walker
325,000
325,686
325,000
283,250
-
-
-
-
-
80,005
1,444
44,496
-
-
-
-
5,372
2,221
2,221
1,966
29,250
29,312
29,250
25,493
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
250,473
168,748
5,301
148,145
-
-
-
78,905
144,660
790,931
150,926
21,346
792,617
143,623
13,956
517,201
161,103
10,828
529,150
123,809
124,867
7,726
488,006
3,478
439,054
1 Fees paid for additional roles undertaken in the initial public offering.
2 The FY10 bonus paid to the Managing Director in the current year consisted of both cash and share based payments for which a general provision
had been provided for in the FY10 accounts. (Although a general provision has been made for incentive payments for FY11, to be paid in FY12, the
allocation for payments to specific individuals and the form, whether to be taken in cash or equity, has not yet been determined.)
3 Non monetary benefits include salary continuance insurance premiums and FBT.
4 Issue of shares as the result of awards under equity incentive schemes, in addition to a bonus awarded in connection with the initial public offering.
A general provision was made in the FY10 accounts, but the allocation to individuals was only calculated at the time of grant in the current FY.
5 Issue of options under equity incentive schemes based on the value of options expensed during the year (Non-executive director options granted
FY08, executive options granted in FY08 and the current year).
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
35
Remuneration Report
for the year ended 30 June 2011 continued...
5.2 Remuneration table for year ended 30 June 2010
Details of the remuneration of directors and key management personnel of the Group for the prior financial year, which
include the five highest remunerated executives, are set out in the following table:
Short term benefits
Cash
salary
and fees
$
Cash
bonus1
$
Non
monetary
benefits2
$
Post-
employment
benefits
Long term
benefits
Long term equity
based benefits
Super-
annuation
$
Termination
Benefits
$
Shares
$
Options3
$
Total
$
Non-executive directors
Trevor St Baker
Tony Bellas
Martin Greenberg
Brett Heading
(appointed 12 October
2010)
Tony Iannello
(appointed 19 July 2010)
269,006
73,333
137,500
-
-
Wayne St Baker
120,000
(ceased 30 June 2010)
Total
Executives
599,839
Philip St Baker
480,000
(Managing Director & CEO)
Mitch Anderson
Peter Jans
Derek McKay
Graeme Walker
277,900
310,000
261,187
275,000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
5,310
6,600
-
-
-
-
-
-
-
-
-
20,000
11,910
20,000
1,444
43,200
4,719
1,444
1,444
1,909
25,011
27,506
23,507
24,750
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
274,316
79,933
5,301
142,801
-
-
-
-
2,242
142,242
7,543
639,292
12,461
537,105
9,966
317,596
6,829
341,406
3,736
289,874
-
301,659
1 No cash bonus paid in FY10.
2 Non monetary benefits include salary continuance insurance premiums and FBT.
3 Issue of options under equity incentive schemes based on the value of options expensed during the year which were granted in FY08.
36 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
5.3 Relative Proportion of Remuneration
The relative proportion of remuneration that was linked to performance and those that were fixed are as follows:
Name
Non-executives directors
Trevor St Baker
Tony Bellas
Martin Greenberg
Brett Heading (appointed 12 October 2010)
Tony Iannello (appointed 19 July 2010)
Wayne St Baker (ceased 30 June 2010)
Executives
Philip St Baker
Mitch Anderson
Peter Jans
Derek McKay
Graeme Walker
Fixed Remuneration
At Risk – Cash Bonus
and Shares Issued
At Risk – Options
2011
%
2010
%
2011
%
2010
%
2011
%
2010
%
100
100
96
100
100
-
68
70
68
73
71
100
100
96
-
-
98
98
97
98
99
100
-
-
-
-
-
-
29
27
30
25
28
-
-
-
-
-
-
-
-
-
-
-
-
-
4
-
-
-
3
3
2
2
1
-
-
4
-
-
2
2
3
2
1
-
5.4 Share-based compensation
The terms and conditions of each grant of options affecting remuneration in the current or a future reporting period are
as follow:
Number
of
Options
granted1
Number
exercisable
as at 30
June 2011
Grant date
Vesting and
exercise date
Expiry
date
Exercise
price2
Value per
option at
grant date
Performance
achieved
%
Vested
1 Jun 2008
10,524,962
9,819,209 Vested 3 Nov 2010
30 Jun 2008
400,000
250,000 Vested 3 Nov 2010
1 Nov 2010
1,296,400
1,296,400 3 business days
after 2012 Financial
Statements are signed
8 Nov 2010
242,706
242,706 3 business days
after 2012 Financial
Statements are signed
6 Jun
2013
30 Jun
2013
1 Nov
2017
8 Nov
2017
$0.806
$0.0448
$0.806
$0.0448
$2.75
$0.1043
$2.75
$0.1043
N/A, service
condition
N/A, service
condition
N/A, service
condition
N/A, service
condition
100%
100%
N/A
N/A
1 Options granted restated for 2 for 1 share split during FY2011.
2 Options convertible into one ordinary share and carry no dividend or voting rights.
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
37
Remuneration Report
for the year ended 30 June 2011 continued...
5.5 Details of option grants
Details of options to acquire ordinary shares in the Company provided as remuneration to each of the key management
personnel are set out below. Further information on the options is set out in note 28 to the financial statements. No options
were granted to any non-executive director of the Company in the current year.
Name
Non-Executive Directors of the Group
Trevor St Baker
Tony Bellas
Martin Greenberg
Brett Heading
Tony Iannello
Key management personnel of the Group
Philip St Baker (Managing Director & CEO)
Mitch Anderson
Peter Jans
Derek McKay
Graeme Walker
Number
of options
granted
during the
year
Nil
Nil
Nil
Nil
Nil
242,706
106,364
106,590
106,364
92,700
Value of
options at
grant date
$
Number
of options
vested during
the year1
Number
of options
lapsed during
the year
Value at
lapse date
-
-
-
-
-
25,314
11,094
11,117
11,094
9,669
Nil
Nil
354,726
Nil
Nil
833,870
666,872
457,010
250,000
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
1 Options issued in June 2008 vested on 3 November 2010.
5.6 Shares issued on the exercise of remuneration options
No ordinary shares were issued as a result of the exercise of remuneration options to any director or key management
personnel during the financial year.
38 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
5.7 Details of remuneration: Bonuses and share-based compensation benefits
Bonus
Share-based compensation benefits
Paid
%
Forfeited
%
Year
Granted
Vested
%
Forfeited
%
Financial
years in which
options may
vest
Maximum total
value of grant
yet to vest
$
Name
Tony Bellas
Martin Greenberg
Tony Iannello
(appointed 19 July 2010)
Philip St Baker
(Managing Director & CEO)
100%
100%
100%
100%
Mitch Anderson
100%
Peter Jans
100%
Derek McKay
100%
Graeme Walker
100%
-
-
-
-
-
-
-
-
-
-
2008
100%
-
-
2011
2011
2011
2008
2011
2011
2011
2008
2011
2011
2011
2008
2011
2011
2011
2008
2011
2011
2011
100%
-
-
100%
100%
-
-
100%
100%
-
-
100%
100%
-
-
100%
100%
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2013
2014
-
-
2013
2014
-
-
2013
2014
-
-
2013
2014
-
-
2013
2014
-
-
-
-
47,059
73,045
-
-
20,348
31,734
-
-
20,390
31,801
-
-
20,348
31,734
-
-
17,732
27,656
5.8 Loans to directors, employees and contractors
Information on loans to directors, employees and contractors including amounts, interest rates and repayment terms are set
out in note 32 to the financial statements.
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
39
Corporate Governance Statement
Compliance with ASX Corporate Governance
Principles and Recommendations
The ASX document, ‘Corporate Governance
Principles and Recommendations’ (‘Guidelines’)
their term of office, duties, rights and responsibilities, and
entitlements on termination.
was published by the ASX Corporate
Governance Council (“Council”) with the aim of
enhancing the credibility and transparency of
Australia’s capital markets. In August 2007 the
Council released a revised version, featuring
eight principles to apply to the first financial year
starting on or after 1 January 2008.
In June 2010, the Council released further amendments to
apply to listed entities in respect of their first financial year
starting on or after 1 January 2011. Those amendments,
relating to diversity, remuneration, trading policies and
briefings, although not required disclosure for ERM Power
Limited (‘Company’) in the 2011 Annual Report, have been
adopted early by the Company as encouraged by the
Council.
This statement summarises the Company’s Corporate
Governance practices which have been in place since
the Company listed in December 2010. The Company is
pleased to report that, with the exception of Principle 2.2 in
relation to an independent director as Chairman, it complied
with all of the ASX Guidelines.
The Board has assessed the Company’s current practice
against the Guidelines and outlines its assessment below.
Principle 1 – Lay solid foundations for management
and oversight
The role of the Board and ability to delegate to management
has been formalised in ERM Power’s Board charter. The
Board charter, along with other charters and policies, can be
found on the Company’s website. The charter is reviewed and
amended from time to time taking into consideration practical
experience gained in operating as an ASX listed company.
The Company complies with this Principle of the Guidelines.
The Managing Director has made delegations to senior
executives related to the Company’s day to day affairs,
within set limits and which delegations may be withdrawn
or amended by the Managing Director at any time,
within the following areas: Legal, Financial, ERM Sales
matters, Operational matters, ERM Gas matters, Project
Development, Asset Optimisation and Project Delivery.
At the time of joining the Company, directors and senior
executives are provided with letters of appointment, together
with key Company documents and information setting out
The performance of all senior executives, including the
Managing Director, is reviewed annually against:
a) a set of personal, financial and non-financial goals;
b) company goals; and
c)
adherence to the Company’s policies, commitments,
values and principles.
The Remuneration Committee reviews and recommends
the Managing Director’s package and incentive payments.
The Remuneration Committee also approves the fixed
remuneration and incentive packages for all senior
executives (the “Executive Management Team”) with
reference to external benchmarking indicators. Further
information on senior executive remuneration is contained
in the Remuneration Report.
Principle 2 – Structure the Board to add value
ERM Power has a six-member Board comprising a Non-
Executive Chairman, four independent Non-Executive
Directors and a Managing Director. The Company seeks
to have directors with a broad range of experience,
expertise, skills, qualifications and an understanding of, and
competence to deal with, current and emerging issues of the
business. The Company’s succession plans are designed
to maintain an appropriate balance of skills, experience
and expertise on the Board. The director’s profiles, period
in office, and details of their skills, experience, and special
expertise are set in the Directors’ Report.
Principle 2.1 of the Guidelines states that the majority of
the Board should be independent directors. The Board
considers each director’s independence on a regular basis
and formed the view that for the FY11 reporting period,
Tony Bellas, Martin Greenberg, Brett Heading and Tony
Iannello were independent. In defining the characteristics
of an independent director, the Board uses the Guidelines,
together with its own consideration of the Company’s
operations and businesses and appropriate materiality
thresholds in any relationship that could materially interfere,
or be perceived as interfering with the exercise of an
unfettered independent judgement in relation to matters
concerning the Company. Despite being a partner of a
law firm that provides professional advice to ERM Power
and its related entities, the Board nevertheless considers
Brett Heading to be independent as he has not been
directly involved in the provision of any legal advice, or the
management of any legal matters (as this responsibility rests
with executive management).
40 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
Principle 2.2 of the Guidelines recommends that the
Company’s chairman should be independent. Trevor St
Baker, the Non-Executive Chairman, is not independent
(by virtue of his major shareholding interest in the Company)
and accordingly, the Company is unable to comply with
Principle 2.2. The Board believes that it is in the best
interests of the Company to have Trevor St Baker as its
Chairman, acknowledging Trevor’s standing and experience
in the Australian electricity industry and his contributions to
the Company’s development over the past 30 years.
The Board schedules a minimum of six meetings a year.
If required, additional unscheduled meetings are held
to deal with urgent matters. An agenda is prepared for
each Board meeting by the Company Secretary to ensure
operational, financial, strategic, regulatory and major risk
areas are addressed. Executive management also provide
the Board each month with an operations report, a health,
safety, environment and sustainability report, financial reports
and reports on all major projects under construction and, as
appropriate, on other company and operational matters. All
directors have unfettered access to any of the Company’s
records and information they consider necessary to fulfil their
responsibilities, and the Board may invite external advisers to
attend Board meetings where necessary or desirable.
The Audit & Risk Committee, Remuneration Committee,
Health, Safety, Environment & Sustainability Committee
and Nomination Committee each has a charter which sets
out its roles and responsibilities, composition, structure,
membership requirements and operation. These are
available on the Company’s website. Committee meeting
minutes are tabled at the following Board meeting.
A list of the members of each Committee and their
attendance at Committee meetings is set out in the
Directors’ Report.
The Nomination Committee provides advice and
makes recommendations to the Board to ensure that it is
comprised of individuals who are best able to discharge the
responsibilities of directors, having regard to the law and the
highest standards of governance by:
• assessing the skills required by the Board and the
extent to which the required skills are represented on
the Board;
•
establishing processes for the review of the individual
directors and the Chairman specifically, and the Board
as a whole;
• establishing processes for the identification of suitable
candidates for appointment to the Board as additional
members or to succeed existing members and
reviewing Board succession plans;
•
reviewing and reporting, at least annually, on the relative
•
proportion of women and men on the Board; and
making recommendations to the Board on directors
appointments or Board and Committee structure.
Each year, one-third of the Board, other than the Managing
Director, retires in accordance with the constitution, and is
eligible for re-election by shareholders at the annual general
meeting (AGM). At the Company’s AGM, on 23 November
2011, Trevor St Baker and Martin Greenberg, as the longest
standing directors, will be retiring and standing for re-election.
The Board unanimously supports their re-election.
Prior to the AGM each year the Nomination Committee
evaluates any new directorship nominations, and evaluates
the performance of those directors retiring by rotation; the
results of which form the basis of the Boards’ recommendation
to shareholders. The Board’s recommendation on the
re-election of Trevor St Baker and Martin Greenberg will
be included in the Notice convening the AGM.
Every year, through the Nomination Committee, the directors
review the performance of the whole Board and Board
Committees. The review considers a director’s expertise,
skill and experience, along with his/her understanding of the
Company’s business, preparation for meetings, relationships
with other directors and management, awareness of ethical
and governance issues, and overall contribution. This year
a full review was undertaken covering the Board’s activities
and work program, time commitments, meeting efficiency
and Board contribution to Company strategy, monitoring,
compliance and governance.
Principle 3 – Promote ethical and responsible
decision making
The Board strongly encourages ethical and responsible
decision making and has implemented policies to achieve
this while in pursuit of the Company’s objectives.
A Code of Business Conduct, Securities Trading Policy and
Whistleblower Policy apply to the Company’s directors and
employees and are available on the Company’s website.
The purpose of these documents is to guide directors
and employees in the performance of their duties, set
appropriate restrictions on the trading of securities by
directors, employees and their associates, and to the
Company’s employees who wish to report in good faith
inappropriate behaviour or wrongful acts without fear of
retaliation or punishment.
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
41
Corporate Governance Report
for the year ended 30 June 2011 continued...
The Guidelines were amended on 30 June 2010 to include,
amongst other things, a recommendation that companies
establish a policy concerning diversity. The Board has
adopted a Diversity Policy which is available on the
Company’s website with the following measurable objectives
proposed for the forthcoming reporting period (FY2012):
• ensure diversity programs reflect the Company’s
policy and approach to diversity and ensure they are
communicated to all employees:
•
review all recruitment and remuneration practices to
ensure they are free from gender bias and encourage
greater female participation and opportunity:
•
identify high talent women at low to middle management
level and implement specific strategies to enhance the
skills and experience of these people to prepare them
for advancement: and
• encourage female applicants for all roles, but
specifically technical roles where representation is low,
and seek at least one female candidate for the shortlist
for each technical role.
As at the end of the FY11 reporting period, there was no
female participation on the Board or in senior executive
positions (out of approximately 10). The percentage of
women employed by the Company as a whole organisation
was 21.5%.
Principle 4 – Safeguard integrity in financial
reporting
The Company has an Audit and Risk Committee compliant
with Principle 4 which consists of three independent
directors, Tony Bellas (Chairman), Martin Greenberg and
Tony Iannello. The charter is available on the Company’s
website and contains information on the procedures for the
selection and appointment of external auditors and for the
rotation of external audit engagement partners.
The Audit and Risk Committee reviews and discusses with
management and the external auditors the half-yearly and
annual financial reports including notes to the financial
accounts and other disclosures and recommends to the
Board whether the financial reports should be approved.
The Audit and Risk Committee monitors the adequacy
of, integrity of, and the effectiveness of, management
processes that support financial reporting. It also maintains
and oversees a sound system of internal controls based on
the adoption by the Board of a risk-based approach to the
identification, assessment, monitoring and management of
risks that are significant to the fulfilment of the Company’s
business objectives.
The qualifications of the members of the Audit and Risk
Committee and their attendance at meetings of the
committee are set out in the Directors’ Report.
Principle 5 – Make timely and balanced disclosure
The Company’s current practice on disclosure is consistent
with the Guidelines. The Board has adopted a Continuous
Disclosure Policy and procedures are in place to ensure
compliance with ASX Listing Rule disclosure requirements.
The Continuous Disclosure Policy and the Shareholder
Communication Policy are available on the Company’s
website.
All material presentations by the Company are released
to the ASX and posted on the Company’s website.
Principle 6 – Respect the rights of shareholders
The Company is committed to providing regular
communication to shareholders about the financial
performance of ERM Power and its business and
operations. Annual reports are able to be accessed by
shareholders via the Company’s website, with a hardcopy
able to be mailed out on request.
The Board will communicate with shareholders regularly
and clearly by electronic means as well as by traditional
methods. Shareholders are encouraged to attend and
participate at general meetings. The Company’s auditor will
attend the annual general meeting and will be available to
answer shareholders’ questions. The Company’s policies
comply with the Guidelines in relation to the rights of
shareholders.
All announcements to the ASX are posted on the
Company’s website. The Company attempts to keep
its website as current and informative as possible for
shareholders and other stakeholders, including any
update on its current projects.
The Shareholder Communication Policy is available
on the Company’s website.
42 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
Principle 7 – Recognise and manage risks
Principle 8 – Remunerate fairly and responsibly
The Board, through the Audit and Risk Committee, has
an overarching policy governing the Company’s approach to
risk oversight and management and internal control systems,
the Risk Management Framework Policy which is available
on the Company’s website. The Board is also responsible for
ensuring that there are other appropriate policies in relation to
risk management and internal control systems.
The Company’s policies are designed to identify, assess,
address and monitor strategic, operational, legal,
reputational, commodity and financial risks to enable it to
achieve its business objectives. Where appropriate, certain
risks are covered by insurance or by Board-approved
policies for hedging of interest rates, foreign exchange rates
and commodities. In this respect, the Company complies
with Principle 7.1.
Board, executive and business unit level controls are
designed to safeguard company and stakeholders’ interests
in respect of those risks mentioned above. Each Executive
Team member is responsible for communicating to their team
the risk framework and structure required by the ERM Power
Board and the Audit and Risk Committee. The Chief Financial
Officer is responsible for reporting to the Board and the Audit
and Risk Committee about the management of the Company’s
material business risks, and the Board has received a report
from the Chief Financial Officer that as at 30 June 2011 its
material business risks are being managed effectively.
The Company undertakes reviews of projects and business
units for major risks and seeks to maintain strong controls
across all corporate and operational activities in compliance
with Principle 7.2.
When presenting financial statements for Board approval,
the Managing Director and Chief Financial Officer provide
a formal statement in accordance with section 295A of
the Corporations Act 2001 (Cth) with an assurance that
the statement is founded upon a sound system of risk
management and internal control that is operating effectively
in all material respects in relation to financial reporting risks.
The Remuneration Committee ensures that remuneration
is consistent with current market practices and that
the Company can attract, retain and develop valued
employees. In this regard, the Company complies with
Principle 8.1. The Remuneration Committee charter can be
found on the Company’s website.
The Remuneration Committee charter was updated during
the FY11 reporting period to ensure the Committee reviews
and reports, at least annually, on the relative proportion of
women and men in the workforce at all levels of the ERM
Power group, excluding the ERM Power Board (which is
the responsibility of the Nomination Committee). These
proportions are contained in Principle 3 above.
In compliance with Principle 8.2, the Remuneration
Committee is comprised of ERM Power’s four independent
Non-Executive Directors (Tony Bellas, Martin Greenberg,
Brett Heading and Tony Iannello) with Tony Iannello as
Chairman. Their attendance at meetings of the committee is
set out in the Directors’ Report.
The remuneration of non-executive directors is structured
separately from that of the Managing Director and senior
executives. The Managing Director and senior executives
are remunerated by way of a mix of fixed and variable
remuneration in a manner that motivates them to pursue the
long term growth and success of the Group.
The Securities Trading Policy contains a prohibition against
directors and employees altering the economic benefit
derived by the director or employee in relation to an equity-
based incentive award or grant made by the Company.
Information on remuneration of directors and senior
executives is contained in the Remuneration Report.
All information referred to in this Corporate Governance
Statement as being on the Company’s website can be
found at the web address: www.ermpower.com.au within the
“Shareholders” tab, under either “Corporate governance” or
“ASX Announcements”. More information on ERM Power’s
Corporate Governance is also located here.
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
43
Oakey power station
ERM Power Limited
Annual Financial Statements
for the year ended 30 June 2011
Contents
Auditors Independence Declaration
Consolidated Income Statement
Consolidated Statement of Comprehensive Income
Consolidated Statement of Financial Position
Consolidated Statement of Changes in Equity
Consolidated Statement of Cash Flows
Notes to the Consolidated Financial Statements
Directors’ Declaration
Independent Auditor’s Report
50
51
105
106
45
46
47
48
49
The financial statements were authorised for issue by the Directors on 25 August
ERM Power Limited is a company limited by shares, incorporated and domiciled in
2011. The Directors have the power to amend and reissue the financial statements.
Australia. Its registered office and principal place of business is as set out on page 52.
This financial report covers ERM Power Limited, formerly known as ERM Power
A description of the Group’s operations and of its principal activities is included in
Pty Ltd, (“ERM”) as a consolidated entity comprising ERM Power Limited and its
the review of operations and activities in the Directors’ report on pages 22 to 30.
controlled entities. ERM was converted to a public company on 17 September
The Directors’ report does not form part of the financial report.
2010. The Group’s functional and presentation currency is Australian dollars (AUD).
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
ABN 28 122 259 223
AuDiTOR’S inDEPEnDEnCE DECLARATiOn
FOR THE YEAR ENDED 30 JUNE 2011
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
45
COnSOLiDATED inCOME STATEMEnT
FOR THE YEAR ENDED 30 JUNE 2011
CONTINUING OPERATIONS
Revenue
Other income
Net gain on disposal of interests in assets
Expenses
Results from operating activities before finance costs, depreciation,
amortisation and fair value gains/losses on financial instruments
Depreciation and amortisation
Net fair value losses on financial instruments designated at fair value
through profit or loss
Results from operating activities
Finance expense
Share of profit of associates, net of income tax
Profit / (loss) before income tax
Income tax (expense) / benefit
Profit / (loss) for the year
Attributable to:
Equity holders of the Company
Non-controlling interest
Profit / (loss) for the year
Earnings per share based on earnings attributable to the ordinary
equity holders of the Company
Basic earnings per share
Diluted earnings per share
Note
2011
$’000
2010
$’000
5
35
6
7
8
17
9
37
37
544,563
513
4,738
378,612
3,412
36,379
(504,843)
(351,041)
44,971
(9,977)
14,187
49,181
(29,793)
1,436
20,824
(4,605)
16,219
16,176
43
16,219
Cents
11.72
11.35
67,362
(12,722)
(37,262)
17,378
(39,770)
1,321
(21,071)
5,318
(1 5,753)
(16,867)
1,114
(15,753)
Cents
(16.72)
(16.72)
The above Consolidated Income Statement should be read in conjunction with the accompanying notes.
Operational business segment performance and underlying profit of the consolidated entity is presented in note 2 together with a reconciliation
between statutory profit attributable to members of the parent entity and underlying profit.
46 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
COnSOLiDATED STATEMEnT OF COMPREhEnSiVE inCOME
FOR THE YEAR ENDED 30 JUNE 2011
Profit / (loss) for the year
Other comprehensive income
Cash flow hedges net of tax
Other comprehensive income for the year, net of tax
Total comprehensive income
Other comprehensive income for the year attributable to:
Equity holders of the Company
Non-controlling interest
Other comprehensive income
Total comprehensive income for the year attributable to:
Equity holders of the Company
Non-controlling interest
Total comprehensive income
2011
$’000
16,219
2010
$’000
(15,753)
3,393
3,393
19,612
3,063
330
3,393
19,239
373
19,612
7,083
7,083
(8,670)
8,749
(1,666)
7,083
(8,118)
(552)
(8,670)
The above Consolidated Statement of Comprehensive Income should be read in conjunction with the accompanying notes.
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
47
COnSOLiDATED STATEMEnT OF FinAnCiAL POSiTiOn
AS AT 30 JUNE 2011
ASSETS
Current Assets
Cash and cash equivalents
Trade and other receivables
Inventories
Other assets
Derivative financial instruments
Total Current Assets
Non-Current Assets
Cash and cash equivalents
Trade and other receivables
Derivative financial instruments
Investment in associates accounted for using the equity method
Property, plant and equipment
Exploration and evaluation costs
Deferred tax assets
Intangible assets
Total Non-Current Assets
TOTAL ASSETS
LIABILITIES
Current Liabilities
Trade and other payables
Current tax liabilities
Borrowings
Borrowings – limited recourse
Derivative financial instruments
Provisions
Total Current Liabilities
Non-Current Liabilities
Borrowings
Borrowings – limited recourse
Derivative financial instruments
Deferred tax liabilities
Provisions
Total Non-Current Liabilities
TOTAL LIABILITIES
NET ASSETS
EQUITY
Contributed equity
Reserves
Retained earnings
Capital and reserves attributable to owners of ERM Power Limited
Non-controlling interest
TOTAL EQUITY
Note
2011
$’000
2010
$’000
11
13
14
15
16
11
13
16
17
19
20
9
21
22
9
23
23
24
25
23
23
24
9
25
26
27
184,264
45,181
3,139
4,486
499
59,478
103,747
800
8,286
409
237,569
172,720
2,091
2,556
43
18,541
206,456
11,435
33,455
1,882
276,459
514,028
63,035
-
-
4,719
27,091
1,079
95,924
4,400
202,575
29,954
23,426
50
260,405
356,329
157,699
160,239
(11,555)
9,015
157,699
-
157,699
3,032
2,607
-
17,675
392,607
6,569
61,066
5,815
489,371
662,091
51,310
46
7,973
5,001
39,601
1,122
105,053
25,140
393,208
47,260
46,149
36
511,793
616,846
45,245
60,573
(21,412)
(7,161)
32,000
13,245
45,245
The above Consolidated Statement of Financial Position should be read in conjunction with the accompanying notes.
48 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
COnSOLiDATED STATEMEnT OF ChAnGES in EquiTy
FOR THE YEAR ENDED 30 JUNE 2011
Contributed
equity
$’000
Reserves
$’000
Retained
earnings
$’000
Note
Non-
controlling
interests
$’000
Total
$’000
Total
equity
$’000
60,012
(30,488)
9,706
39,230
13,797
53,027
-
-
-
-
(16,867)
(16,867)
1,114
(15,753)
8,749
-
8,749
(1,666)
7,083
8,749
(16,867)
(8,118)
(552)
(8,670)
561
327
-
888
-
888
Balance at 1 July 2009
Loss for the period
Other comprehensive income
Total comprehensive income
for the year
Transactions with owners in
their capacity as owners:
Issue of shares and share options
pursuant to employee incentive scheme
Balance at 30 June 2010
60,573
( 21,412)
(7,161)
32,000
13,245
45,245
-
16,176
16,176
3,063
3,063
-
16,176
3,063
19,239
43
330
373
16,219
3,393
19,612
6,517
(13,618)
(7,101)
Profit for the period
Other comprehensive income
Total comprehensive income
for the year
Transactions with owners in
their capacity as owners:
Disposal of interest in partnership net
of tax (i)
Issue of shares and share options
pursuant to employee incentive
scheme
Contribution of equity from IPO net of
transactions costs
Issue of shares on acquisition of SAGE
Purchase of treasury shares
Share based payment expense
Balance at 30 June 2011
26
26
26
26
28
-
-
-
-
4,470
93,760
2,334
(898)
-
6,517
-
-
-
-
277
-
-
-
-
-
-
4,470
93,760
2,334
(898)
277
160,239
(11,555)
9,015
157,699
-
-
-
-
-
-
4,470
93,760
2,334
(898)
277
157,699
(i) Kwinana Power Station sold during year. Refer note 35 for further details
The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying notes.
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
49
COnSOLiDATED STATEMEnT OF CASh FLOwS
FOR THE YEAR ENDED 30 JUNE 2011
Note
2011
$’000
2010
$’000
Cash flows from operating activities
Receipts from customers (inclusive of applicable goods and services tax)
Payments to suppliers and employees (inclusive of goods and services tax)
Dividends received
Income tax paid
644,967
(536,434)
570
-
Net cash flows used in operating activities
12a
109,103
424,663
(409,269)
1,230
(9,112)
7,512
(3,378)
(41,070)
18,863
-
(25,585)
26,640
(78,561)
168,061
(144,011)
(39,025)
2,759
-
-
-
(64,137)
(82,210)
144,720
62,510
(4,866)
(13,143)
(1,264)
417
(18,856)
4,400
(33,086)
-
(3,438)
(32,696)
4,488
100,000
(6,240)
170
33,598
123,845
62,510
186,355
2,334
-
Cash flows from investing activities
Payments for exploration and evaluation
Payments for plant and equipment
Cash loss on disposal of joint interests
Net cash acquired as part of business combination
Net cash flows used in investing activities
Cash flows from financing activities
Proceeds from borrowings
Repayments of borrowings
Proceeds from borrowings – limited recourse
Repayments of borrowings – limited recourse
Finance costs
Interest received
Issue of shares on initial public offering
Transaction costs on initial public offering share issue
Cash received on exercise of share options
Net cash flows from financing activities
Net increase / (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
Non-cash investing and financing activities
35
36
26
26
26
11
12b
The above Consolidated Statement of Financial Position should be read in conjunction with the accompanying notes.
50 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
INDEX TO NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
PAGE
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
2. SEGMENT REPORT
3. FINANCIAL RISK MANAGEMENT
4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
5. REVENUE
6. EXPENSES
7.
NET FAIR VALUE GAIN / (LOSS) ON FINANCIAL INSTRUMENTS
DESIGNATED AT FAIR VALUE THROUGH PROFIT AND LOSS
8. FINANCE COSTS
9.
INCOME TAX
10. DIVIDENDS PAID AND PROPOSED
11. CASH AND CASH EQUIVALENTS
12. RECONCILIATION OF CASH FLOWS USED IN OPERATING ACTIVITIES
13. TRADE AND OTHER RECEIVABLES
14.
INVENTORIES
15. OTHER ASSETS
16. DERIVATIVE FINANCIAL INSTRUMENTS – ASSETS
17. INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD
18. INVESTMENT IN CONTROLLED ENTITIES
19. PROPERTY, PLANT AND EQUIPMENT
20. EXPLORATION AND EVALUATION COSTS
21. INTANGIBLE ASSETS
22. TRADE AND OTHER PAYABLES
23. BORROWINGS
24. DERIVATIVE FINANCIAL INSTRUMENTS – LIABILITIES
25. PROVISIONS
26. CONTRIBUTED EQUITY
27. RESERVES
28. SHARE BASED PAYMENTS
29. PARENT ENTITY FINANCIAL INFORMATION
30. COMMITMENTS AND CONTINGENCIES
31. INTERESTS IN JOINTLY CONTROLLED ENTITIES
32. RELATED PARTY DISCLOSURES
33. KEY MANAGEMENT PERSONNEL DISCLOSURES
34. AUDITORS’ REMUNERATION
35. SALE OF INTERESTS IN POWER STATION
36. BUSINESS COMBINATION
37. EARNINGS PER SHARE
38. EVENTS AFTER THE REPORTING PERIOD
52
63
65
71
73
73
74
74
75
78
78
79
80
81
81
81
81
83
84
86
86
86
87
88
88
89
90
91
93
94
96
98
99
100
101
102
103
103
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
51
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
These financial statements cover ERM Power Limited
the consolidated entity (‘Group’ or ‘consolidated entity’)
consisting of ERM Power Limited and its subsidiaries.
The report is presented in Australian dollars.
ERM Power Limited is incorporated and domiciled in
Australia. Its registered office and place of business is
Level 5, Riverside Centre, 123 Eagle Street, Brisbane,
Queensland, 4000.
A description of the nature of the Group’s operations and of
its principal activities is included in the review of operations
and activities in the Directors’ report on pages 22 to 30.
This report was authorised for issue by the Directors on
25 August 2011.
1.
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The principal accounting policies adopted in the preparation
of the financial report are set out below. These policies have
been consistently applied to all the years presented, unless
otherwise stated.
(a) Basis of preparation
This general purpose financial report has been prepared
in accordance with Australian Accounting Standards, other
authoritative pronouncements of the Australian Accounting
Standards Board and the Corporations Act 2001.
Compliance with IFRS
The consolidated financial statements of the Group
comply with International Financial Reporting Standards
(IFRS) as issued by the International Accounting Standards
Board (IASB).
Early adoption of Australian Accounting Standards
The Group has elected to apply the following
pronouncements to the annual reporting period
commencing 1 July 2010:
Revised AASB 124 Related Party Disclosures and AASB
2009-12 Amendments to Australian Accounting Standards.
This includes applying the revised pronouncement to the
comparatives in accordance with AASB 108 Accounting
Policies, Changes in Accounting Estimates and Errors.
None of the items in the financial statements had to be
restated as the result of applying this standard.
Historical cost convention
These financial statements have been prepared under the
historical cost convention, as modified by the revaluation
of financial assets and liabilities (including derivative
instruments) at fair value through profit and loss.
Critical accounting estimates
The preparation of financial statements requires the use
of certain critical accounting estimates. It also requires
management to exercise its judgement in the process
of applying the Group’s accounting policies. Information
regarding critical accounting estimates is provided in note 4.
(b) Principles of consolidation
Subsidiaries
The consolidated financial statements incorporate the
assets and liabilities of all subsidiaries of ERM Power
Limited as at 30 June 2011 and the results of all its
subsidiaries for the year then ended.
Subsidiaries are all those entities (including special purpose
entities) over which the Group has the power to govern their
financial and operating policies, generally accompanying
a shareholding of more than one-half of the voting rights.
The existence and effect of potential voting rights that are
currently exercisable or convertible are considered when
assessing whether the Group controls another entity.
Subsidiaries are fully consolidated from the date on which
control is transferred to the Group. They are de-consolidated
from the date that control ceases.
The acquisition method of accounting is used to account
for the acquisition of subsidiaries by the Group that were
not previously under common control.
On an acquisition-by-acquisition basis, the Group recognises
any non-controlling interest in the acquiree either at fair
value or at the non-controlling interest’s proportionate share
of the acquiree’s net identifiable assets. Non-controlling
interests in the results and equity of subsidiaries are shown
separately in the consolidated income statement, statement
of comprehensive income, statement of changes in equity
and balance sheet respectively.
The financial statements of subsidiaries are prepared for
the same reporting period as the parent company, using
consistent accounting policies.
Intercompany balances, transactions and unrealised
gains resulting from intra-Group transactions have been
eliminated in full. Unrealised losses are also eliminated
unless the transaction provides evidence of the impairment
of the asset transferred.
Investments in subsidiaries are accounted for at cost less
any impairment in the individual financial statements of
ERM Power Limited.
52 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
1.
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES continued
(b) Principles of consolidation continued
Associates
Associates are all entities over which the Group
has significant influence but not control, generally
accompanying a shareholding of between 20% and
50% of the voting rights. Investments in associates are
accounted for in the consolidated financial statements
using the equity method of accounting.
The Group’s share of its associates’ post-acquisition
profits or losses is recognised in the income statement,
and its share of post-acquisition movements in reserves is
recognised in reserves. The cumulative post-acquisition
movements are adjusted against the carrying amount of
the investment. Dividends receivable from associates are
recognised in the consolidated financial statements by
reducing the carrying amount of the investment.
When the Group’s share of losses in an associate equals
or exceeds its interest in the associate, including any other
unsecured receivables, the Group does not recognise
further losses, unless it has incurred obligations or made
payments on behalf of the investment.
Unrealised gains on transactions between the Group and
its associates are eliminated to the extent of the Group’s
interest in the associates. Unrealised losses are also
eliminated unless the transaction provides evidence of an
impairment of the asset transferred. Accounting policies of
associates have been changed where necessary to ensure
consistency with the policies adopted by the Group.
Jointly controlled entities
Jointly controlled entities are those entities over whose
activities the entity has joint control, established by a
contractual agreement. In the consolidated financial
statements, investments in jointly controlled entities,
including partnerships, are accounted for using the
proportionate consolidation method of accounting.
The proportionate interests in the assets, liabilities, income
and expenses of a jointly controlled entity are incorporated
in the financial statements under the appropriate headings.
Transactions and balances between the Group and jointly
controlled entities are eliminated to the extent of the Group’s
proportionate interests.
Employee share trusts
The Group has formed trusts to administer the Group’s
employee share schemes. The trusts are consolidated,
as the substance of the relationship is that the trusts
are controlled by the Group. Shares held by the trusts
are disclosed as treasury shares and deducted from
contributed equity.
(c) Parent entity financial information
The financial information for the parent entity, ERM Power
Limited, disclosed in note 29 has been prepared on the
same basis as the consolidated financial statements,
except as set out below:
(i)
Investments in subsidiaries, associates and joint
venture entities
Investments in subsidiaries, associates and joint venture
entities are accounted for at cost in the financial statements
of ERM Power Limited. Dividends received from associates
are recognised in the parent entity’s profit or loss, rather
than being deducted from the carrying amount of these
investments.
(ii) Financial guarantees
Where the parent entity provides financial guarantees
in relation to loans and payables of subsidiaries for no
compensation, the fair values of these guarantees are
accounted for as contributions and recognised as part
of the cost of the investments.
(iii) Share-based payments
The grant by the company of options over its equity
instruments to the employees of subsidiary undertakings
in the Group is treated as a capital contribution to that
subsidiary undertaking. The fair value of employee
services received, measured by reference to the grant
date fair value, is recognised over the vesting period as an
increase to investment in subsidiary undertakings, with a
corresponding credit to equity.
(iv) Tax consolidation legislation
ERM Power Limited and its wholly-owned Australian
controlled entities have implemented the tax consolidation
legislation.
The head entity ERM Power Limited, and the controlled
entities in the tax consolidated Group, account for their own
current and deferred tax amounts. These tax amounts are
measured as if each entity in the tax consolidated Group
continues to be a standalone taxpayer in its own right.
In addition to its own current and deferred tax amounts,
ERM Power Limited also recognises the current tax liabilities
(or assets) and the deferred tax assets arising from unused
tax losses and unused tax credits assumed from controlled
entities in the tax consolidated Group.
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
53
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
1.
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES continued
(c) Parent entity financial information continued
(iv) Tax consolidation legislation continued
Assets or liabilities arising under tax funding agreements
with the tax consolidated entities are recognised as amounts
receivable from or payable to other entities in the Group.
Any difference between the amounts assumed and
amounts receivable or payable under the tax funding
agreement are recognised as a contribution to (or
distribution from) wholly-owned tax consolidated entities.
(d) Segment reporting
The consolidated entity determines and presents operating
segments based on the information that is internally
provided to the Managing Director who is the chief
operating decision maker. The Managing Director regularly
receives financial information on the underlying profit of
each operating segment and the statutory profit.
An operating segment is a distinguishable component of an
entity that engages in business activity from which it may
earn revenues and incur expenses (including revenues and
expenses relating to transactions with other components of
the same entity), and whose operating results are regularly
reviewed by the chief operating decision maker to make
decisions about resources to be allocated to the segment.
(e) Foreign currency translation
Functional and presentation currency
The consolidated financial statements are presented in
Australian dollars, which is the functional and presentation
currency of each of the Group companies.
Transactions and balances
Foreign currency transactions are translated into the
functional currency at the rate of exchange at the date
of the transaction. Foreign exchange gains and losses
resulting from the settlement of such transactions, and
from the translation at year end exchange rates of monetary
assets and liabilities denominated in foreign currencies, are
recognised in the income statement, except when deferred
in equity as qualifying cash flow hedges.
(f) Cash and cash equivalents
Cash and cash equivalents comprise cash on hand,
deposits held at call with financial institutions, and other
short-term highly liquid investments with original maturities
of three months or less that are readily convertible into
known amounts of cash and which are subject to an
insignificant risk of changes in value, net of any bank
overdrafts. These assets are stated at nominal values.
Cash that is reserved and its use specifically restricted
for maintenance and/or debt servicing under the Group’s
borrowing agreements is defined as restricted cash.
Restricted cash is shown at the balance date according to
the timing of its release. Accordingly, cash that cannot be
applied or used within the next 12 months is shown as a
non-current asset. All other cash and cash equivalents are
shown as current assets.
(g) Trade and other receivables
All trade and other debtors are recognised initially at fair
value and subsequently measured at amortised cost using
the original effective interest method less allowances for
doubtful debts. Collectability is reviewed on an ongoing
basis. An allowance for doubtful debts is made when
there is objective evidence that the Group will not be able
to collect any amounts due according to original terms.
The amount of the allowance is the difference between
the asset’s carrying amount and the present value of the
estimated future cash flows discounted at the effective
interest rate. The amount of the impairment loss is
recognised in the income statement.
Trade receivables are those due for settlement no more
than 30 days from the date of invoice.
(h) Inventories
Renewable energy certificates
Renewable energy certificates held by the Group are
accounted for as commodity inventories. The Group
participates in the purchase and sale of a range of
renewable energy certificates, including both mandatory
and voluntary schemes.
Purchased renewable energy certificates are initially
recognised at cost within inventories. Subsequent
measurement is at fair value less costs to sell, with
unrealised gains and losses arising from changes in fair
value being recognised in the income statement in the
period of the change.
(i) Financial assets
Investments are recognised and derecognised on trade
date where the purchase or sale of an investment is under
a contract whose terms require delivery of the investment
within the timeframe established by the market concerned,
and are initially measured at fair value.
Subsequent to initial recognition, investments in associates
are accounted for under the equity method in the
consolidated financial statements. Further information
regarding equity accounted investments is detailed in
note 1 (b).
54 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
1.
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES continued
(i) Financial assets continued
Other financial assets are classified into the following
specified categories: financial assets ‘at fair value through
profit or loss’, ‘held-to-maturity investments’, ‘available-
for-sale’ financial assets, and ‘loans and receivables’.
The classification depends on the nature and purpose
of the financial assets and is determined at the time of
initial recognition. Further information on the categories of
financial assets held by the Group during the financial year
is provided below.
Financial assets at fair value through profit or loss
Financial assets are classified as financial assets at fair
value through profit or loss where the financial asset:
• has been acquired principally for the purpose of selling
in the near future; and
•
is a derivative that is not designated and effective as a
hedging instrument.
Loans and receivables
Trade receivables, loans and other receivables that have
fixed or determinable payments that are not quoted in an
active market are classified as ‘loans and receivables’.
Loans and receivables are measured at amortised cost
using the effective interest method less impairment. Interest
income is recognised by applying the effective interest rate.
De-recognition of financial assets
The Group derecognises a financial asset only when the
contractual rights to the cash flows from the asset expire, or
it transfers the financial asset and substantially all the risks
and rewards of ownership of the asset to another entity. If
the Group neither transfers nor retains substantially all the
risks and rewards of ownership and continues to control the
transferred asset, the Group recognises its retained interest
in the asset and an associated liability for amounts it may
have to pay. If the Group retains substantially all the risks
and rewards of ownership of a transferred financial asset,
the Group continues to recognise the financial asset and
also recognises a collateralised borrowing for the proceeds
received.
Impairment of financial assets
Financial assets, other than those at fair value through profit
or loss, are assessed for indicators of impairment at each
balance date. Financial assets are impaired where there is
objective evidence that as a result of one or more events
that occurred after the initial recognition of the financial
asset the estimated future cash flows of the investment have
been impacted.
For financial assets carried at amortised cost, the amount
of the impairment is the difference between the asset’s
carrying amount and the present value of estimated future
cash flows, discounted at the original effective interest rate.
The carrying amount of financial assets including uncollectable
trade receivables is reduced by the impairment loss through
the use of an allowance account. Subsequent recoveries
of amounts previously written off are credited against the
allowance account. Changes in the carrying amount of the
allowance account are recognised in profit or loss.
With the exception of available-for-sale equity instruments,
if in a subsequent period the amount of the impairment loss
decreases and the decrease can be related objectively to
an event occurring after the impairment was recognised,
the previously recognised impairment loss is reversed
through profit or loss to the extent the carrying amount of
the investment at the date the impairment is reversed does
not exceed what the amortised cost would have been had
the impairment not been recognised.
Effective interest method
The effective interest method is a method of calculating the
amortised cost of a financial asset and of allocating interest
income over the relevant period. The effective interest rate
is the rate that exactly discounts estimated future cash
receipts (including all transaction costs and other premiums
or discounts) through the expected life of the financial
asset, or, where appropriate, a shorter period.
Income is recognised on an effective interest rate basis for
debt instruments other than those financial assets ‘at fair
value through profit or loss’.
(j) Capitalised work in progress
Costs incurred in relation to the development of a project,
including the cost of construction, are recorded as
capitalised work in progress when these costs are incurred
prior to the establishment of a development vehicle.
Development expenditure is recorded as capitalised work in
progress only if development costs can be measured reliably,
the project is technically and commercially feasible, future
economic benefits are probable, and the Group intends to
and has sufficient resources to complete development and
to use or sell the asset. Development costs relating to project
costs incurred may include legal fees, insurance costs,
independent engineer costs, borrowing costs, environmental
impact study fees, and direct labour and overhead costs.
Capitalised work in progress is measured at cost less
accumulated impairment losses.
The recovery of these costs usually occurs at financial close
of a project at which time these costs are transferred to a
development vehicle.
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55
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
1.
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES continued
(k) Derivative financial instruments
ERM Power Retail Pty Limited (“ERM Sales”), one of the
subsidiaries in the Group, routinely enters into forward sales
contracts (“Contracts”) related to the provision of electricity
in the Australian National Electricity Market (“NEM”). The
Contracts are exclusively entered into with large industrial,
commercial and government entities under term contracts.
All of the electricity provided under these contracts is
traded in the NEM spot market.
ERM Sales also enters into a variety of electricity derivative
transactions (“Derivatives”) as part of an overall strategy
to hedge the exposure to contract prices. ERM Sales
manages all of its Contracts and Derivatives as part of an
overall commodity trading strategy.
Revenue from the Contracts is recognised in accordance
with the revenue recognition policy in note 1(x). Derivatives
are initially recognised at fair value on the date the
derivative contract is entered into, and are subsequently
remeasured to their fair value at each balance date.
Derivatives are carried in the statement of financial position
as assets when the fair value is positive and as liabilities
when the fair value is negative. The resulting gain or loss
arising from the revaluation is recognised in the income
statement in the period it arises.
Hedge accounting
The Group designates interest rate swaps and forward
foreign exchange contracts as cash flow hedges.
At the inception of the hedge relationship the entity
documents the relationship between the hedging instrument
and hedged item, along with its risk management
objectives and its strategy for undertaking various hedge
transactions. Furthermore, at the inception of the hedge and
on an ongoing basis, the Group documents whether the
hedging instrument that is used in a hedging relationship
is highly effective in offsetting changes in cash flows of the
hedged item.
Cash flow hedge
The effective portion of changes in the fair value of
derivatives that are designated and qualify as cash flow
hedges are deferred in equity. The gain or loss relating to
the ineffective portion is recognised immediately in profit
or loss. Amounts deferred in equity are recycled in profit
or loss in the periods when the hedged item is recognised
in profit or loss in the same line as the recognised hedged
item. However, when the forecast transaction that is hedged
results in the recognition of a non-financial asset or a non-
financial liability, the gains and losses previously deferred in
equity are transferred from equity and included in the initial
measurement of the cost of the asset or liability.
Hedge accounting is discontinued when the Group revokes
the hedging relationship, the hedging instrument expires or
is sold, terminated, or exercised, or no longer qualifies for
hedge accounting. Any cumulative gain or loss deferred in
equity at that time remains in equity and is recognised when
the forecast transaction is ultimately recognised in profit
or loss. When a forecast transaction is no longer expected
to occur, the cumulative gain or loss that was deferred in
equity is recognised immediately in profit or loss.
(l) Fair value estimation
The fair value of financial assets and financial liabilities
must be estimated for recognition and measurement or
for disclosure purposes.
The fair value of financial instruments traded in active
markets (such as publicly traded derivatives, and trading
and available-for-sale securities) is based on quoted market
prices at the balance date. The quoted market price used
for financial assets held by the Group is the current bid
price; the appropriate quoted market price for financial
liabilities is the current ask price.
The fair value of financial instruments that are not traded in
an active market is determined using a variety of valuation
techniques and assumptions that are based on market
conditions existing at each balance date. Quoted market
prices or dealer quotes for similar instruments are used for
long-term debt instruments held. Other techniques, such
as estimated discounted cash flows, are used to determine
fair value for the remaining financial instruments. The fair
value of forward exchange contracts is determined using
market exchange rates and published forward margins at
balance date.
The nominal value less estimated credit adjustments of trade
receivables and payables is assumed to approximate their
fair value. For disclosure purposes the fair value of financial
liabilities is estimated by discounting the future contractual
cash flows at the current market interest rate that is available
to the Group for similar financial instruments.
(m) Property, plant and equipment
Items of property, plant and equipment are initially
measured at historical cost less depreciation. Historical
cost includes expenditure that is directly attributable to the
acquisition of the items. Cost may also include transfers
from equity of any gains/losses on qualifying cash flow
hedges of foreign currency purchases of property, plant
and equipment.
56 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
1.
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES continued
(m) Property, plant and equipment continued
Subsequent costs are included in the asset’s carrying amount
or recognised as a separate asset, as appropriate, only when
it is probable that future economic benefits associated with
the item will flow to the Group and the cost of the item can be
measured reliably. All repairs and maintenance expenses are
charged to the income statement during the financial period
in which they are incurred.
Subsequent impairment losses are recognised in
accordance with note 1(o).
The probability of expected future economic benefits is
assessed using reasonable and supportable assumptions
that represent management’s best estimate of the set of
economic conditions that will exist over the useful life of
the asset. In this assessment, greater weighting is given
to available external evidence. Exploration and evaluation
assets will be reclassified as development assets at the
point in which technical feasibility and commercial viability
of extraction gas are demonstrated or a petroleum lease is
granted. Exploration and evaluation assets are assessed
for impairment and any impairment loss is recognised
before reclassification. Accumulated costs in relation to an
abandoned area are written off in full against profit in the
year in which the decision to abandon is made.
Depreciation
Software
Land and capital work in progress are not depreciated.
Depreciation on the other assets is calculated using the
straight-line method to allocate their cost, net of their
residual values, over their estimated useful lives, as follows:
• Leasehold improvements the lesser of the remaining
lease term and the life of the asset
•
•
•
•
Motor vehicles
3 – 10 years;
Plant and equipment
20 – 33 years;
IT equipment
3 – 5 years; and
Furniture and equipment 5 years.
Capital work in progress comprises costs incurred to date
on construction of power generation plants.
Asset residual values and useful lives are reviewed and
adjusted if appropriate at each balance date.
Gains and losses on disposals are determined by comparing
the proceeds to the carrying amount. These are included in
the income statement.
Exploration and evaluation costs
Exploration and evaluation expenditure incurred is
accumulated in respect of each identifiable area of interest.
Such expenditure comprises net direct costs and an
appropriate portion of related overhead expenditure but
does not include overheads or administration expenditure
not having a specific nexus with a particular area of interest.
Exploration and evaluation expenditure is only capitalised
from the point when the rights to tenure of the area are
granted. All exploration and evaluation costs are capitalised
to the extent that they are expected to be recouped through
the successful development of the area or where activities
in the area have not yet reached a stage which permits
reasonable assessment of the existence of economically
recoverable reserves and active or significant operations in
relation to the area are continuing.
Computer software is either purchased or developed within
the organisation and is recorded at cost less accumulated
amortisation and impairment losses. Amortisation is
calculated using the straight line method over the estimated
useful lives. Depending on the individual software, the
estimated useful life ranges between 3 and 5 years.
(n) Intangible assets
Goodwill
Goodwill is measured as described in note 1(p). Goodwill
on acquisitions of subsidiaries is included in intangible
assets. Goodwill on acquisitions of associates is included in
investments in associates.
Goodwill is allocated to cash-generating units for the
purpose of impairment testing. The allocation is made to
those cash-generating units or groups of cash-generating
units that are expected to benefit from the business
combination in which the goodwill arose, identified
according to operating segments.
(o) Impairment of assets
Assets that are subject to depreciation 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. The recoverable amount is the higher of an asset’s
fair value less costs to sell and its value in use. For the
purposes of assessing impairment, assets are grouped at
the lowest levels for which there are separately identifiable
cash flows.
Intangible assets, including exploration and evaluation
assets, are assessed for impairment when facts and
circumstances suggest that the carrying amount may
exceed its recoverable amount.
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
57
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
1.
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES continued
(o) Impairment of assets continued
Goodwill and intangible assets that have an indefinite useful
life are not subject to amortisation and are tested annually
for impairment, or more frequently if events or changes in
circumstances indicate that they might be impaired.
(p) Business combinations
The acquisition method of accounting is used to account
for all business combinations, regardless of whether equity
instruments or other assets are acquired. The consideration
transferred for the acquisition of a subsidiary comprises
the fair values of the assets transferred, the liabilities
incurred and the equity interests issued by the Group. The
consideration transferred also includes the fair value of any
asset or liability resulting from a contingent consideration
arrangement and the fair value of any pre-existing equity
interest in the subsidiary. Acquisition-related costs are
expensed as incurred. Identifiable assets acquired and
liabilities and contingent liabilities assumed in a business
combination are, with limited exceptions, measured
initially at their fair values at the acquisition date. On an
acquisition-by-acquisition basis, the Group recognises any
non-controlling interest in the acquiree either at fair value or
at the non-controlling interest’s proportionate share of the
acquiree’s net identifiable assets.
The excess of the consideration transferred, the amount
of any non-controlling interest in the acquiree and the
acquisition-date fair value of any previous equity interest
in the acquiree over the fair value of the group’s share
of the net identifiable assets acquired is recorded as
goodwill. If those amounts are less than the fair value
of the net identifiable assets of the subsidiary acquired
and the measurement of all amounts has been reviewed,
the difference is recognised directly in profit or loss as a
bargain purchase.
Where settlement of any part of cash consideration is
deferred, the amounts payable in the future are discounted
to their present value as at the date of exchange. The
discount rate used is the entity’s incremental borrowing
rate, being the rate at which a similar borrowing could be
obtained from an independent financier under comparable
terms and conditions.
Contingent consideration is classified either as equity or a
financial liability. Amounts classified as a financial liability
are subsequently remeasured to fair value with changes in
fair value recognised in profit or loss.
(q) Trade and other payables
These amounts represent liabilities for goods and services
provided to the Group prior to the end of the financial period
and which are unpaid. The amounts are unsecured and are
usually paid within 60 days of recognition.
(r) Provisions
Onerous contracts
Obligations arising under onerous contracts are recognised
and measured as a provision. An onerous contract is
considered to exist where the Group has a contract under
which the unavoidable costs of meeting the obligations
under the contract exceed the economic benefits expected
to be derived from it.
(s) Other financial liabilities
Other financial liabilities, including borrowings, are initially
recognised at fair value, net of transaction costs.
Other financial liabilities are subsequently measured at
amortised cost using the effective interest method, with
interest expense recognised on an effective yield basis.
The effective interest method is a method of calculating
the amortised cost of a financial liability and of allocating
interest expense over the relevant period. The effective
interest rate is the rate that exactly discounts estimated
future cash payments through the expected life of the
financial liability, or, where appropriate, a shorter period.
(t) Employee benefits
Wages and salaries, annual leave and sick leave
Liabilities arising in respect of wages and salaries, annual
leave and any other employee entitlements expected to be
settled within 12 months of balance date are measured at
the amounts expected to be paid when the liabilities are
settled.
Long service leave
Long service leave liabilities are measured at the present
value of the estimated future cash outflow to be made in
respect of services provided by employees up to balance
date. Consideration is given to expected future wage and
salary levels, projected employee movements and periods
of service. Expected future payments are discounted using
market yields at balance date on government bonds with
terms to maturity that match, as closely as possible, the
estimated future cash flows.
58 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
1.
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES continued
(v) Earnings per share
Basic earnings per share are calculated by dividing:
(t) Employee benefits continued
Bonus plans
Liabilities for employee benefits in the form of bonus plans
are recognised in liabilities when it is probable that the
liability will be settled and there are formal terms in place to
determine the amount of the benefit.
Liabilities for bonus plans are expected to be settled within
12 months and are measured at the amounts expected to
be paid when they are settled.
Equity-based compensation benefits
Equity-based compensation benefits are provided to
employees via employee and executive equity plans.
The fair value of options or shares issued to employees
is recognised as an employee benefit expense with a
corresponding increase in equity. The fair value is measured
at grant date and recognised in the option reserve or share-
based payment reserve over the period during which the
employees become unconditionally entitled to the equity.
When the shares are issued, or the options exercised, the
value is transferred to contributed equity.
The fair value of options at grant date is determined using
the Black Scholes method that takes into account the value
of the underlying share at grant date, the term of the vesting
period, exercise price and expiry date.
The assessed fair value of shares granted to employees is
allocated equally over the period from issue to the actual or
expected vesting date.
Refer to note 28 for further details.
(u) Assets available for sale
Non-current assets and disposal groups are classified
as held for sale if their carrying amount will be recovered
principally through a sale transaction rather than through
continuing use. This condition is regarded as met only when
the sale is highly probable and the asset (or disposal group)
is available for immediate sale in its present condition.
Management must be committed to the sale which should
be expected to qualify for recognition as a completed sale
within one year from the date of classification. Non-current
assets (and disposal groups) classified as held for sale are
measured at the lower of their previous carrying amount
and fair value less costs to sell.
• The profit attributable to owners of the Company,
excluding any cost of servicing equity other than
ordinary shares;
• By the weighted average number of ordinary shares
outstanding during the financial year, adjusted for
bonus elements ordinary shares issued during the
year and excluding treasury shares.
Diluted earnings per share
Diluted earnings per share adjust the figures used in the
determination of basic earnings per share to take into
account:
• The after income tax effect of interest and other
financing cost associated with dilutive potential ordinary
shares; and
• The weighted average number of additional ordinary
shares that would have been outstanding assuming the
conversion of all dilutive potential ordinary shares.
(w) Contributed equity
Ordinary shares
Ordinary shares are classified as equity. Incremental costs
directly attributable to the issue of ordinary shares and
share options are recognised as a deduction from equity,
net of any tax effects.
Preference share capital
Preference share capital is classified as equity if it is non-
redeemable, or redeemable only at the entity’s option, and
any dividends are discretionary. Dividends thereon are
recognised as distributions within equity upon declaration
by the directors.
Preference share capital is classified as a liability if it is
redeemable on a specific date or at the option of the
shareholders, or if dividend payments are not discretionary.
Dividends thereon are recognised as interest expense in
profit or loss.
(x) Revenue recognition
The Group recognises revenue when the amount of revenue
can be reliably measured, it is probable that future economic
benefits will flow to the entity and specific criteria have been
met for each of the Group’s activities as outlined below.
Revenue is measured at the fair value of the consideration
received or receivable. Amounts disclosed as revenue
are net of trade allowances and duties and taxes paid.
Electricity sales revenue from sales contracts is recognised
on measurement of electrical consumption at the metering
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
59
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
1.
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES continued
(x) Revenue recognition continued
point, as specified in each contractual agreement, and is
billed monthly in arrears. At each balance sheet date, sales
and receivables include an amount of sales delivered to
customers but not yet billed and recognised as accrued
income.
Interest revenue is recognised on a time proportional basis
taking into account the interest rates applicable to the
financial assets. All revenue is stated net of goods and
services tax.
Project management fees are calculated based on current
contractual guidelines and include project success fees
earned at financial close. The Group’s share of capitalised
project management fees is eliminated on consolidation.
The fair value of the liability portion of a convertible bond is
determined using a market interest rate for an equivalent
non-convertible bond. This amount is recorded as a liability
on an amortised cost basis using the effective interest rate
method until extinguished on conversion or maturity of
the bonds. The remainder of the proceeds is allocated to
the conversion option. This is recognised and included in
shareholders’ equity, net of income tax effects.
Borrowings are removed from the balance sheets when the
obligation specified in the contract is discharged, cancelled
or expired. The difference between the carrying amount of
a financial liability that has been extinguished or transferred
to another party and the consideration paid, including
any non-cash assets transferred or liabilities assumed,
is recognised in profit or loss as other income or finance
costs. Borrowings are classified as current liabilities unless
the Group has an unconditional right to defer settlement of
the liability for at least 12 months after the reporting period.
(y) Cost of sales
Cost of sales is recognised as those costs directly
attributable to the goods sold and includes the costs of
electricity, materials and associated distribution expenses.
Electricity
Electricity costs are based upon spot prices for
electricity as established by the Australian Energy
Market Operator (AEMO) and the outcomes of derivative
financial instruments entered into for the purpose of risk
management (refer to note 1(k)).
(z) Borrowings
Borrowings are initially recognised at fair value, net of
transaction costs incurred. Borrowings are subsequently
measured at amortised cost. Any difference between the
proceeds (net of transaction costs) and the redemption
amount is recognised in profit or loss over the period of the
borrowings using the effective interest method. Fees paid
on the establishment of loan facilities are recognised as
transaction costs of the loan to the extent that it is probable
that some or all of the facility will be drawn down. In this
case, the fee is deferred until the draw down occurs. To the
extent there is no evidence that it is probable that some or
all of the facility will be drawn down, the fee is capitalised as
a prepayment for liquidity services and amortised over the
period of the facility to which it relates.
Preference shares, which are mandatorily redeemable on a
specific date, are classified as liabilities. The dividends on
these preference shares are recognised in profit or loss as
finance costs.
(aa) Borrowing costs
Borrowing costs incurred for the construction of any
qualifying asset are capitalised during the period of time
that is required to complete and prepare the asset for its
intended use or sale. Other borrowing costs are expensed.
The capitalisation rate used to determine the amount of
borrowing costs to be capitalised to each project is the
effective interest rate applicable to the specific borrowings
at a project level during the year.
(bb) Leases
Finance leases, which transfer to the Group substantially all
the risks and benefits incidental to ownership of the leased
item, are capitalised at the inception of the lease at the fair
value of the leased property or, if lower, at the present value
of the minimum lease payments.
Lease payments are apportioned between the finance
charges and reduction of the lease liability so as to achieve a
constant rate of interest on the remaining balance of the
liability. Finance charges are charged directly against income.
Capitalised leased assets are depreciated over the shorter
of the estimated useful life of the asset or the lease term.
Leases where the lessor retains substantially all the risks
and benefits of ownership of the asset are classified as
operating leases. Operating lease payments are recognised
as an expense in the income statement on a straight-line
basis over the lease term.
60 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
1.
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES continued
(cc) Income tax
Income tax expense or revenue for the period is the tax
payable on the current period’s taxable income based
on the prevailing income tax rate adjusted by changes in
deferred tax assets and liabilities attributable to temporary
differences and to unused tax losses.
The current income tax charge is calculated on the basis
of tax laws enacted or substantively enacted at the end of
the reporting period in the countries where the Company’s
subsidiaries and associates operate and generate taxable
income. Management periodically evaluates positions taken
in tax returns with respect to situations in which applicable
tax regulation is subject to interpretation. It establishes
provisions where appropriate on the basis of amounts
expected to be paid to the tax authorities.
Deferred income tax is provided in full, using the liability
method, on temporary differences arising between the
tax bases of assets and liabilities and their carrying
amounts in the consolidated financial statements. However,
deferred income tax is not accounted for if it arises from
initial recognition of an asset or liability in a transaction
other than a business combination that at the time of the
transaction affects neither accounting nor taxable profit or
loss. Deferred income tax is determined using tax rates
(and laws) that have been enacted or substantially enacted
by the balance date and are expected to apply when the
related deferred income tax asset is realised or the deferred
income tax liability is settled.
Deferred tax assets are recognised for deductible
temporary differences and unused tax losses only if it is
probable that future taxable amounts will be available to
utilise those temporary differences and losses.
Deferred tax liabilities and assets are not recognised for
temporary differences between the carrying amount and tax
bases of investments in controlled entities where the entity
is able to control the timing of the reversal of the temporary
differences and it is probable that the differences will not
reverse in the foreseeable future.
Deferred tax assets and liabilities are offset when there is
a legally enforceable right to offset current tax assets and
liabilities and when the deferred tax balances relate to the
same taxation authority. Current tax assets and tax liabilities
are offset where the entity has a legally enforceable right to
offset and intends either to settle on a net basis, or to realise
the asset and settle the liability simultaneously.
Current and deferred tax is recognised in profit or loss,
except to the extent that it relates to items recognised in
other comprehensive income or directly in equity. In this
case, the tax is also recognised in other comprehensive
income or directly in equity, respectively.
(dd) Goods and services tax (GST)
Revenues, expenses and assets are recognised net of the
amount of associated GST, unless the GST incurred is not
recoverable from the taxation authority. In this case it is
recognised as part of the cost of acquisition of the asset or
as part of the expense.
Receivables and payables are stated inclusive of the
amount of GST receivable or payable. The net amount of
GST recoverable from, or payable to, the taxation authority
is included with other receivables or payables at the
balance date.
Cash flows are presented on a gross basis. The GST
components of cash flows arising from investing or financing
activities which are recoverable from, or payable to the
taxation authority, are presented as operating cash flows.
(ee) Dividends
Provision is made for the amount of any dividend declared,
appropriately authorised, no longer at the discretion of the
entity and not distributed during the reporting period.
(ff) Rounding of amounts
The Group is of a kind referred to in Class Order 98/100,
issued by the Australian Securities and Investments
Commission, relating to the ‘’rounding off’’ of amounts in the
financial statements. Amounts in the financial statements
have been rounded off in accordance with that class order
to the nearest thousand dollars, or in certain cases, the
nearest dollar.
(gg) New accounting standards and interpretations
Certain new accounting standards and interpretations have
been published that are not mandatory for 30 June 2011
reporting periods.
AASB 9 Financial Instruments, AASB 2009-11
Amendments to Australian Accounting Standards
arising from AASB 9 and AASB 2010-7 Amendments to
Australian Accounting Standards arising from AASB 9
(December 2010) (effective for annual reporting periods
beginning on or after 1 January 2013). AASB 9 Financial
Instruments addresses the classification, measurement and
derecognition of financial assets and financial liabilities.
The standard is not applicable until 1 January 2013 but is
available for early adoption.
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
61
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
1.
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES continued
(gg) New accounting standards and interpretations
continued
AASB 1053 Application of Tiers of Australian Accounting
Standards and AASB 2010-2 Amendments to Australian
Accounting Standards arising from Reduced Disclosure
Requirements (effective 1 July 2013). On 30 June 2010 the
AASB officially introduced a revised differential reporting
framework in Australia. Under this framework, a two-tier
differential reporting regime applies to all entities that prepare
general purpose financial statements. ERM Power Limited
is listed on the ASX and is therefore not eligible to adopt the
new Australian Accounting Standards – Reduced Disclosure
Requirements. As a consequence, the two standards will
have no impact on the financial statements of the entity.
IFRS 10 Consolidated Financial Statements, IFRS 11 Joint
Arrangements, IFRS 12 Disclosure of Interests in other
Entities and revised IAS 27 Separate Financial Statements
and IAS 28 Investments in Associates and Joint Ventures
(effective 1 January 2013). In May 2011, the IASB issued a
suite of five new and amended standards which address
the accounting for joint arrangements, consolidated
financial statements and associated disclosures. The AASB
is expected to issue equivalent Australian standards shortly.
IFRS 10 replaces all of the guidance on control and
consolidation in IAS 27 Consolidated and separate financial
statements, and SIC-12 Consolidation – special purpose
entities. The core principle that a consolidated entity
presents a parent and its subsidiaries as if they are a single
economic entity remains unchanged, as do the mechanics
of consolidation. However, the standard introduces a single
definition of control that applies to all entities. It focuses on the
need to have both power and rights or exposure to variable
returns before control is present. Power is the current ability to
direct the activities that significantly influence returns. Returns
must vary and can be positive, negative or both. There is also
new guidance on participating and protective rights and on
agent/principal relationships.
IFRS 11 introduces a principles based approach to
accounting for joint arrangements. The focus is no longer
on the legal structure of joint arrangements, but rather on
how rights and obligations are shared by the parties to
the joint arrangement. Based on the assessment of rights
and obligations, a joint arrangement will be classified as
either a joint operation or joint venture. Joint ventures are
accounted for using the equity method, and the choice to
proportionately consolidate will no longer be permitted.
Parties to a joint operation will account their share of
revenues, expenses, assets and liabilities in much the same
way as under the previous standard. IFRS 11 also provides
guidance for parties that participate in joint arrangements
but do not share joint control.
IFRS 12 sets out the required disclosures for entities
reporting under the two new standards, IFRS 10 and IFRS
11, and replaces the disclosure requirements currently
found in IAS 28.
Amendments to IAS 28 provide clarification that an
entity continues to apply the equity method and does
not remeasure its retained interest as part of ownership
changes where a joint venture becomes an associate,
and vice versa. The amendments also introduce a “partial
disposal” concept.
IFRS 13 Fair value measurement (effective 1 January
2013). IFRS 13 was released in May 2011. The AASB is
expected to issue an equivalent Australian standard shortly.
IFRS 13 explains how to measure fair value and aims to
enhance fair value disclosures.
Revised IAS 1 Presentation of Financial Statements
(effective 1 July 2012). In June 2011, the IASB made an
amendment to IAS 1 Presentation of Financial Statements.
The AASB is expected to make equivalent changes to
AASB 101 shortly. The amendment requires entities to
separate items presented in other comprehensive income
into two groups, based on whether they may be recycled to
profit or loss in the future. It will not affect the measurement
of any of the items recognised in the balance sheet or the
profit or loss in the current period.
The Group is currently in the process of assessing the
impact of these standards and amendments and is yet to
decide whether to early adopt any of the new and amended
standards.
62 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
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E R M P O W E R A N N U A L R E P O R T 2 0 1 1
63
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
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nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
3. FINANCIAL RISK MANAGEMENT
A. Financial risk management objectives
The Group’s activities are exposed to a variety of financial risks, including market risk (commodity price, interest rate
and foreign currency rate), credit risk and liquidity risk. The Group’s overall risk management strategy focuses on the
unpredictability of markets and seeks to minimise potential adverse effects on the financial performance of the Group.
The Group uses a variety of derivative financial instruments such as electricity derivatives, interest rate swaps and foreign
exchange contracts, to hedge against certain risk exposures.
The Group uses different methods to measure the different types of risk to which it is exposed. These methods include
sensitivity analysis in the case of interest rate, foreign exchange and other price risks, and ageing analysis for credit risk.
The Group holds the following financial instruments:
Financial assets
Derivative financial instruments
Loans and receivables
Cash and cash equivalents
Financial liabilities
Derivative financial instruments
Other financial liabilities at amortised cost
(a) Market risk
Electricity pool price risk
CONSOLIDATED
2011
$’000
542
3,688
186,355
190,585
57,045
274,729
331,774
2010
$’000
409
76,723
62,510
139,642
86,861
482,632
569,493
The Group is exposed to fluctuations in wholesale market electricity prices as a result of electricity generation and sales.
Group policies prescribe active management of exposures arising from forecast electricity sales within prescribed limits. In
doing so, various hedging contracts have been entered into with individual market participants. Any unhedged position has
the potential for variation in revenue from fluctuations in electricity pool prices.
ERM Power Retail Pty Limited (“ERM Sales”), one of the subsidiaries of the Group, routinely enters into forward sales
contracts for the provision of electricity. The Group is exposed to a market risk of price fluctuations between the fixed price
of these contracts and the relevant spot price of the electricity pool at the time of usage. The majority of this exposure to
fluctuations in wholesale market electricity prices is managed through the use of various types of hedging contracts. The
hedge portfolio consists predominantly of swaps, caps, futures and sales contracts. Electricity derivatives are either entered
into in separate agreements or arise as embedded derivatives. Whilst the Group recognises the fair value of electricity
derivate contracts for accounting purposes, the Group does not similarly recognise the fair value of the sales contracts that
form the other side of the economic hedging relationship.
The following table summarises the impact of a 10% change in the relevant forward prices for wholesale market electricity
prices for the Group at the balance date, while all other variables were held constant.
The impact disclosed below summarises the sensitivity on the mark to market of electricity derivatives contracts only and
does not include any corresponding movement in the value of customer contracts.
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
65
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
3. FINANCIAL RISK MANAGEMENT continued
A. Financial risk management objectives continued
(a) Market risk continued
Retail sales sensitivity
2011
Net profit / (loss)
Equity increase / (decrease)
2010
Net profit / (loss)
Equity increase / (decrease)
Increase by 10%
$’000
decrease by 10%
$’000
35,191
-
27,556
-
(35,420)
-
(28,157)
-
Sensitivity of 10% has been selected as this is considered reasonably possible based on industry standard benchmarks
and historical volatilities.
Electricity generation sensitivity
2011
Net profit / (loss)
Equity increase / (decrease)
2010
Net profit / (loss)
Equity increase / (decrease)
Increase by 10%
$’000
decrease by 10%
$’000
77
-
2,206
-
(77)
-
(2,206)
-
Sensitivity of 10% has been selected as this is considered reasonably possible based on industry standard benchmarks
and historical volatilities.
Interest rate risk
The Group is exposed to interest rate risk on the funds it borrows at floating interest rates and cash deposits. The risk is
managed by entering into interest rate swap contracts. The sensitivity analysis to net profit (being profit before tax) and
equity has been determined based on the exposure to interest rates at the balance date and assumes that there are
concurrent movements in interest rates and parallel shifts in the yield curves. A sensitivity of 100 basis points has been
selected as this is considered reasonable given the current level of short term and long term interest rates.
66 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
3. FINANCIAL RISK MANAGEMENT continued
A. Financial risk management objectives continued
(a) Market risk continued
At balance date, if interest rates had been 100 basis points higher/lower and all other variables were held constant, the
impact of the Group would be:
2011
Net profit / (loss)
Other equity increase / (decrease)
2010
Net profit / (loss)
Other equity increase / (decrease)
Increase by 1%
$’000
decrease by 1%
$’000
632
-
(337)
-
(632)
-
337
-
The impact on net profit is largely due to the Group’s exposure to interest rates on its non-hedged variable rate limited
recourse borrowings and cash assets.
Foreign exchange risk
The Group undertakes certain transactions denominated in foreign currencies, related to capital expenditure, which result in
exposure to exchange rate fluctuations. Exchange rate exposures are managed utilising forward foreign exchange contracts.
For unhedged foreign exchange exposures, there would be no material impact on the Group net profit or equity as a result of
a 10% change in the Australian dollar against the USD or EURO with all other variables held constant as at balance date.
(b) Credit risk
Credit risk refers to the loss that would occur if a debtor or other counterparty fails to perform under its contractual
obligations. The carrying amounts of financial assets recognised at balance date best represents the Group’s maximum
exposure to credit risk at balance date. The Group seeks to limit its exposure to credit risks as follows:
• conducting appropriate due diligence on counterparties before entering into arrangements with them;
• depending on the outcome of the credit assessment, obtaining collateral with a value in excess of counterparties’
obligations to the Group – providing a ‘margin of safety’ against loss; and,
•
for derivative counterparties, using primarily high credit quality counterparties, in addition to utilising ISDA master
agreements with derivative counterparties in order to limit the exposure to credit risk.
The Group has no significant concentrations of credit risk. The credit qualities of all financial assets are consistently
monitored in order to identify any potential adverse changes in the credit quality.
Concentrations of credit risk
The Group minimises concentrations of credit risk in relation to debtors by undertaking transactions with a large number of
customers from across a broad range of industries within the business segments in which the Group operates, such that there
are no significant concentrations of credit risk within the Group at balance date. Credit risk to trade debtors is managed through
setting normal payment terms of up to 30 days and through continual risk assessment of debtors with material balances. Credit
risk to electricity debtors is managed through system driven credit management processes. The process commences after
due date. For some debtors the Group may also obtain security in the form of guarantees, deeds of undertaking, or letters of
credit which can be called upon if the counterparty is in default under the terms of the agreement.
The Group minimises concentrations of credit risk in relation to other receivables by entering into partnership arrangements
with appropriately qualified partners in order to secure project financing for completion of the project.
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
67
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
3. FINANCIAL RISK MANAGEMENT continued
A. Financial risk management objectives continued
(b) Credit risk continued
The ageing of receivables as at balance date was as follows:
Total
$’000
< 30 days
$’000
31-60 days
$’000
> 60 days
$’000
Impaired
(i)
PDNI(a)
(ii)
Impaired
(i)
>1 year
479
3,209
3,688
479
-
479
6,923
69,800
76,723
6,923
67,193
74,116
8
-
8
-
-
-
-
-
-
-
-
-
-
-
-
-
3,209
3,209
266
-
266
-
2,607
2,607
2011
Consolidated
Trade receivables
Other receivables
2010
Consolidated
Trade receivables
Other receivables
(a) Past due not impaired
The majority of year end debtors relate to electricity. All of these trade receivables have been paid subsequent to year end.
Other receivables are neither past due or impaired and relate principally to employee shareholder loans, which are subject
to loan deeds:
(i)
Impaired balance represents account balances deemed to be irrecoverable by the Group at balance date. A provision
for doubtful debts has been provided for.
(ii) Past due not impaired (PDNI) represents account balances deemed to be outstanding for greater than 30 days but are
still considered to be recoverable in the ordinary course of business. Included in the Group’s trade receivable balance
are debtors with a carrying amount of $Nil (2010: $Nil) which are past due at balance date for which the Group has not
provided as there has not been a significant change in credit quality and the amounts are still considered recoverable.
The Group does not have any collateral over these balances.
(c) Liquidity risk
Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. Prudent liquidity risk
management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate
amount of committed credit facilities and the ability to close out market positions. The Group manages liquidity risk by
continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities.
Surplus funds are generally only invested in instruments that are tradeable in highly liquid markets.
Information regarding undrawn finance facilities available as at 30 June 2011 is contained in Note 23.
Maturities of financial liabilities
The tables below analyse the Group’s financial liabilities, including net and gross settled derivative financial instruments,
into relevant maturity groupings based on the remaining period at balance date to the contractual maturity date. The
amounts disclosed in the table are the contractual undiscounted cash flows. For interest rate swaps the cash flows have
been estimated using forward interest rates applicable at balance date. For electricity derivatives the cash flows have
been estimated using forward electricity prices at balance date. For foreign exchange contracts, the cash flows have been
estimated using forward foreign exchange rates at the balance date.
68 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
3. FINANCIAL RISK MANAGEMENT continued
A. Financial risk management objectives continued
(c) Liquidity risk continued
Financial liabilities
Consolidated
2011
Trade payables
Other payables
Interest bearing liabilities
Interest bearing liabilities –limited recourse
Derivatives
2010
Trade payables
Other payables
Interest bearing liabilities
Interest bearing liabilities – limited recourse
Finance leases
Derivatives
≤1 year
$’000
1 to 5 years
$’000
>5 years
$’000
Discount
$’000
Total
$’000
41,777
21,258
5,900
3,219
27,091
99,245
34,414
16,896
12,956
4,420
17
-
-
-
-
-
-
-
-
-
41,777
21,258
5,900
23,996
197,547
(18,968)
205,794
29,954
-
-
57,045
53,950
197,547
(18,968)
331,774
-
-
28,605
-
-
-
-
-
(3,463)
34,414
16,896
38,098
33,220
393,549
(37,982)
393,207
39,601
47,260
-
-
-
-
-
17
86,861
108,304
109,085
393,549
(41,445)
569,493
B. Significant accounting policies
Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of
measurement and the basis on which income and expenses are recognised in respect of each class of financial asset,
financial liability and equity instrument are disclosed in note 1 to the financial statements.
C. Financial instruments used by the Group
The Group is party to derivative financial instruments in the normal course of business acquired in order to hedge exposure
to fluctuations in electricity prices and interest and foreign exchange rates in accordance with the Group’s financial risk
management policies.
Interest rate swap contracts-cash flow hedges
The Neerabup partnership has limited recourse, variable interest rate project finance in place. This variable interest has
been swapped into fixed.
Swaps currently in place for the Neerabup partnership cover approximately 96% (2010:97%) of the variable loan principal
outstanding and are timed to expire as each loan repayment falls due. The fixed interest rate is 7.189% (2010:7.189%) and
the variable rate is 1.2% above the BBSY rate which at the end of the reporting period was 5.0% (2010:4.92%).
The contracts require settlement of net interest receivable or payable each 90 days. The settlement dates coincide with the
dates on which interest is payable on the underlying debt. The contracts are settled on a net basis.
The gain or loss from remeasuring the hedging instruments at fair values is recognised in other comprehensive income and
deferred in equity in the hedging reserve, to the extent that the hedge is effective. It is reclassified into profit or loss when the
hedged interest expense is recognised. There was no hedge ineffectiveness in the current or prior year.
Electricity derivative contracts held for trading
The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of derivate
financial asset mentioned in notes 16 and 24.
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
69
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
3. FINANCIAL RISK MANAGEMENT continued
D. Fair value of financial instruments
The directors are of the opinion that the carrying amount of financial assets and financial liabilities recorded in the financial
statements approximates their fair values.
The fair values of financial assets and financial liabilities are determined as follows:
•
the fair value of financial assets and financial liabilities with standard terms and conditions, and traded on active liquid
markets, is determined with reference to quoted market prices;
•
the fair value of other financial assets and financial liabilities is determined in accordance with generally accepted
pricing models based on discounted cash flow analyses; and
•
the fair value of derivative instruments included in hedging assets and liabilities is calculated using quoted prices. The
fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives and
sales contracts) is determined using valuation techniques. The Group uses a variety of methods, such as estimated
discounted cash flows, and makes assumptions that are based on market conditions existing at each balance date.
These amounts reflect the estimated amount which the Group would be required to pay or receive to terminate
(or replace) the contracts at their current market rates at balance date.
The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure
purposes.
The following table presents the Group’s assets and liabilities measured and recognised at fair value at 30 June 2011.
Level 1
$’000
Level 2
$’000
Level 3
$’000
Total
$’000
As at 30 June 2011
Assets
Financial assets at fair value through profit or loss
Electricity derivatives contracts
Total assets
Liabilities
Financial assets at fair value through profit or loss
Electricity derivatives contracts
Derivatives used for hedging
Total liabilities
As at 30 June 2010
Assets
Financial assets at fair value through profit or loss
Electricity derivatives contracts
Total assets
Liabilities
Financial assets at fair value through profit or loss
Electricity derivatives contracts
Derivatives used for hedging
Total liabilities
70 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
-
-
542
542
1,061
38,615
-
17,369
1,061
55,984
-
-
-
-
-
409
409
60,860
26,001
86,861
-
-
-
-
-
-
-
-
-
-
542
542
39,676
17,369
57,045
409
409
60,860
26,001
86,861
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
3. FINANCIAL RISK MANAGEMENT continued
D. Fair value of financial instruments continued
Level 1
The fair value of financial instruments traded in active markets is based on quoted market prices at the end of the reporting
period. The quoted market price used for financial assets held by the Group is the current bid price.
Level 2
The fair values of financial instruments that are not traded in an active market are determined using valuation techniques.
The Group uses a variety of methods and makes assumptions that are based on market conditions existing at the end of
each reporting period. Quoted market prices or dealer quotes for similar instruments are used to estimate fair value for
long-term debt for disclosure purposes. Other techniques, such as estimated discounted cash flows, are used to determine
fair value for the remaining financial instruments. The fair value of interest rate swaps is calculated as the present value of
the estimated future cash flows. The fair value of forward exchange contracts is determined using forward exchange market
rates at the end of the reporting period.
Level 3
A valuation technique for these instruments is based on significant unobservable inputs.
E. Capital risk management
The Group manages its capital so that it will be able to continue as a going concern while maximising the return to
stakeholders through an appropriate mix of debt and equity. The capital structure of the Group as at balance date consists
of total corporate facilities, as listed in note 23, total limited recourse facilities as listed in note 23 and equity, comprising
issued capital, reserves and retained earnings as listed in notes 26 and 27. The Group does not hold recourse corporate
debt. All debt at balance date is limited recourse and unsecured debt.
In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders,
return capital to shareholders, issue new shares or sell assets to reduce debt.
The Group is required to provide prudential credit support to various parties which it does through provision of bank guarantees
or cash collateral. It also has a working capital facility in place which is settled each month. Virtually all of the Group debt is in
the form of limited recourse project finance provided directly to power stations in which the Group has an interest.
The quantitative analysis of each of these categories of capital is provided in their respective notes to the accounts.
4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
Estimates and judgements are continually evaluated and are based on historical experience and other factors, including
expectations of future events that may have a financial impact on the Group and that are believed to be reasonable under
the circumstances.
(a) Critical accounting estimates and assumptions
The Group makes estimates and assumptions concerning variables. The estimates and assumptions that have a significant
risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are
discussed below.
Estimated impairment of goodwill
The Group tests annually whether goodwill has suffered any impairment in accordance with the accounting policy stated in
note 1 (o). The recoverable amounts of cash-generating units have been determined based on value-in-use calculations,
where applicable. These calculations require the use of assumptions. Provisional goodwill in relation to the acquisition of
SAGE has not been tested for impairment as this goodwill has not been allocated to a cash generating unit at 30 June 2011.
Refer to note 21 for details.
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
71
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS continued
(a) Critical accounting estimates and assumptions continued
Impact of Carbon Tax on carrying value of assets
Directors are of the view that the Carbon Tax Plan introduced on 10 July 2011 will not have any negative impact on the
recoverability of any assets of the Group.
Share-based payment transactions
The Company measures the cost of shares and options issued to employees and third parties by reference to the fair value
of the equity instruments at the date at which they are granted. The fair value of unlisted options is determined using the
Black-Scholes method taking into account the terms and conditions upon which the instruments were granted.
Deferred tax assets
The Group has recognised deferred tax assets relating to carried forward tax losses to the extent there are sufficient taxable
temporary differences (deferred tax liabilities) relating to the same taxation authority against which the unused tax losses can
be utilised. However, utilisation of the tax losses also depends on the ability of the entity to satisfy certain tests at the time the
losses are recouped.
(b) Critical judgements in applying the entity’s accounting policies
Recoverability of exploration costs
All exploration, evaluation and development costs are capitalised to the extent that they are expected to be recouped
through the successful development of the area or where activities in the area have not yet reached a stage which permits
reasonable assessment of the existence of economically recoverable reserves and active or significant operations in
relation to the area are continuing. The probability of expected future economic benefits is assessed using reasonable and
supportable assumptions that represent management’s best estimate of the set of economic conditions that will exist over
the useful life of the asset. In this assessment, greater weighting is given to available external evidence.
Exploration and evaluation assets are reclassified as development assets at the point in which technical feasibility and
commercial viability of extracting gas are demonstrated or a petroleum lease is granted. Exploration and evaluation assets
are assessed for impairment and any impairment loss recognised before reclassification.
Fair value of financial instruments
The fair value of financial assets and financial liabilities are estimated for recognition and measurement and for disclosure
purposes. Management uses its judgement in selecting appropriate valuation techniques for financial instruments not
quoted in active markets. Valuation techniques commonly used by market practitioners are applied. For derivative financial
instruments, assumptions are made based on quoted market rates adjusted for specific features of the instrument. Other
financial instruments are valued using a discounted cash flow analysis based on assumptions supported, where possible,
by observable market prices and rates. Refer to note 3 for further details of valuation methods used by the Group to
determine fair value.
Purchase price allocation
AASB 3 Business Combinations requires the recognition of fair value estimates of assets and liabilities acquired. By the
nature of these estimates, judgements are made on the allocation of the purchase consideration.
72 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
5. REVENUE
Revenue from Continuing Operations
Sale of electricity
Electricity generation revenue
Project fees
Sale of Gas
Interest income
CONSOLIDATED
2011
$’000
2010
$’000
483,631
47,055
9,200
30
4,647
285,509
80,090
9,737
517
2,759
544,563
378,612
Refer to note 2 for further information regarding transactions between entities within the Group that have been eliminated on consolidation.
6. EXPENSES
Cost of electricity sales
Employee benefits expense
Other expenses
Included in the above are:
Rental expenses relating to operating leases
Foreign exchange (gains) and losses
Defined contribution superannuation expense
Equity settled share based payment compensation
CONSOLIDATED
2011
$’000
2010
$’000
473,492
314,167
20,158
11,193
23,055
13,819
504,843
351,041
1,309
8
1,723
277
1,546
291
1,351
327
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
73
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
7.
NET FAIR VALUE GAIN / (LOSS) ON FINANCIAL INSTRUMENTS DESIGNATED AT FAIR VALUE
THROUGH PROFIT AND LOSS
Unrealised
Electricity derivative contracts
Option contract
Realised
Electricity derivative contracts
Interest rate swaps
CONSOLIDATED
2011
$’000
2010
$’000
20,602
-
20,602
(49,868)
(6,498)
(56,366)
-
19,104
(6,415)
(6,415)
14,187
-
19,104
(37,262)
In the absence of hedge accounting, the Group’s electricity derivatives and foreign exchange contracts are designated at
fair value through profit or loss.
8. FINANCE COSTS
Borrowing costs – bank loans
Borrowing costs – convertible notes
Other borrowing costs
Less: Amounts included in qualifying assets
CONSOLIDATED
2011
$’000
18,447
8,953
2,393
-
29,793
2010
$’000
44,886
7,799
8,667
(21,582)
39,770
74 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
9. INCOME TAX
(a) Income tax expense / (benefit)
Income tax comprises:
Current tax expense / (benefit)
Deferred tax expense / (benefit)
Under / (over) provided in prior years
Income tax expense / (benefit)
Deferred income tax included in income tax expense / (benefit) comprises:
Decrease / (increase) in deferred tax asset
(Decrease) / increase in deferred tax liabilities
Prior period acquired deferred tax asset de-recognised in current period on consolidation
Prior period acquired deferred tax liability de-recognised in current period on consolidation
Prior year under / (over) provision of deferred tax expense
Deferred income tax expense / (benefit)
(b) Numerical reconciliation of prima facie tax benefit to prima facie tax
Profit / (loss) from continuing operations
Income tax expense calculated at 30%
Differences between Braemar 2 accounting and tax deconsolidation
Effect of permanent differences on Kwinana disposal
Effect of expenses that are not deductible in determining taxable profit
Other permanent differences
Under / (over) provided in prior year
Income tax expense / (benefit)
(c) Amounts recognised directly in other comprehensive income
(Increase) / decrease in equity due to current and deferred amounts charged
directly to equity during the period:
Net tax effect of amounts charged to hedge reserve
CONSOLIDATED
2011
$’000
2010
$’000
(231)
3,738
1,098
4,605
(11,664)
6,346
-
(5,318)
26,509
(18,721)
(21,491)
-
-
(1,280)
3,738
20,824
6,247
-
398
119
(3,257)
1,098
4,605
14,749
13,325
(4,785)
1,778
6,346
(21,071)
(6,321)
481
-
598
(76)
-
(5,318)
-
-
1,607
1,607
(3,023)
(3,023)
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
75
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
9. INCOME TAX (continued)
(d) Tax losses
Tax losses for which deferred tax asset is recognised in the current period
Potential tax benefit at 30%
(e) Current tax liabilities
Current tax payables:
Income tax payable
(f) Recognised deferred tax assets and deferred tax liabilities
Deferred tax assets
Carried forward tax losses
Capitalised borrowing costs
Derivative financial instruments
Employee provisions
Project development costs
Other miscellaneous
Fixed assets
Deferred tax liabilities
Trade and other receivables
Property, plant and equipment
Capitalised exploration expenditure (Gas)
Other
CONSOLIDATED
2011
$’000
2010
$’000
771
231
-
-
10,979
210
17,189
1,519
-
42
3,516
33,455
-
(18,695)
(3,660)
(1,071)
38,881
11,664
-
46
28,787
1,050
26,434
382
893
3
3,516
61,065
(14,540)
(29,704)
(1,905)
-
(23,426)
(46,149)
Tax consolidation
The Company and its wholly-owned Australian controlled entities, has implemented the tax consolidation legislation.
The entities in the tax consolidated Group have entered into tax sharing agreements which, in the opinion of the directors,
limits the joint and several liability of the wholly-owned entities in the case of a default by the head entity being ERM Power
Limited.
The entities in the tax consolidated Group have also entered into tax funding agreements under which the wholly-owned
entities fully compensate the head entity for any current tax payable assumed and are compensated by the head entity for
any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred
to the head entity under the tax consolidation legislation. The funding amounts are determined by reference to the amounts
recognised in the wholly-owned entities’ financial statements. The amounts receivable/payable under the tax funding
agreement are due upon receipt of the funding advice from the head entity, which is issued as soon as practicable after the
end of each financial year. The head entity may also require payment of interim funding amounts to assist with its obligations
to pay tax instalments. The funding amounts are recognised as current intercompany receivables or payables.
76 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
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E R M P O W E R A N N U A L R E P O R T 2 0 1 1
77
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
10. DIVIDENDS PAID AND PROPOSED
During the year ended 30 June 2011, no dividend was paid by the Company (2010: Nil).
After 30 June 2011 the following dividends were proposed by the directors. The dividends have not been provided for and
there are no income tax consequences.
Final ordinary
3.5
5,674
Franked
19 October 2011
Cents per
share
Total
amount
$‘000
Franked /
Unfranked
Date of
payment
Franking credits available to shareholders in subsequent years
The franking account balance is adjusted for:
2011
$’000
13,595
2010
$’000
13,211
•
•
•
franking credits that will arise from the payment of income tax;
franking debits that will arise from the payment of dividends recognised as a liability at the reporting date; and
franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date.
The consolidated amounts include franking credits that would be available to the parent entity if distributable profits of
subsidiaries were paid as dividends. The impact on the franking account of the dividend recommended by the directors
since the end of the reporting period, but not recognised as a liability at the reporting date, will be a reduction in the franking
account of $2,431,714.
11. CASH AND CASH EQUIVALENTS
Current
Non-restricted cash at bank and cash on hand
Restricted cash
Non-current
Restricted cash
Total cash and cash equivalents
Restricted cash
Non-restricted cash
The cash and cash equivalents are bearing interest at rates between nil and 5%.
78 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
CONSOLIDATED
2011
$’000
2010
$’000
110,153
74,111
184,264
2,091
2,091
186,355
76,202
110,153
186,355
20,046
39,432
59,478
3,032
3,032
62,510
42,464
20,046
62,510
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
11. CASH AND CASH EQUIVALENTS continued
Restricted cash
Restricted cash deposits are held as cash-backed guarantees in respect of coupon payments due for the convertible notes
issued and to provide credit support for the Group’s electricity derivative contracts. The restricted cash deposits, held on
term deposit, are bearing interest at rates between 4% and 5%.
Term deposits
Other restricted cash deposits
12. (a) RECONCILIATION OF CASH FLOWS USED IN OPERATING ACTIVITIES
Net profit / (loss) after tax
Adjustments for:
Depreciation and amortisation of non-current assets
Interest income
Share based payment expense
Share of associate’s net profit
Net fair value (gains) / losses on financial instruments
Finance costs
Gain on disposal of assets
Transfers to/(from) provisions:
Employee entitlements
Changes in assets and liabilities net of purchase of subsidiary
and divestment of Kwinana:
(Increase) / decrease in trade and other receivables
(Increase) / decrease in other assets
(Increase) / decrease in inventories
(Increase) / decrease in deferred tax assets
Net movement in derivatives
(Decrease) / increase in deferred tax liabilities
(Decrease) / increase in current tax liability
(Decrease) / increase in trade and other payables
Net cash provided (used in)/by operating activities
CONSOLIDATED
2011
$’000
68,072
8,130
76,202
2010
$’000
26,531
15,933
42,464
CONSOLIDATED
2011
$’000
2010
$’000
16,219
(15,753)
9,977
(4,647)
277
(1,436)
(14,187)
29,793
(4,738)
12,722
(2,759)
-
(1,321)
37,262
39,025
(36,379)
(12)
380
51,612
(1,159)
(1,667)
18,631
-
(9,913)
(46)
20,399
109,103
(60,203)
(6,416)
(650)
(28,085)
73,776
14,749
(9,112)
(9,724)
7,512
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
79
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
12. (b) NON-CASH INVESTING AND FINANCING ACTIVITIES
Issue of shares – SAGE acquisition
Disclosure of financing facilities
Refer to note 23 for information regarding financing facilities.
13. TRADE AND OTHER RECEIVABLES
Current
Trade receivables
Amount receivable from third party
Amounts receivable from jointly controlled entities
Other receivables
Amounts receivable from employee shareholders
Accrued income
Non-current
Amounts receivable from employee shareholders
Amount receivable from external party
Note
26
Note
(i)
(ii)
(iii)
(v)
(iv)
(v)
CONSOLIDATED
2011
$’000
2,334
2,334
2010
$’000
-
-
CONSOLIDATED
2011
$’000
2010
$’000
479
-
-
199
454
1,132
44,049
45,181
2,101
455
2,556
6,923
62,960
4,034
199
-
74,116
29,631
103,747
2,052
555
2,607
(i)
Trade receivables are non-interest bearing and are generally on 30-day terms. An allowance for doubtful debts is made when there is
objective evidence that a trade receivable is impaired. An allowance of $7,857 (2010: $266,000) has been recognised as an expense for the
current year for specific debtors for which such evidence exists. The amount of the allowance / impairment loss is measured as the difference
between the carrying amount of the trade receivables and the estimated future cash flows expected to be received from the relevant debtors.
(ii) Amount receivable from Arrow relating to the sale of the interest in the Braemar 2 power station. This amount was received on 30 June 2011.
(iii) Loans to jointly controlled entities are interest-free and are subject to loan deeds.
(iv) Accrued income represents electricity amounts due to be invoiced on 1 July 2011.
(v) Employee shareholder loans are subject to loan deeds and interest is charged at the FBT benchmark rate.
Details regarding the effective interest rate and credit risk of current receivables are disclosed in Note 3.
Impaired receivables and receivables past due
None of the non-current receivables are impaired or past due but not impaired. The carrying amounts of non-current
receivables are equal to the fair values.
80 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
14. INVENTORIES
Renewable energy certificates
Gas in storage
15. OTHER ASSETS
Current
Prepayments (1)
Security deposits (2)
(1) Prepayments predominantly consist of amounts for prepaid gas.
(2) Refer to Note 30 for further details regarding security deposits.
16. DERIVATIVE FINANCIAL INSTRUMENTS – ASSETS
Current
Electricity derivatives
Non-current
Electricity derivatives
CONSOLIDATED
2011
$’000
3,081
58
3,139
2010
$’000
759
41
800
CONSOLIDATED
2011
$’000
1,337
3,149
4,486
2010
$’000
4,455
3,831
8,286
CONSOLIDATED
2011
$’000
2010
$’000
499
499
43
43
409
409
-
-
Refer to note 3 for further information regarding financial instruments used by the Group.
Refer to note 24 for Derivative Financial Instruments - Liabilities.
17. INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD
Investment in Associates
Name of the entity
Principal activity
Place of
incorporation
Reporting
date
Oakey Power Holdings Pty Ltd (“Oakey”)
Power generation
NSW
30 June
Ownership interest
2011
%
12.5
2010
%
12.5
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
81
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
17. INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD continued
The Group accounts for its investment in Oakey as an associate because the Group has the ability to exercise significant
influence over the investment due to its voting power via representation on the Oakey Board of directors and key decision
making committees.
Movements in carrying amounts
Carrying amount at the beginning of the financial year
Dividend received/receivable
Share of profit after tax
Carrying amount at the end of the financial year
Share of associate’s profit or losses
Revenue
Profit before income tax
Income tax expense
Profit after income tax
Summarised financial information of associate
not adjusted for percentage ownership
Current assets
Non-current assets
Total assets
Current liabilities
Non-current liabilities
Total liabilities
Net assets
Share of associate’s expenditure commitments
Capital commitments
Lease commitments
Restriction on funds distributed to shareholders
CONSOLIDATED
2011
$’000
2010
$’000
17,675
(570)
1,436
18,541
4,296
2,052
(616)
1,436
7,524
105,080
112,604
14,775
62,998
77,773
34,831
-
-
-
17,584
(1,230)
1,321
17,675
4,131
1,876
(555)
1,321
7,307
111,234
118,541
14,225
76,416
90,641
27,900
-
-
-
Oakey may make a distribution to its shareholders in the form of cash dividends and repayment of shareholder loans when
the required levels have been met in the Debt Service Reserve Account (DSRA) and the Major Maintenance Reserve Account
(MMRA), as required by the terms of its Credit Facility Agreement. The DSRA is an amount necessary to ensure there is a
balance equal to the sum of the principal and interest amounts and the Bank Guarantee fees scheduled to be paid during the
next six months. The MMRA is required to be maintained from financial close until the first major overhaul of the plant. As at
30 June 2011, the DSRA was $8.5 million (2010: $8.6 million), and the MMRA was $2.5 million (2010: $2.2 million). There are
no other restrictions on distribution to shareholders.
82 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
18. INVESTMENT IN CONTROLLED ENTITIES
Name
DIRECT HOLDINGS
ACN 139 091 866 Pty Ltd
EIT Kwinana Genco Pty Ltd
Arrow Braemar 2 Holdings Pty Ltd
ERM Braemar 3 Power Pty Ltd
Arrow Braemar Power Pty Ltd
ERM Financial Services Pty Ltd
ERM Gas Pty Ltd
ERM Holdings Pty Ltd
ERM Neerabup Holdings Pty Ltd
ERM Neerabup Power Pty Ltd
ERM Power Developments Pty Ltd
ERM Power Executive Option Plan Manager Pty Ltd
ERM Power Generation Pty Ltd
ERM Power Retail Pty Ltd
ERM Power Services Pty Ltd
ERM Power Utility Systems Pty Ltd
INDIRECT HOLDINGS
Braemar 3 Holdings Pty Ltd
Arrow Braemar 2 Power Pty Limited
Arrow Braemar 2 Pty Ltd
ERM Braemar 3 Pty Ltd
ERM Gas WA01 Pty Ltd
NewGen Kwinana Holdings Pty Ltd
EIT Kwinana Partner Pty Ltd
ERM Land Holdings Pty Ltd
ERM Neerabup Pty Ltd
EIT Kwinana Genco 1 Pty Ltd
ERM Power Generation Pty Ltd
EIT Power Investments Pty Ltd
MetroWest Convenience Store Pty Ltd
SAGE Utility Systems Pty Ltd
Summit Kwinana Holdings Pty Ltd
Summit Kwinana Power Pty Limited
Percentage of equity interest
held by the Company
Place of
incorporation
2011
%
2010
%
QLD
VIC
VIC
QLD
QLD
QLD
QLD
QLD
QLD
VIC
VIC
NSW
VIC
VIC
VIC
VIC
QLD
VIC
QLD
QLD
VIC
VIC
VIC
QLD
VIC
QLD
VIC
QLD
QLD
VIC
VIC
VIC
-
-
-
100
-
100
100
100
100
100
100
100
50
100
100
100
100
-
-
100
100
-
-
100
100
-
100
-
100
100
-
-
100
100
100
100
50.1
100
100
100
100
100
100
100
50
100
100
-
100
50.1
50.1
100
100
30
30
100
100
100
100
60
100
-
30
30
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
83
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
19. PROPERTY, PLANT AND EQUIPMENT
Plant and equipment
Cost
Accumulated depreciation and impairment
Net carrying amount
Land
Carrying amount at cost
Furniture and equipment
Cost
Accumulated depreciation and impairment
Net carrying amount
Motor vehicles
Cost
Accumulated depreciation and impairment
Net carrying amount
Software
Cost (gross carrying amount)
Accumulated amortisation and impairment
Net carrying amount
CONSOLIDATED
2011
$’000
2010
$’000
190,136
(10,554)
179,582
389,140
(13,507)
375,633
9,830
3,776
2,498
(2,035)
463
2,420
(1,520)
900
87
(87)
-
2,139
(1,434)
705
87
(67)
20
2,010
(812)
1,198
Capital work in progress (i)
15,876
11,080
Total property, plant and equipment – net carrying
206,456
392,607
(i) Capital work in progress relates to capitalised costs for power station projects.
Each of the Group’s current generation assets, the Oakey and Neerabup power stations, are project financed by limited
recourse debt, meaning the security of project lenders does not extend beyond the Group’s interest in the particular
generation asset. The Group also raised funds for its equity investment in the Neerabup power station by issuing notes.
Those notes are limited-recourse to the Group’s interest in the Neerabup power station.
Refer note 23 for details regarding recourse and limited recourse borrowings of the Group.
84 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
19. PROPERTY, PLANT AND EQUIPMENT (continued)
Reconciliations
Plant and equipment
Net of accumulated depreciation and impairment at start of year
Transfers from capital work in progress
Additions
Disposals
Depreciation
Net of accumulated depreciation and impairment at end of year
Land
At start of year
Additions
Transfers from capital work in progress
At end of year
Furniture and equipment
Net of accumulated depreciation and impairment at start of year
Additions
Acquired through business combination
36
Disposals
Depreciation
Net of accumulated depreciation and impairment at end of year
Motor vehicles
Net of accumulated depreciation and impairment at start of year
Depreciation
Net of accumulated depreciation and impairment at end of year
Software
Net of accumulated depreciation and impairment at start of year
Additions
Disposals
Amortisation
Net of accumulated depreciation and impairment at end of year
CONSOLIDATED
2011
$’000
2010
$’000
Note
375,633
-
2,009
(189,266)
(8,794)
179,582
196,315
185,110
4,205
-
(9,997)
375,633
3,776
6,054
-
9,830
900
97
4
-
(538)
463
20
(20)
-
1,198
129
-
(622)
705
253
2,199
1,324
3,776
1,576
43
-
(45)
(674)
900
43
(23)
20
933
822
(19)
(538)
1,198
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
85
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
20. EXPLORATION AND EVALUATION COSTS
Exploration and evaluation costs
Cost (gross carrying amount)
Accumulated amortisation and impairment
Net carrying amount
Reconciliation
Net of accumulated amortisation and impairment at start of year
Additions
Net of accumulated amortisation and impairment at end of year
21. INTANGIBLE ASSETS
Goodwill
Cost (gross carrying amount)
Accumulated impairment
Net carrying amount
Reconciliation
Note
Net of accumulated amortisation and impairment at start of year
Disposals
Acquired through business combination
36
Net of accumulated amortisation and impairment at end of year
CONSOLIDATED
2011
$’000
11,435
-
11,435
6,569
4,866
11,435
2010
$’000
6,569
-
6,569
3,191
3,378
6,569
CONSOLIDATED
2011
$’000
1,882
-
1,882
5,815
(5,815)
1,882
1,882
2010
$’000
9,740
(3,925)
5,815
5,815
-
-
5,815
Impairment test for goodwill
As the SAGE acquisition accounting is provisional the Group has not finalised the allocation or amount of goodwill.
Refer note 2 and note 36.
22. TRADE AND OTHER PAYABLES
Current
Trade creditors and accruals
Other creditors
86 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
CONSOLIDATED
2011
$’000
2010
$’000
41,777
21,258
63,035
34,414
16,896
51,310
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
23. BORROWINGS
Current
Unsecured
Other loans – related parties
Secured
Obligations under finance leases
Total borrowings
Secured limited recourse
Bank loan – Kwinana working capital facility
Bank loan – Neerabup working capital facility
Bank loans – Neerabup term facility (current portion)
Total limited recourse borrowings
Non-current
Unsecured
Other loans – related parties
Secured
Loans – other parties
Total borrowings
Secured limited recourse
Bank loans – Kwinana term facility
Bank loans – Neerabup term facility
Convertible notes
Total limited recourse borrowings
Note
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(iv)
(viii)
CONSOLIDATED
2011
$’000
2010
$’000
-
-
-
-
1,500
3,219
4,719
4,719
4,400
-
4,400
-
159,552
43,023
202,575
206,975
7,956
17
7,973
3,501
1,500
-
5,001
12,974
-
25,140
25,140
155,857
168,061
69,290
393,208
418,348
Information on credit risk, fair value and interest rate risk exposure of the Group is provided at note 3.
(i) Loans of $8.0 million from a director related entity bearing interest at BBSY plus 4% were repaid during the period.
(ii)
Amounts drawn down on a limited recourse bank working capital facility by NewGen Power Kwinana partnership. These borrowings were part
of the Group’s interest in the Kwinana power station which was disposed of in October 2010.
(iii) Amounts drawn down on a limited recourse bank working capital facility by the Neerabup partnership. This facility has recourse to the assets
of the Neerabup partnership only which is proportionately consolidated into the Group.
(iv) Amounts drawn down on a limited recourse term debt facility in respect of the Neerabup partnership. This facility has recourse to the assets of
the Neerabup partnership only which is proportionately consolidated into the Group.
(v)
Loan of $4.4 million from director related entity drawn down on 30 June 2011 in relation to funding of additional 50% interest in Oakey
acquisition. Refer notes 32 and 38 for further details. Loan is interest bearing at 12% per annum.
(vi) Loan from third party repaid in December 2010.
(vii) Amounts drawn down on a limited recourse term debt facility in respect of the Kwinana Partnership. The interest in which was disposed of in
October 2010.
(viii) Convertible notes are redeemable by the issuer from 30 September 2010 until maturity in February 2023. Notes have a coupon rate fixed
at 4% p.a. until 30 September 2009, 11% until 11 February 2010, and then the rate is variable based on BBSY plus 4%. The notes are
accounted for using the effective interest method at 10.5% (2010: 10.55%). The notes can only be converted to shares in the issuing
subsidiary upon failure to redeem them at maturity or other named event of default. The notes have recourse to the Group’s 50% interest in the
Neerabup partnership only.
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
87
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
23. BORROWINGS continued
Financing facilities available
The Group’s financing facilities predominantly relate to limited recourse power station development activities. Funding
is drawn down progressively according to project time lines. At balance date, the following financing facilities had been
negotiated and were available:
CONSOLIDATED
2011
$’000
187,578
166,234
21,344
2010
$’000
430,434
383,482
46,952
CONSOLIDATED
2011
$’000
2010
$’000
27,091
27,091
39,601
39,601
12,585
17,369
29,954
21,259
26,001
47,260
CONSOLIDATED
2011
$’000
1,079
1,079
50
50
2010
$’000
1,122
1,122
36
36
Total facilities – bank loans
Facilities used at balance date – bank loans
Facilities unused at balance date – bank loans
24. DERIVATIVE FINANCIAL INSTRUMENTS – LIABILITIES
Current
Electricity derivatives
Non-current
Electricity derivatives
Interest rate swaps
Refer to note 3 for further information regarding financial instruments used by the Group
25. PROVISIONS
Current
Employee benefits – annual leave
Non-current
Employee benefits – long service leave
88 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
26. CONTRIBUTED EQUITY
Issued ordinary shares – fully paid
Treasury shares
(a) Movement in ordinary share capital
CONSOLIDATED
CONSOLIDATED
2011
Number
of shares
2010
Number
of shares
2011
$’000
2010
$’000
162,140,656
50,454,354
161,137
60,573
(513,072)
-
(898)
-
161,627,584
50,454,354
160,239
60,573
Note
26(a)
26(b)
At the beginning of the period
50,454,354
50,199,463
60,573
Issue of shares – employee incentive scheme
1,656,786
254,891
Exercise of options
Issue of shares – SAGE acquisition
Share split 2:1
Issue of shares – initial public offering
(net of transaction costs)
202,999
1,368,854
51,314,805
57,142,858
-
-
-
-
4,300
170
2,334
-
93,760
60,012
561
-
-
-
-
At the end of the period
162,140,656
50,454,354
161,137
60,573
(b) Terms and conditions of contributed equity
Ordinary shares
During the year, the Company conducted an initial public offering raising $100 million from the issue of 57,142,858 ordinary
fully paid shares at $1.75 per share.
Ordinary shares have the right to receive dividends as declared and, in the event of winding up the Company, to participate
in the proceeds from the sale of all surplus assets in proportion to the number of shares held.
Ordinary shares entitle their holder to one vote, either in person or by proxy, at a meeting of the Company.
Ordinary shares have no par value and the company does not have a limited amount of authorised capital.
Treasury shares
Treasury shares are shares that are held in trust for the purpose of issuing shares under employee share incentive schemes.
Details of shares and options issued under employee share schemes (see note 28).
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
89
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
27. RESERVES
Cash flow hedge reserve
Asset revaluation reserve
Share option reserve
Movements
Cash flow hedge reserve
Balance at the beginning of the year
Revaluation – gross
Revaluation – deferred tax
Sale of interest in jointly controlled entity – net of tax (note 35)
Balance at the end of the year
Asset revaluation reserve
Balance at the beginning of the year
Disposal of subsidiary
Balance at the end of the year
Share option reserve
Balance 1 July
Options expense
Balance 30 June
CONSOLIDATED
2011
$’000
2010
$’000
(12,158)
(24,615)
-
603
2,876
327
(11,555)
(21,412)
(24,615)
(33,364)
4,165
(1,249)
9,541
(9,597)
2,778
15,568
(12,158)
(24,615)
2,876
(2,876)
-
327
276
603
2,876
-
2,876
-
327
327
(a) Cash flow hedge reserve
The cash flow hedge reserve comprises the effective portion of the cumulative net change in the fair value of cash flow
hedging instruments related to hedged transactions that have not yet occurred.
(b) Asset revaluation reserve
The revaluation reserve related to the revaluation of property, plant and equipment acquired via a stepped acquisition of
a subsidiary. The purchase of a controlling interest in the Kwinana Power Station on 11 October 2007 resulted in an asset
revaluation in respect of the initial acquisition of $2.9 million after tax. Upon review of the carrying amount of the Kwinana
Power Station asset when it was available for sale during the current year, the valuation of the asset was decreased by the
amount of the existing revaluation surplus.
(c) Share option reserve
As at the date of this report, there were 10,069,209 options on issue to acquire fully paid ordinary shares. The options do not
carry any entitlement to participate in any share issue. All options expire on the earlier of their expiry date or termination of
the holder’s employment, or as otherwise determined by the Board. Refer to note 28 for details of the employee share and
option incentive schemes.
90 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
28. SHARE BASED PAYMENTS
(a) Short term incentives
During the year eligible employees received ordinary shares as a short term incentive bonus by way of an offer to
participate in the Short Term Incentive Share Trust. The number of shares issued to participants during the year was
1,997,761 (inclusive of effect of 2 for 1 share split). The shares vested immediately on issue with the cost provided for
in the 2010 financial year.
(b) Long term incentives
The objective of the Long Term Incentive Scheme is to provide incentives to focus on long term shareholder returns.
Participation in the scheme is open to senior employees (including Executive Directors) who are invited by the Board.
Although a performance based award was not made during the year, the Company did award an incentive to certain
employees for achieving the successful Initial Public Offering (“IPO”). The vesting conditions were targeted at the retention
of those employees through to at least September 2012, being the prospectus forecast period, as well as twelve months
beyond the forecast period.
These incentive awards were granted by way of offers to participate in both the Long Term Incentive Share Trust (LTIST)
and the Long Term Incentive Option Trust (LTIOT).
i. LTIST
Shares will be acquired by a trustee who will hold those Shares on behalf of participants. The Shares will be acquired by
the trustee either subscribing for new Shares or purchasing Shares on market. Vesting conditions may be a combination of
service and performance hurdles, as determined by the Directors.
Participants hold their interest in the Long Term Incentive Share Trust (“LTIST”) by holdings units, where one unit represents
one Share. Participants are issued units at the prevailing market value of the Shares. A participant may instruct the trustee
how to exercise its vote in the case of a poll at a meeting of ERM Power. If the participant’s employment ceases prior to the
Shares vesting, the participant’s units in the LTIST will be forfeited.
Early vesting may occur in the following circumstances, subject to the participant achieving any relevant performance
hurdles, as set out below:
• On a change of control of ERM Power, being a material change in the composition of the Board initiated as a result of
a change of ownership of Shares and the purchaser of the Shares requiring (or agreeing with other Shareholders to
require) that change in Board composition, or in other circumstances that the Board determines appropriate.
• On termination of employment due to redundancy, death or permanent disability, or in circumstances that the Board
determines appropriate.
The number of shares issued under the plan to employees during the year was 513,072 (2010 – not applicable). Subject to
continuation of employment of the participants, 33% of those shares will vest in September 2012 with the balance to vest
in September 2013. The value of the shares at grant date was $1.75 per share with the expense to be allocated over the
vesting periods.
ii. LTIOT
Participants are issued units at the prevailing market value of the Options. If the participant’s employment ceases prior to the
Options vesting, the participant’s options will be forfeited.
Early vesting may occur in the same circumstances as the Long Term employee share scheme, subject to achieving any
relevant performance hurdles.
Set out below are summaries of options granted under the plan during the current financial year with vesting conditions
subject to continuation of employment in September 2012:
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
91
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
28. SHARE BASED PAYMENTS continued
(b) Long term incentives continued
Grant
Date
Expiry
date
Exercise
price
Balance at
start of
the year
Granted
during
the year
Forfeited
during
the year
Options
exercised
during
the year
Balance
at end of
the year
Vested and
exercisable
at end of
the year
Number
Number
Number
Number
Number
Number
1/11/2010
1/11/2017
8/11/2010
8/11/2017
2.75
2.75
Total
-
-
-
1,296,400
242,706
1,539,106
-
-
-
-
-
-
1,296,400
242,706
1,539,106
-
-
-
The weighted average remaining contractual life of share options outstanding at the end of the period was 6 years
(2010 – not applicable).
Fair value of options granted
The assessed fair value at grant date of options granted during the year ended 30 June 2011 was 10.43 cents. The fair
value at grant date is determined using a Black-Scholes option pricing model that takes into account the exercise price, the
term of the option, the share price at grant date and expected price volatility of the underlying share, the expected dividend
yield and the risk free interest rate for the term of the option.
The model inputs for options granted during the year ended 30 June 2011 included:
• Share price at grant date: $1.75;
• Exercise price: $2.75;
• Expected price volatility of the Company’s shares: 28.1%;
• Risk free interest rate: 5.69%; and
• Expected vesting date: 3 years after issue.
Employee Option Plan 2008
In June 2008, the Company made offers to certain employees to participate in the Employee Option Plan (“EOP”) and
granted Options with a five year exercise period and an exercise price of $0.806. There are no performance conditions
attached to the Options issued under the EOP.
Details of the 2008 option plan, the options in which vested in the financial year, are summarised below:
Grant
Date
Expiry
date
Exercise
price
Balance at
start of
the year
Granted
during
the year
Forfeited
during
the year
Options
exercised
during
the year
Balance
at end of
the year
Vested and
exercisable
at end of
the year
Number
Number
Number
Number
Number
Number
6/06/2008
6/06/2013
0.806 10,524,962
30/06/2008 30/06/2013
0.806
400,000
Total
10,924,962
-
-
-
496,550
209,203
9,819,209
9,819,209
150,000
-
250,000
250,000
646,550
209,203 10,069,209
10,069,209
The weighted average share price from the date of listing on 10 December 2010 to 30 June 2011 was $1.8388 (2010 – not
applicable).
92 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
28. SHARE BASED PAYMENTS continued
(c) Amounts expensed in respect of share-based payment transactions
Expenses recognised in respect of share-based payment transactions during the period as part of employee benefit expense:
Options issued under employee option plans
Shares issued under long term employee share scheme
29. PARENT ENTITY FINANCIAL INFORMATION
(a) Summary financial information
The individual financial statements for the parent entity show the following aggregate amounts:
Statement of financial position
Current Assets
Total Assets
Current Liabilities
Total liabilities
Shareholders’ equity
Contributed equity
Treasury shares
Reserves
Share option reserve
Retained earnings
(Loss) / profit for the year
Total comprehensive (loss) / income
CONSOLIDATED
2011
$’000
167
110
277
2010
$’000
327
-
327
2011
$’000
2010
$’000
212,917
286,467
71,848
78,270
161,136
(898)
603
47,356
208,197
(1,937)
(1,937)
134,279
214,908
65,785
104,717
60,573
-
327
49,291
110,191
10,398
10,398
(b) Guarantees entered into by the parent entity
The Company has provided bank guarantees in relation to its lease arrangements for premises in Brisbane totalling
$522,000 (2010: $418,600).
(c) Contingent liabilities of the parent entity
The Company does not have any contingent liabilities at 30 June 2011.
(d) Contractual commitments for acquisition of property, plant and equipment
There are no contractual commitments for the acquisition of property, plant and equipment at 30 June 2011.
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
93
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
30. COMMITMENTS AND CONTINGENCIES
(a) Capital expenditure commitments
Estimated capital expenditure contracted for at balance date, not provided
for but payable (including share of associates and joint ventures):
– not later than one year
–
–
later than one year and not later than five years
later than five years
(b) Lease expenditure commitments
(i) Operating leases (non-cancellable):
Minimum lease payments
– not later than one year
–
–
later than one year and not later than five years
later than five years
Aggregate lease expenditure contracted for at balance date
(ii) Finance leases:
Minimum lease payments
– not later than one year
–
later than one year and not later than two years
Total minimum lease payments
Future finance charges
Net liability
Classified as follows:
Current liability
Non-current liability
CONSOLIDATED
2011
$’000
2010
$’000
4,076
23,224
-
-
-
-
4,076
23,224
1,272
1,649
-
2,921
1,131
2,826
286
4,243
-
-
-
-
-
-
-
-
18
-
18
(1)
17
17
-
17
94 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
30. COMMITMENTS AND CONTINGENCIES continued
Details of contingent liabilities are set out below. The directors are of the opinion that provisions are not required in respect of
these items as it is not probable that a future sacrifice of economic benefits will be required or the amount is not capable of
reliable measurement.
Bank guarantees – Australian Energy Market Operator
Bank guarantees – Lease arrangements
Financial bond
Third party guarantee
Futures margin deposits
Security deposits
Bank guarantees – Western Power
Bank guarantees - Powerlink
Note
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
CONSOLIDATED
2011
$’000
38,000
522
-
25,000
2,732
3,145
300
2,200
2010
$’000
12,800
419
4,900
25,000
-
-
-
-
71,899
43,119
(i)
The Group has provided bank guarantees in favour of the Australian Energy Market Operator (formerly National Electricity Market Management
Company) to support its obligations to purchase electricity from the national electricity market. Bank guarantees have also been provided to
various counterparties in relation to electricity derivatives. These guarantees are supported by term deposits as detailed in note 11.
(ii)
The Group has provided bank guarantees in relation to lease arrangements for premises in Brisbane. The guarantee is secured by a
registered charge over all assets and undertakings of the Company (being ERM Power Limited).
(iii) The Group had drawn down on a financial bond with a financial institution in order to provide reserve capacity security to the independent
market operator in Western Australia.
(iv) The Company and one of its subsidiaries had issued a guarantee to a third party under a credit support facility agreement. The third party
has provided credit support in favour of the Group in relation to electricity derivatives. The guarantee is secured by assets held in a director
related entity.
(v)
Futures margin deposits represent interest bearing cash lodged with the Group’s futures clearing brokers. The deposits are in relation to
various futures contracts on the Australian Stock Exchange and may be retained by the clearing brokers in the event that the Group does not
meet its contractual obligations.
(vi) Security deposits represent interest bearing cash lodged as eligible credit support with various counterparties to the Group’s electricity
derivative contracts and may be retained by those counterparties in the event that the Group does not meet its contractual obligations.
(vii) The Group has provided a bank guarantee in favour of Western Power. This can be called upon if the Neerabup partnership fails to pay its
monthly transmission invoices.
(viii) The Group has provided a bank guarantee in favour of Powerlink for $2.2 million under the B3 Connection Agreement.
The NewGen Neerabup Partnership is currently in dispute with a contractor responsible for the design and construct of the
balance of plant works for the NewGen Neerabup Power Station. The dispute is currently being progressed through the
dispute resolution provisions contained within the contract.
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
95
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
31. INTERESTS IN JOINTLY CONTROLLED ENTITIES
As at 30 June 2011, the Group has the following interests in power station projects with
other external parties:
Name
NewGen Power Neerabup Pty Ltd
NewGen Neerabup Pty Ltd
NewGen Neerabup Partnership
NewGen Braemar 2 Pty Ltd
ERM Power Trust
Queensland Electricity Investors Pty Ltd
NewGen Power Kwinana Pty Ltd
NewGen Kwinana Holdings Pty Ltd
Summit Kwinana Holdings Pty Ltd
Summit Kwinana Power Pty Limited
ERM Kwinana Power Pty Ltd
NewGen Kwinana Partnership
Interest Held
2011
%
2010
%
50
50
50
-
50
50
-
-
-
-
-
-
50
50
50
25.05
50
50
30
30
30
30
30
30
96 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
31. INTERESTS IN JOINTLY CONTROLLED ENTITIES continued
Net assets employed in the jointly controlled entities, including assets held for sale, are
included in the financial statements as follows:
CURRENT ASSETS
Cash and cash equivalents
Trade and other receivables
Inventories
Prepayments
TOTAL CURRENT ASSETS
NON-CURRENT ASSETS
Investment in associates accounted for using the equity method
Property, plant and equipment
TOTAL NON-CURRENT ASSETS
TOTAL ASSETS
CURRENT LIABILITIES
Trade and other payables
Borrowings
Provisions
TOTAL CURRENT LIABILITIES
NON-CURRENT LIABILITIES
Borrowings
Derivative financial instruments
TOTAL NON-CURRENT LIABILITIES
TOTAL LIABILITIES
NET ASSETS
Capital expenditure commitments
Estimated capital expenditure contracted for at balance date, not provided for
but payable:
– not later than one year
–
–
later than one year and not later than five years
later than five years
CONSOLIDATED
2011
$’000
2010
$’000
9,717
3,471
58
226
13,472
12,914
199,733
212,647
226,119
764
4,719
20
5,503
159,552
17,369
176,921
182,424
43,695
27,347
11,754
41
3,758
42,900
12,914
381,090
394,004
436,904
6,830
5,001
5
11,836
321,793
26,001
347,794
359,630
77,274
4,076
8,242
-
-
-
-
4,076
8,242
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
97
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
32. RELATED PARTY DISCLOSURES
Parent Company
ERM Power Limited is the parent entity of the consolidated entity. Balances and transactions between the parent entity and
its wholly owned subsidiaries (which are related parties) have been eliminated on consolidation and are not disclosed in this
note. Details of transactions between the consolidated entity and other related parties are disclosed below.
Trevor St Baker and his related parties have a controlling shareholding in the Company at 30 June 2011.
Equity interests in subsidiaries
Details of interests in subsidiaries are set out in note 18.
Equity interests in associates
Details of interests in associates are set out in note 17.
Equity interests in jointly controlled entities
Details of interests in jointly controlled entities are set out in note 31.
Key management personnel
Disclosures relating to key management personnel are set out in note 33 and the Directors’ Report.
Transactions with related parties
Transaction type
Loans from Directors
Loans received
Loan repayments
Interest paid on director loans
Director related entity transactions
Consulting fees
CONSOLIDATED
2011
$’000
2010
$’000
i
ii
iii
4,400,000
250,889
7,955,955
4,119,807
-
676,713
304,447
475,150
(i)
Loan of $4.4 million from a related entity of Trevor St Baker drawn down on 30 June 2011 in relation to funding of
additional 50% interest in Oakey acquisition. Loan is interest bearing at 12% per annum.
(ii) Loans of $8.0 million from a director related entity bearing interest at BBSY plus 4% were repaid during the period.
(iii) ERM Power has entered into a consulting agreement with Sunset Power Pty Ltd (a related party of Trevor St Baker)
for Trevor St Baker to provide mentoring services and advice to ERM Power’s planning group on a range of planning
functions until 30 June 2011. Under this agreement ERM Power pays Sunset Power Pty Ltd a fee of $3,500 per day for
services provided (up to a maximum of 70 days per annum). Sunset Power Pty Ltd is also entitled to be reimbursed for
all reasonable expenses incurred in providing these services. The consulting agreement may be terminated by giving
30 days written notice or immediately if Sunset Power breaches the agreement.
Other related party transactions
During the year, Stephen St Baker and Andrew St Baker were employed by the Company, either directly or on a contractor
basis, on terms and conditions no more favourable than those that would have been adopted if dealing at arm’s length with
an unrelated person. Total payments excluding GST for the year ended 30 June 2011 were $524,807 (2010: $421,900).
There is no allowance account for impaired receivables in relation to any outstanding balances, and no expense has been
recognised in respect of impaired receivables due from related parties.
98 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
32. RELATED PARTY DISCLOSURES continued
Transactions with jointly controlled entities:
Net loans advanced/(repaid)
Current trade receivables
Current trade payables
Project fees
Operations management fees
33. KEY MANAGEMENT PERSONNEL DISCLOSURES
(a) Key management personnel compensation
Short-term employee benefits
Post-employment benefits
Termination benefits
Share-based payments
CONSOLIDATED
2011
$’000
2010
$’000
(4,582,604)
52,075,989
183,484
1,155,257
(140,135)
-
1,040,981
2,573,388
5,548,633
3,269,684
CONSOLIDATED
2011
$’000
2010
$’000
2,573,842
2,214,886
212,026
155,884
-
761,662
20,000
40,535
3,547,530
2,431,305
Detailed remuneration disclosures are provided in the Remuneration Report on pages 31 to 39.
(b) Equity instruments disclosures relating to key management personnel
The number of shares and options held during the financial year by each director and other Key management personnel of
the Group are disclosed in the Directors’ Report.
(c) Loans to key management personnel
Details of loans made to directors and other key management personnel of the Group, including their related parties, are set
out below:
Total individual loans
Balance at the
start of the
year
Interest paid
and payable
for the year
Interest not
charged
Balance at
the end of
the year
Number in
Group at the
end of the year
2011
2010
1,163,642
1,313,680
83,354
74,596
-
-
1,246,996
1,163,642
4
4
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
99
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
33. KEY MANAGEMENT PERSONNEL DISCLOSURES continued
Total Individuals with loans above $100,000 during the financial year
2011
2010
Balance at
the start of
the year
Interest paid
and payable
for the year
1,088,089
1,242,377
74,481
74,845
Interest not
charged
Balance at the
end of the year
Number in
Group at the
end of the year
-
-
1,166,570
1,088,089
3
3
The above loans to key management personnel include employee shareholder loans. In 2007 and 2008, ERM Power made
offers to certain senior executives to participate in a share loan incentive plan. ERM Power provided loans to participants
to enable them to subscribe for shares. The loans subject to loan deeds and are interest bearing at the FBT benchmark
rate with recourse limited to the value of the shares. The loans are repayable in the event of termination of employment or
otherwise between seven and 10 years from the date of advance.
Key management personnel and their related parties with loans greater than $100,000 at 30 June 2011 and 30 June 2010
include Philip St Baker, Mitch Anderson and Andrew St Baker.
Further details regarding Director loans and other Director transactions are included in Note 32 and the Directors’ Report.
34. AUDITORS’ REMUNERATION
Amounts received or due and receivable by PricewaterhouseCoopers Australia for:
An audit or review of the financial report of the entity and any other entity in the Group
Amounts received or due and receivable by PricewaterhouseCoopers Australia
for non-audit services:
Investigating accounts report
Due diligence services
Other agreed-upon procedures in relation to the entity and any other entity in the
consolidated Group
CONSOLIDATED
2011
$’000
2010
$’000
525,000
525,000
442,500
442,500
630,000
60,000
115,002
805,002
-
-
-
-
100 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
35. SALE OF INTERESTS IN POWER STATION
Braemar 2 Power Station
In the prior year, the Group disposed its interest in the Braemar 2 Power Station for a consideration of $113.7 million and
recognised a gain on disposal of $36.4 million.
Kwinana Power Station
On 28 October 2010, the Group sold its 30% interest in the Kwinana power station. The Group sold all the shares of ERM BK
Power Pty Ltd and ERM Oakey Power II Pty Ltd which were the holding companies for Kwinana group subsidiaries.
The consideration received by the Group for its interest in Kwinana was $39.9 million less the convertible note liability
outstanding at the date of sale of $31.0 million.
Deferred interest of $6.0 million, payable on redemption of the notes, is included in finance expense. A loss of $6.4 million in
relation to the interest rate swaps entered into by the Kwinana partnership is included in net fair value losses.
Consideration received
Consideration received in cash and cash equivalents
Total consideration received
Assets and liabilities over which control was lost
Cash and cash equivalents
Trade & other receivables
Prepayments
Property, plant & equipment
Goodwill
Deferred tax assets
Trade & other payables
Deferred tax liabilities
Borrowings – limited recourse
Minority interest share of relevant assets and liabilities disposed of
Net assets and liabilities disposed of
Gain on sale
Consideration received
Net assets disposed of
Gain on disposal
Net cash inflow on disposal
Consideration received in cash or cash equivalents
Less cash and cash equivalents disposed of
Net cash outflow on disposal
2011
$’000
8,917
8,917
10,181
6,818
4,102
185,222
5,815
10,115
(5,375)
(11,577)
(187,504)
(13,618)
4,179
8,917
(4,179)
4,738
8,917
(10,181)
(1,264)
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
101
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
36. BUSINESS COMBINATION
There were no acquisitions in the year ended 30 June 2010.
Current year acquisition – SAGE Utility Systems Pty Ltd
On 31 March 2011, the Group purchased all of the share capital of SAGE Utility Systems Pty Ltd. At 30 June 2011 the fair
values of the assets and liabilities acquired as well as any goodwill on acquisition, is provisional. Provisional fair values may
be used for a period of 12 months from acquisition. During the 12 month period from acquisition date the Group will continue
to assess the fair value of identifiable assets and liabilities acquired as well as any goodwill on acquisition.
Details of the purchase consideration and the provisional fair values of net assets acquired are as follows:
Purchase consideration
Cash paid
Shares
Working capital adjustment
Total purchase consideration
Acquisition of subsidiary net of cash acquired
Cash balances acquired
Direct cash costs of acquisition
Net cash inflow
Details of the provisional fair values of the assets and liabilities acquired are as follows:
Provisional fair value of net identifiable assets acquired
Add: Provisional goodwill
Provisional net assets acquired
2011
$’000
50
1,950
384
2,384
467
(50)
417
Provisional
fair value
$’000
502
1,882
2,384
102 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
37. EARNINGS PER SHARE
Basic earnings per share
Diluted earnings per share
(i) Earnings per share are not diluted for net losses
Reconciliation of weighted average number of
ordinary shares
Weighted average number used in calculating basic
earnings per share
Effect of share options on issue
Weighted average number used in calculating diluted
earnings per share
Information concerning earnings per share
Options
CONSOLIDATED
CONSOLIDATED
2011
Number
(’000)
138,421
142,880
2010
Number
(’000)
100,908
106,732
2011
Cents
11.72
11.35
2010
Cents
(16.72)(i)
(16.72)(i)
138,421
4,459
100,905
5,827
142,880
106,732
-
-
-
-
-
-
Options granted are usually considered to be potential ordinary shares and taken into account in the determination of diluted
earnings per share and are not included in the determination of basic earnings per share.
38. EVENTS AFTER THE REPORTING PERIOD
Acquisition of additional 50% interest in the Oakey Power Station
On 1 July 2011 the Group acquired an additional 50% interest in Oakey Power Holdings Pty Ltd from Redbank Energy
Limited (formerly Alinta Energy Limited) taking the Group’s total shareholding in Oakey Power Holdings Pty Ltd and interest
in the Oakey Power Station from 12.5% to 62.5%.
The financial effects of the transaction have not been brought to account at 30 June 2011. The operating results and assets
and liabilities of Oakey Power Holdings Pty Ltd and its wholly owned subsidiaries will be consolidated from 1 July 2011, the
date at which the Group gained a controlling interest.
Details of the purchase consideration transferred and the provisional net fair values of the assets and liabilities acquired are:
Purchase consideration
Cash paid
Total purchase consideration
Provisional fair value of net identifiable assets acquired
Less: Provisional acquisition date fair value of previously held equity interest of 12.5%
Less: Provisional fair value of minority interests
Less: Provisional discount on acquisition
Provisional net assets acquired
$’000
61,691
61,691
$’000
156,000
(18,541)
(58,338)
(17,430)
61,691
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
103
nOTES TO ThE COnSOLiDATED FinAnCiAL STATEMEnTS
FOR THE YEAR ENDED 30 JUNE 2011
38. EVENTS AFTER THE REPORTING PERIOD continued
At the time that the financial statements were authorised for issue the Group has not yet completed the accounting for the
acquisition of the additional 50% of Oakey Power Holdings Pty Ltd.
Acquisition related costs to be included in profit and loss for the year ended 30 June 2012 and are expected to be
approximately $0.5 million.
The fair value of net identifiable assets acquired, discount on acquisition and minority interests have only been determined
provisionally at the time that the financial statements were authorised for issue as the independent valuation had not been
finalised. It is also not yet possible to provide detailed information about each class of acquired receivables and contingent
liabilities.
Provisional fair values may be used for a period of 12 months from acquisition. During the 12 month period from acquisition
date the Group will continue to assess the fair value of identifiable assets and liabilities acquired, the minority interest as well
as any goodwill on acquisition.
Other events after the reporting period
Since 30 June 2011, there have been no other matters or circumstances not otherwise dealt with in the financial report that
have significantly affected or may significantly affect the Group.
104 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
DiRECTOR’S DECLARATiOn
FOR THE YEAR ENDED 30 JUNE 2011
1.
In the opinion of the directors of ERM Power Limited (“Company”):
(a) the financial statements and notes set out on pages 46 to 104 are in accordance with the Corporations Act 2001,
including:
i.
ii.
giving a true and fair view of the financial position of the consolidated entity as at 30 June 2011 and of its
performance for the year then ended, and
complying with Australian Accounting Standards (including the Australian Accounting Interpretations), the
Corporations Regulations 2001 and other mandatory professional reporting requirements.
(b) the financial report complies with International Financial Reporting Standards as disclosed in note 1;
(c) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become
due and payable.
Note 1(a) confirms that the financial statements also comply with International Financial Reporting Standards as issued by
the International Accounting Standards Board.
The directors have been given the declarations by the chief executive officer and chief financial officer required by section
295A of the Corporations Act 2001.
Signed in accordance with a resolution of the directors:
Tony Bellas
Director
Brisbane
25 August 2011
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
105
inDEPEnDEnT AuDiTOR’S REPORT
FOR THE YEAR ENDED 30 JUNE 2011
106 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
inDEPEnDEnT AuDiTOR’S REPORT
FOR THE YEAR ENDED 30 JUNE 2011
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
107
ShARE AnD ShAREhOLDER inFORMATiOn
TWENTY LARGEST SHAREHOLDERS
The following table sets out the 20 largest holders of listed shares (when multiple holdings are grouped together) and the
percentage of capital each holds as at 7 October 2011:
Shareholders
Number of shares % of issued shares
1. Energy Resource Managers Holdings Pty Ltd
2. Sunset Power Pty Ltd
3. Citicorp Nominees Pty Limited
4. Gaffwick Pty Ltd
5. Ilwella Pty Limited
6. Sunset Power A Pty Ltd
7. Sunset Power B Pty Ltd
8. Sunset Power C Pty Ltd
9. Sunset Power D Pty Ltd
10. National Nominees Limited
11. Philip St Baker & Peta St Baker
12. AMP Life Limited
13. Trinity Management Pty Ltd
14. St Baker Investments Pty Ltd
15. Andrew James St Baker & Cathryn Jeanne St Baker
16. Bond Street Custodians Ltd
17. WH & LL St Baker Pty Ltd
18. HSBC Custody Nominees (Australia) Limited
19. St Baker-Childs Investments Pty Ltd
20. J P Morgan Nominees Australia Limited
Total
As at 7 October 2011 there were 162,304,453 shares on issue.
DISTRIBUTION OF SHARES
The following table summarises the distribution of listed shares as at 7 October 2011:
Ordinary Shares
1 – 1,000
1,001 – 5,000
5,001 - 10,000
10,000 – 100,000
100,001 – and over
Total
43,549,488
20,438,364
8,900,098
8,705,182
8,571,429
5,160,934
5,160,934
5,160,934
5,160,934
5,152,406
3,264,036
2,046,825
2,004,224
2,002,088
1,841,814
1,499,586
1,447,100
1,214,714
1,199,532
778,935
26.83
12.59
5.48
5.36
5.28
3.18
3.18
3.18
3.18
3.17
2.01
1.26
1.24
1.23
1.13
0.92
0.89
0.75
0.74
0.48
133,260,147
82.08
Number of
shareholders % of issued shares
92
474
465
570
72
1,673
0.03
0.90
2.20
9.04
87.82
100.00
The number of shareholders holding less than a marketable parcel of shares was 29 holding 5,041 shares.
108 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
ShARE AnD ShAREhOLDER inFORMATiOn continued
SUBSTANTIAL SHAREHOLDERS
The following table shows holdings of five per cent or more of voting rights in ERM Power’s shares as notified to ERM Power
Limited under the Corporations Act 2001, Section 671B:
Class of Securities
Identity of
person or group
Date of
notice received
Relevant interest in
number of securities
Percentage of total
voting rights
Ordinary Shares
Trevor Charles St Baker1
Ordinary Shares
Gaffwick Pty Ltd
Ordinary Shares
Ilwella Pty Limited
10/12/2010
10/12/2010
10/12/2010
84,631,588
8,571,429
8,571,429
52.97%
5.37%
5.37%
1. Trevor Charles St Baker controls each registered shareholder of Energy Resource Managers Holdings Pty Ltd as trustee for the Energy
Resource Managers Trust, Sunset Power Pty Ltd as trustee for the St Baker Family Trust, Sunset Power A Pty Ltd as trustee for Sunset Power
Trust A, Sunset Power B Pty Ltd as trustee for Sunset Power Trust B, Sunset Power C Pty Ltd as trustee for Sunset Power Trust C and Sunset
Power D Pty Ltd as trustee for the Sunset Power Trust D.
VOTING RIGHTS
As a meeting of members, each member who is entitled to attend and vote may attend and vote in person or by proxy,
attorney or representative. On a show of hands, every person present who is a member, proxy, attorney or representative,
shall have one vote and on a poll, every member who is present in person or by proxy, attorney or representative shall have
one vote for each fully paid share held.
SECURITIES EXCHANGE LISTING
ERM Power Limited shares are traded on the Australian Securities Exchange (ASX) under the symbol “EPW”.
VOLUNTARY ESCROW
98,679,437 shares are subject to voluntary escrow until the date that is 3 business days after the release of the full year
results for the year ending 30 June 2012.
UNQUOTED SECURITIES
As at 7 October 2011, there were 11,444,518 options to acquire fully paid ordinary shares. The options do not carry any
entitlement to participate in any share issue. All options expire on the earlier of their expiry date, or for those with a 2017
expiry date, termination of the holder’s employment, or as otherwise determined by the Board.
Expiry Date
6 June 2013
30 June 2013
1 November 2017
8 November 2017
Issue price
of shares (cents)
80.6
80.6
275.0
275.0
Number
of options
9,655,412
250,000
1,296,400
242,706
Number
of holders
49
2
24
1
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
109
GLOSSARy
AASB
ACF
AEMO
AGL
Alinta
Australian Accounting Standards Board
the ratio of the actual output of a power plant and its output if it had operated at full
capacity over the entire year
Australian Energy Market Operator Limited ACN 072 010 327 (formerly National
Electricity Market Management Company Limited)
AGL Energy Limited ACN 115 061 375 or its controlled entities
Alinta Energy Limited ACN 116 665 608 (formerly Babcock & Brown Power Limited)
ANZSAM
Arrow Energy
ANZ Specialist Asset Management Limited ACN 098 827 671
Arrow Energy Limited ACN 078 521 936 or its controlled entities
ASIC
ASX
Base load
BBSY
Board
Braemar 1
Braemar 2
Braemar 3
Broker
CCGT
Company
Australian Securities and Investments Commission
ASX Limited ACN 008 624 691 or the exchange operated by it
generating power plant that is normally operated to take all or part of the minimum load
of a system, and which produces electricity at an essentially constant rate
bank bill swap bid rate
the Board of directors of ERM Power
the Braemar 1 power station, a 504 MW power station, situated approximately
30 kilometres west of Dalby, Queensland
means the Braemar 2 power station, a 519 MW power station, situated approximately
30 km west of Dalby, Queensland
the proposed 550 MW Braemar 3 power station, to be situated approximately 30 km
west of Dalby, Queensland
an ASX participating organisation
combined-cycle gas turbine
ERM Power
Contact Energy
Contact Energy Limited ARBN 080 480 477
Corporations Act
Corporations Act 2001 (Cth)
CO2
CY
Directors
DRP
EBITDAIF
EBITF
Empire Oil and Gas
ERM Gas
carbon dioxide
the calendar year ended or ending 31 December
the directors of ERM Power
dividend reinvestment plan
earnings before interest, tax, depreciation, amortisation, goodwill impairment and net
fair value gains/losses on financial instruments designated at fair value through profit
and loss and gains/losses on onerous contracts
earnings before interest , tax and net fair value gains/losses on financial instruments
designated at fair value through profit and loss and gains/losses on onerous contracts
Empire Oil Company (WA) Limited ACN 009 475 423 a wholly owned subsidiary of
Empire Oil and Gas NL
ERM Gas Pty Ltd ACN 126 836 799, ERM Power’s gas business focussed on
procurement of long term gas supplies for future projects through commercial
contracts and exploration
110 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
GLOSSARy continued
ERM Generation Assets
ERM Power’s business of owning interests in gas-fired power stations, currently
comprised of interests in Oakey and Neerabup
ERM Land Holdings
ERM Land Holdings Pty Ltd ACN 083 762 056, the entity that holds ERM Power’s
strategic land holdings
ERM Oakey
ERM Power
E.R.M Oakey Power Pty Ltd ACN 075 130 022, the entity that holds ERM Power’s
interest in the Oakey power station
ERM Power Limited ACN 122 259 223 (‘ERM Power’ and ‘Company’ shall have a
corresponding meaning)
ERM Power Generation
ERM Power Generation Pty Ltd ACN 117 443 035, ERM Power’s operation services
company that manages and operates electricity generation and gas pipeline businesses
ERM Sales
ERM Power Retail Pty Ltd ACN 126 175 460, ERM Power’s electricity sales business
targeting the larger end of the business customer market
Forecast Period
the period from 1 July 2010 to 30 June 2012
FY
Group
GW
GWh
the financial year ended or ending 30 June
ERM Power and each of its subsidiaries
gigawatt
gigawatt hours
Infrastructure Capital Group
Infrastructure Capital Group Limited ACN 094 815 513 as manager for the Energy
Infrastructure Trust
Intermediate
generating power plant that operates between the extremes of baseload and peaking
power plants, curtailing their output in periods of low demand
IPO
ISDA
km
km2
Kwinana
LTIOT
LTIST
MW
MWh
NEM
Neerabup
NewGen Braemar 2
NewGen Neerabup
initial public offering
means the International Swaps and Derivatives Association
kilometre
square kilometre
means the Kwinana power station, a 320 MW baseload power station located
approximately 30 km south of Perth, Western Australia
Long Term Incentive Option Trust
Long Term Incentive Share Trust
megawatt
megawatt hours
National Electricity Market
means the Neerabup power station, a 330 MW peaking power station located in the
town of Neerabup, approximately 40 km north of Perth, Western Australia
means the partnership between ERM Braemar 2 Pty Ltd and Arrow Southern
Generation Pty Ltd, which owns Braemar 2
means the partnership between ERM Neerabup Pty Ltd ACN 126 964 583 and EIT
Neerabup Power Pty Ltd ACN 128 916 478, which owns Neerabup
NewGen Power Kwinana
means the partnership between ERM Kwinana Power Pty Ltd ACN 115 348 171 and
Summit Kwinana Power Pty Ltd ACN 116 803 779, which owns Kwinana
E R M P O W E R A N N U A L R E P O R T 2 0 1 1
111
GLOSSARy continued
New Shares
new Shares to be issued by ERM Power
NPAT
Oakey
net profit after tax
means the Oakey power station, a 332 MW peaking power station situated in the
Darling Downs, 150 km west of Brisbane, Queensland
Oakey Power Holdings
Oakey Power Holdings Pty Ltd ACN 075 260 794
OCGT
Option
Personnel
PJ
Powerlink
PPA
Prospectus
RECs
Shareholders
Share Registry
Shares
Siemens
STIST
open-cycle gas turbine
an option to acquire a Share in ERM Power
employees and professional service contractors of ERM Power
petajoules
Powerlink, the Queensland state government corporation that owns, operates and
maintains Queensland’s high voltage electricity transmission network
Power Purchase Agreement
Prospectus lodged by ERM Power on 17th November 2011
Renewable Energy Certificates produced when generating electricity from eligible
renewable generators under the ERET
holders of Shares in ERM Power
Link Market Services ABN 54 083 214 537
fully paid Shares in ERM Power
Siemens Ltd ACN 004 347 880
Short Term Incentive Share Trust
Sunset Power
Sunset Power Pty Ltd ACN 101 619 658, an entity controlled by Trevor St Baker
Synergy
Uranquinty
Wellington 1
Western Power
Electricity Retail Corporation ABN 71 743 446 839, trading as Synergy
the Uranquinty power station, a 664 MW power station, located in Uranquinty,
New South Wales
the proposed 550 MW Wellington 1 power station to be situated in Wellington,
New South Wales
Western Power, the electricity networks corporation owned by the Western
Australia Government
112 E R M P O W E R A N N U A L R E P O R T 2 0 1 1
Company
ERM Power Limited
(ACN: 122 259 223)
Directors
Trevor St Baker
Non-Executive Chairman
Anthony (Tony) Bellas
Independent Non-Executive Director
Martin Greenberg
Independent Non-Executive Director
Antonino (Tony) Iannello
Independent Non-Executive Director
Brett Heading
Independent Non-Executive Director
Philip St Baker
Managing Director
Company Secretaries
Peter Jans
Graeme Walker
Head office
Level 5, Riverside Centre
123 Eagle Street
Brisbane Qld 4000
Tel: (07) 3020 5100
Fax: (07) 3020 5111
Sydney office
Suite 2, Level 6
3 Spring Street
Sydney NSW 2000
Tel: (02) 8243 9100
Fax: (02) 9251 4827
Perth office
Level 4, St Georges Square
225 St Georges Terrace
Perth WA 6000
Tel: (08) 9841 1100
Fax: (08) 9322 6154
Bankers
National Australia Bank
Auditors
PricewaterhouseCoopers
Lawyers
McCullough Robertson
Freehills
Share Registry
Link Market Services
Website
www.ermpower.com.au
Level 5, Riverside Centre
123 Eagle Street
Brisbane Qld 4000
T: (07) 3020 5100
F: (07) 3020 5111
www.ermpower.com.au