E R M P O W E R L I M I T E D A N N U A L R E P O R T 2 0 1 6 ANNUAL REPORT 2016 CONTENTS Chairman’s and Managing Director’s Report Management Discussion and Analysis Directors’ Report Remuneration Report Corporate Governance Statement Annual Financial Statements Directors’ Declaration Independent Auditor’s Report Share and Shareholder Information 2 4 16 22 36 44 107 108 110 Corporate Directory Inside Back Cover ERM Power Limited ABN 28 122 259 223 (ERM Power, Company, Group, we, our) was listed on the Australian Securities Exchange on 10 December 2010. This review is for the year ended 30 June 2016 with comparison against the previous corresponding period ended 30 June 2015 (previous year or previous period). All reference to $ is a reference to Australian dollars unless otherwise stated. Individual items totals and percentages are rounded to the nearest approximate number or decimal. Some totals may not add down the page due to rounding of individual components. CHAIRMAN’S AND MANAGING DIRECTOR’S REPORT PAGE 2 TRANSFORMATION AND RESULTS ERM Power made excellent progress in the execution of its diversification and growth strategy during the 2016 financial year. The Company delivered earnings of $81.2m (EBITDAF1) while furthering the transformation of the business. Today ERM Power specialises in electricity retailing and energy management solutions for commercial and industrial (C&I) customers and SMEs in Australia and two major markets in the US. Our industry is changing and we are transforming the business to take advantage of the growing need for new energy solutions in a dynamic and competitive market. Earnings during this period reflected business transition and investment, with underlying EBITDAF down $13.2m from $94.4m in the prior period. Underlying NPAT was $19.2m, down 41% on the prior year. These results and the share price clearly do not yet reflect our aspirations or the significant transformational efforts underway. The Board approved dividends of 12.0 cents per share, unchanged from the previous year. PROGRESS AGAINST OUR STRATEGY In October 2015, ERM Power announced its US electricity retailing and energy solutions businesses would form the cornerstone of our growth strategy. The acquisitions of Greensense and Lumaled during the year made material contributions to the growing Energy Solutions suite. Energy efficiency offers tremendous opportunity for our business customers to manage cost as well as meet environmental targets and associated branding objectives. ERM Power is ideally positioned in this rapidly growing sector of the energy industry. We’re making good progress in providing our business customers with smart data, analytics on usage and a full range of energy solutions such as efficient lighting, power factor correction, demand side management, storage and energy efficiency technologies. US operations and electricity sales scaled up substantially during the year. The US business, Source Power & Gas, in its first full year as an ERM Power company grew electricity sales from 0.6TWh in FY2015 to 2.4TWh in FY2016. Forward contracted electricity sales in the US grew from 4.0TWh to 10.8TWh at 30 June 2016. The Australian electricity sales business performed well in a highly competitive market, with electricity sales increasing 12.4% to 18.1TWh. The 12-month forward contract load is comparable to that signed at the same period last year. Total contracted forward sales of 25.3TWh at 30 June 2016 for the Australian business were down 5.8TWh on the same period last year as customers elect to sign for shorter periods, in the hope that wholesale electricity prices come down. Pleasingly, the SME business performed strongly with the number of sites under contract increasing by 31% to 38,341 at 30 June 2016. Profitability in the SME business continued to improve with greater economies of scale on higher load sold. 1 Refer to Glossary of Management Discussion and Analysis. 2 Utility Market Intelligence (UMI) survey of major retail electricity retailers by independent research company NTF Group in 2015 (20th year of Survey). Research based on survey of 300 business electricity customers between November 2015 and January 2016. Four major electricity retailers benchmarked. ERM POWER ANNUAL REPORT | 2016 Oakey Power Station had a challenging year with revenue down slightly and EBITDAF down 49% to $11.5m. The plant now operates as a merchant facility and, as such, electricity market and derivative revenue was lower than the off-take contract revenue under the prior contract. Revenue and EBITDAF from Neerabup decreased slightly as a result of additional energy sales in the prior year. Both Oakey and Neerabup Power Stations maintained outstanding availability, performance and safety records. SATISFIED CUSTOMERS For five years running, ERM Business Energy has been ranked number one for customer satisfaction2. This underscores our commitment to customer service and is an important foundation for the expansion of customer relationships in energy solutions. MARKET LANDSCAPE The Australian business landscape remains challenging, from an industry, political and regulatory perspective. A decade of changing public policy, mixed investment signals, renewables and new technologies have resulted in highly volatile gas and electricity markets. The lack of an economically rational and energy-secure pathway from lower cost thermal generation to renewables is having wide-ranging impacts on the sector and the broader economy. The need for stable and consistent national energy policy has never been greater. ENERGY EFFICIENCY OPPORTUNITY The move to renewables naturally means the supply side of the energy equation continues to drive national discussion on energy policy. The push by governments to de-carbonise the economy has both structural and commercial implications for the energy supply industry. The transition to a greater share of renewables in the energy mix is not easily achieved. South Australia, the state with the largest proportion of wind and solar power in its energy mix is struggling with issues of intermittency of supply, wholesale market volatility and much higher electricity prices than other NEM regions. This type of disruption represents an opportunity for ERM Power to provide innovative solutions to the challenges facing business energy customers. The Company has a history of adapting to changing markets, is already a disruptor in electricity retailing and has the capability and product suite to help business customers manage the rising cost of electricity through energy efficiency. ERM Power focusses on the often-neglected demand side of the energy equation, and champions information (data analytics) and energy management solutions which allow businesses to better understand and manage their consumption. For ERM Power, energy efficiency is a sustainable differentiator for the future. We consider energy efficiency to be a strategic enabler for businesses, helping reduce costs and improve operational, environmental and reputational outcomes. The acquisition of LED lighting company, Lumaled, and software and data analytics company, Greensense, adds to our energy solutions arsenal as we build a strong and compelling value proposition for existing and new customers. FUNDING GROWTH ERM Power has implemented a range of innovative capital efficiency measures to fund the next phase of growth. We are using funds more efficiently to support expansion in the SME market and energy solutions, and geographic expansion in the US. Diversification and growth are allowing us to build on our underpinning generation assets, and continue to drive further growth in the C&I sector. We expect SME customer acquisition to generate increasingly strong revenues. Key growth will also come from the US business. Finally, we will build on our strategic C&I base to deliver a range of end-to-end solutions which take advantage of our customer relationships, leading customer satisfaction and our knowledge of customer energy use. SHAPING THE FUTURE On behalf of the Board, we would like to thank ERM Power’s staff and the management team for their hard work and commitment which underpin our competitive advantage. With employee engagement at global high performing levels we have a culture which drives our strategy in a rapidly changing market. The dedication of our team is driving the success of our transformation. We thank our growing customer base in Australia and the US. To our loyal shareholders, we appreciate your support as we have made changes. Clearly, our results are not reflective of the potential of the Company or the aspirations of management, Board and shareholders. Nevertheless, the Board is confident that the Company is strategically positioned for sustained high performance. Our chosen markets in C&I and SME electricity retailing in Australia and, increasingly, in the US, present significant upside potential and the lead indicators are encouraging. We provide almost 20% of the electricity powering businesses, governments and industrials in Australia. We are taking these business relationships to the next level to provide energy management solutions which deliver real benefits for business. We have the agility and proven expertise to integrate emerging technology into our business model to create value for our customers. Finally, we wish to acknowledge the support of our fellow directors. We look forward to demonstrating the results of our strategic transformation. Tony Bellas Chairman Jon Stretch Managing Director and CEO PAGE 3 1. RESULTS OVERVIEW Key financial data ($m unless otherwise stated) Underlying EBITDAF before interest income Underlying EBITDAF Underlying EBIT Underlying NPAT Statutory NPAT Net debt / (cash) Dividends paid (cents per share) Underlying earnings per share (cents) Key operational data Electricity sold (TWh) Forward contracted electricity sales (TWh) FY2016 FY2015 77.9 81.2 52.7 19.2 35.8 29.0 12.0 7.8 89.5 94.4 69.2 32.3 65.9 68.9 12.0 13.4 FY2016 FY2015 20.5 36.1 16.7 35.1 SME customers (Australia) 38,341 29,238 Overview ERM Power delivered earnings of $81.2m (underlying EBITDAF) in the 2016 financial year while making significant progress on the execution of its diversification and growth strategy. The Company’s transition gathered pace with the acquisition of complementary energy solutions businesses and growth in the US retailing business, consistent with the strategy to build allied revenue streams off a strong, satisfied and growing electricity retailing customer base. During the year, the scale of operations and the forward customer book in the US business grew substantially. The Australian electricity retailing business performed well in a competitive market which was characterised by sustained high prices in wholesale electricity and environmental certificates. It was a challenging year for Oakey Power Station, operating in its first full financial year as a merchant plant. Neerabup and corporate expenses have remained stable. Significant progress was made in delivering on the capital efficiency program of work, with the Vales Point offtake agreement signed and the finalisation of a A$150m unsecured senior bank guarantee facility with Liberty International Underwriters Singapore. MANAGEMENT DISCUSSION AND ANALYSIS FOR THE YEAR ENDED 30 JUNE 2016 PAGE 4 ERM POWER ANNUAL REPORT | 2016 Underlying EBITDAF for the period was $81.2m compared to $94.4m in the prior year. Lower margins in the Australian electricity retailing business were offset by increased volumes during the period. The key drivers of the $13.2m decrease were as follows: 2. REVIEW OF OPERATING AND FINANCIAL RESULTS 2.1 Summary of Group financial results • The Oakey Power Station (Oakey) offtake contract expired on 31 December 2014 and Oakey operated for its first full financial year as a merchant facility. Earnings reduced $11.2m on the prior year with a major contributing factor being the Q4 market environment which differed substantially to expectations and market trends; • A smaller profit from the US electricity sales business SPG Energy Group LLC (Source) than the prior year due to increased operating costs to scale up the business and enter new markets ($0.8m); and • Reduction in underlying interest income ($1.6m). Underlying NPAT was $19.2m compared to $32.3m in the previous year with the key driver of the decrease being the after tax impact of reduced EBITDAF of $13.7m. Underlying finance costs and depreciation combined were $6.4m higher than the comparable period with the increase mostly arising from a full year of operations in the US business. Statutory NPAT was $35.8m and differs to underlying NPAT largely due to the unrealised net fair value movement in financial instruments, which are excluded from the underlying NPAT result. Earnings were at the lower end of the EBITDAF guidance range of $81m to $85m given the well-publicised volatility in energy markets, particularly in Q4, which saw unexpected electricity price outcomes. Outlook The FY2017 outlook for each of the business divisions, as outlined in the market update of 20 June 2016, is as follows: • The US electricity retailing business continues to show strong lead indicators: A forecast doubling of annual sales volume in FY2017 to about 5TWh. Gross margin expected to be AUD$8 to $8.50/MWh and operating expenditure at AUD$4/MWh, reducing as the business scales. • The Australian electricity retailing business anticipates load growth and margin pressure, as outlined below, given the significant retail competition in the Australian electricity markets: Continued growth in sales volumes to about 18.5TWh for FY2017, which at 2% growth, is slower than historic levels. This reflects a larger than normal proportion of business which came up for renewal and has resulted in some attrition, notwithstanding win rates and retention rates were strong at 23% and 67% for FY2016. Re-contracting volumes will normalise during FY2017. Average gross margin for FY2017 is expected to be about $3/MWh for the Australian retailing business. • FY2017 EBITDAF for Oakey Power Station is forecast in the range of $14 to $16m which includes allowance for a scheduled maintenance outage in 2017. • Corporate costs, combined with investment in the growing Energy Solutions portfolio, are expected to be about $18m. $m Revenue Expenses FY2016 FY2015 Change 2,763.3 2,316.2 447.1 (2,685.4) (2,226.7) (458.7) Underlying EBITDAF before interest income Interest income Underlying EBITDAF 77.9 3.3 81.2 89.5 4.9 94.4 Significant items (8.5) (7.7) (11.6) (1.6) (13.2) 0.8 % 19% 21% (13%) (33%) (14%) 10% Statutory EBITDAF including interest income Depreciation and amortisation Net fair value gain on financial instruments Share of associate profit (net of tax) Impairment expense Finance expense Profit before tax Tax expense Statutory net profit after tax (NPAT) Add back: Net fair value gain on financial instruments (net of tax) Share of associate profit (net of tax) Significant items Underlying NPAT 72.7 86.7 (14.0) (16%) (25.2) (20.3) (4.9) 24% 39.5 97.7 (58.2) (60%) 0.4 – (29.2) 58.2 (22.4) 0.7 (43.0) (27.3) 94.5 (28.6) (0.3) (43%) 43.0 (1.9) (36.3) 6.2 N/A 7% (38%) (22%) 35.8 65.9 (30.1) (46%) (27.3) (68.3) 41.0 (60%) (0.4) 11.1 19.2 (0.7) 35.4 32.3 0.3 (24.3) (13.1) (43%) (69%) (41%) Statutory NPAT down 46% to $35.8m Statutory NPAT reduced $30.1m largely as a result of a reduction in net fair value gains on financial instruments following adoption of hedge accounting from 1 July 2015 for certain electricity derivative financial instruments. The Group is required to value its forward electricity purchase contracts at market prices at each reporting date. Changes in values between reporting dates are recognised as unrealised gains or losses in the particular reporting period either in profit or loss or the hedge reserve. During the year the Group recognised a provision of $1.9m for an onerous contract in relation to the sublease of part of the Group’s Brisbane premises. A $3.4m loss was recognised on sale of the Group’s shareholding in Empire Oil & Gas NL (Empire). The Group’s proportional earnings from this investment prior to sale are shown in share of associate profit, which was $0.4m for the year. In the prior year, an impairment expense of $43.0m was recognised on the Group’s power station development costs and gas interests. PAGE 5 MANAGEMENT DISCUSSION AND ANALYSIS (CONT.) FOR THE YEAR ENDED 30 JUNE 2016 Underlying EBITDAF down 14% to $81.2m Underlying EBITDAF decreased principally as a result of lower earnings from Oakey Power Station as shown in the table below. $m FY2016 FY2015 Change Business Energy AU Business Energy US Generation 54.8 0.0 35.4 54.6 0.8 46.8 % – N/A 0.2 (0.8) (11.4) (24%) Corporate and other (12.3) (12.7) 0.4 3% Underlying EBITDAF before interest income Interest income Underlying EBITDAF 77.9 3.3 81.2 89.5 4.9 94.4 (11.6) (1.6) (13.2) (13%) (33%) (14%) 2.2 Operating business results 2.2.1 Electricity sales Load sold (TWh) Contestable revenue ($’000) Gross margin ($’000) Opex ($’000) EBITDAF before interest income ($’000) Interest income ($’000)2 EBITDAF ($’000) Significant items ($’000) Underlying EBITDAF ($’000) Underlying NPAT down 41% to $19.2m Underlying NPAT decreased from $32.3m in the prior year to $19.2m with the key drivers of the decrease being the after tax impact of reduced EBITDAF and increased depreciation and finance costs from a full year of operations in the US. Finance costs were $1.9m higher overall primarily as a result of additional US credit sleeving and other financial costs of $2.7m on higher load sold, while Australian finance costs were $0.8m lower than the prior year. Depreciation and amortisation costs have risen $4.9m overall with increases in depreciation and amortisation of software and customer acquisition costs in the Australian electricity sales business and the inclusion of the US operations for a full year. These increases were partly offset by the reduction in depreciation following the sale of gas assets in the second half of FY2015. Business Energy Australia Business Energy US Total FY2016 FY2015 FY2016 FY20151 FY2016 FY2015 18.1 16.1 2.4 0.6 20.5 16.7 1,299,380 1,066,237 158,629 44,231 1,458,009 1,110,468 75,665 72,299 15,356 6,662 91,021 78,961 (21,212) (21,739) (15,832) (5,887) (37,044) (27,626) 54,453 50,560 2,482 3,174 56,935 53,733 363 3,974 57,298 57,707 (476) – (476) 469 (7) 780 53,977 51,340 – 2,482 3,174 780 56,459 54,513 – 832 3,974 780 57,291 58,487 1 Reflects part year ownership from January 2015 to 30 June 2015. 2 Includes interest income on cash held for AEMO prudential requirements. Underlying gross margin / MWh Australia US Underlying Opex / MWh Australia US Load (TWh) C&I Australia SME Australia US Underlying EBITDAF before interest income ($’000) Australia US Figures above are rounded 2H FY2016 1H FY2016 2H FY2015 1H FY2015 2H FY2014 1H FY2014 2H FY2013 1H FY2013 3.94 7.16 4.48 5.61 5.37 10.02 4.07 4.71 3.60 3.62 5.85 – – – – – (1.10) (6.13) (1.25) (6.82)1 8.8 0.3 1.3 8.7 0.3 1.1 (1.32) (1.36) (0.91) (1.65) (1.08) (1.18) (8.85) 8.0 0.2 0.6 – 7.8 0.1 – – 7.4 0.1 – – 6.5 0.1 – – 5.9 – – – 5.2 – – 25,816 29,000 33,176 21,357 28,598 12,709 16,155 22,989 1,276 (1,283)1 780 – – – – – 27,092 27,717 33,956 21,357 28,598 12,709 16,155 22,989 1 Restated following finalisation of SPG purchase price allocation to include provision for trailing commission broker costs. See note 29 of annual financial report for further details. PAGE 6 ERM POWER ANNUAL REPORT | 2016 FY2016 performance Australian market The Australian electricity sales business load grew 12.4% on the prior year. SME load grew 73.7% and C&I load sold increased by 11.5% on the prior year. C&I load increased to 17.5TWh reflecting ERM Power’s continued strong position in the market and excellent customer service. Market share at 30 June 2016 was approximately 20%. The business was again recognised for outstanding customer service in the independent NTF Group’s annual Utility Market Index survey with 84% of customers either very satisfied or satisfied. The nearest competitor achieved a score of 65%. This represented the fifth year in a row in which the survey results demonstrated ERM Power’s leadership in customer satisfaction and service. Operationally ERM Power continued to maintain its industry leading position across all key measures including billing timeliness and accuracy. The recontracting rate in FY2016 remained strong at 67%, although slightly below the calendar 2015 rate of 71%. FY2016 overall win rates were also strong at 23%. Contracted forward sales of 25.3TWh at 30 June 2016 for the Australian business were down 5.8TWh (19%) on the same time last year. The 12-month forward contracted load at 1 July 2016 for FY2017 is 15.7TWh, which is in line with the comparable figure for FY2016 (15.6TWh). These changes reflect customers entering into shorter duration contracts, driven by their reluctance to contract for long periods at current higher wholesale prices. The average contract length of ERM Power’s largest customers signed in FY2016 versus FY2015 declined around 23%. Progress in the SME market continued with 38,341 sites under contract at 30 June 2016, an increase of 31% on the 29,238 sites under contract at 30 June 2015. Profitability continued to improve with greater economies of scale on higher load sold. All aspects of operational performance kept pace with the growth in customer numbers and renewal rates remain strong as customers value ERM Power’s superior service. ERM Power’s focus in the SME market remains in New South Wales (NSW) and Victoria (VIC) with a growing presence in Queensland (QLD). The Company continues to have limited presence in South Australia (SA) and Tasmania (TAS) due to wholesale market conditions and unfavourable regulated electricity tariffs. Contestable revenue increased as a result of both volume increases and higher underlying wholesale prices (energy and renewable energy certificates). Underlying gross margin per MWh decreased from $4.72 in the prior year to $4.20. The decrease reflects competitive pressures lowering margins. Portfolio optimisation of positions for both black electricity and environmental commodity products is a normal part of operations; in FY2016 with the substantial rise in both Large Scale Generation Certificates (LGCs) and wholesale electricity prices, sales on market increased for both of these products as part of ERM Power’s risk management strategy. The sale of favourably priced LGC inventory in FY2016 has contributed partially to the lower than trend gross margin forecast for FY2017, which is expected to be about $3/MWh. Operating costs per MWh in the Australian business decreased in FY2016 compared to FY2015. This reflects continued economies of scale and reduced staff bonuses. US market The US electricity sales business Source Power & Gas sold 2.4TWh of electricity during the year, an increase of 64% on the total load sold in FY2015. Forward electricity sales increased substantially from 4.0TWh1 to 10.8TWh at 30 June 2016. The significant increase in forward contracted load reflects a comprehensive broker engagement plan and significant investment in new systems, processes and people. As the business grows in scale we expect to see greater portfolio diversification of customers in the PJM and ERCOT markets and greater economies of scale in operating costs. Gross margin increased in the second half to $7.16/MWh versus $5.61/MWh in the first half, and was ahead of expectations. This is driven by a number of factors, including customer mix, where there are benefits being realised from an increase in high margin customer load, and the contribution from improved trading and risk management capability. There is further scope for improvement in this area. Operating unit costs in the US business decreased on the immediately preceding half through a combination of scale benefits and the timing of investments weighted to 1H. As a part of completion of the purchase price allocation, the accounting treatment of trailing broker costs in the US has been aligned with the Australian business resulting in the capitalisation of $1.9m of broker costs which had been expensed in 1H, which equates to A$1.73/MWh. During the year, the business developed the capability to serve an additional nine new PJM local markets across Pennsylvania, Delaware and the District of Columbia. The business now serves 31 local markets in eight states, which has added 105TWh to the current total accessible business market of 516TWh and a residential market in ERCOT of 86TWh. This capability to serve combined with the investment in system improvements and increased staffing sets the business up to continue to grow the forward sales book and decrease operating costs per MWh. In 2015 Source participated in the ERCG2 Broker Survey for the second year running. Pleasingly the business was ranked third overall for broker satisfaction, up from fourth in the prior year. 21% of the 130 brokers surveyed said they did business with Source in 2014 and this increased to 44% in December 2015. The survey results demonstrate strong customer service and growing broker consideration and satisfaction with the Source proposition. 1 Previously forward contracted load for our US business was reported in our 30 June 2015 annual report as 3.2TWh. This is incorrect and forward contracted load was 4.0TWh. 2 Energy Research Consulting Group’s (ERCG) survey of Aggregators, Brokers and Consultants (ABC) Study December 2015. Research based on survey of 134 ABCs, which represents ~82% of brokered US power sales. PAGE 7 MANAGEMENT DISCUSSION AND ANALYSIS (CONT.) FOR THE YEAR ENDED 30 JUNE 2016 2.2.2 Generation $m Revenue and other income1 Oakey Neerabup Generation development and operations Underlying EBITDAF Oakey Neerabup Generation development and operations Interest income Significant items Statutory EBITDAF including interest income 1 Excludes interest income. Oakey Forced outage rate Availability rate Neerabup Forced outage rate Availability rate FY2016 FY2015 Change % 71.7 31.1 74.2 32.2 2.7 6.9 105.5 113.3 (2.5) (1.1) (4.2) (7.8) 11.5 25.1 22.7 25.2 (11.2) (0.1) (1.2) 0.5 35.9 (0.3) (1.1) 0.6 47.4 (0.6) (0.1) (0.1) (11.5) 0.3 (3%) (3%) (61%) (7%) (49%) – 9% (17%) (24%) (50%) 35.6 46.8 (11.2) (24%) FY2016 FY2015 0.03% 0.2% 99.1% 98.5% 0.01% 0.01% 97.96% 99.93% FY2016 performance Underlying EBITDAF for the period was $35.9m, down 24% from $47.4m in the previous comparable period. Revenue and EBITDAF for Oakey decreased following the expiration of the off-take contract with AGL on 31 December 2014. Oakey operated as a merchant facility during the year with the electricity market and derivative revenue lower than the off-take contract revenue from AGL and consequently underlying EBITDAF before interest income for the year was down 49% to $11.5m for FY2016. Oakey is utilised both to deliver value as an asset and also as a component of ERM Power’s retail hedging strategy. Since moving into merchant operations Oakey’s load factor has increased substantially to 17.75%. In its first full year of merchant operations in FY2016, EBITDAF from Oakey Power Station was $11.5m, lower than the prior year ($22.7m) when Oakey was contracted under a long-term profitable off-take arrangement in the first half of the year. Oakey produced solid earnings in Q1-Q3 of FY2016 in line with a full year expectation of previous guidance of $16m EBITDAF. However, market conditions in April to June differed substantially from market expectations and were not favourable to our merchant strategy which had proved effective in previous quarters. This resulted in reduced profitability in Q4 and a full year EBITDAF result of $11.5m. PAGE 8 After the earnings generated in Q1-Q3 of FY2016 and the experience of running the station as a merchant operation for the full year in FY2016 we expect the FY2017 earnings from Oakey to improve with projected EBITDAF in the range of $14m to $16m. Generation development and operations revenue decreased following the operator agreement with Kwinana concluding on 30 September 2014. EBITDAF remained steady following the decision in 2015 to suspend future generation development activities. Revenue from Neerabup decreased slightly as a result of additional energy sales in the prior year. Further financial information on the power station assets is contained in Appendix A1.3. Power station operating performance During the period Oakey operated for 17.75% of the time. Oakey maintained its outstanding availability and overall performance record, with a forced outage rate of 0.03% and an overall availability of 99.1% during the year. Neerabup operated for 3.72% of the year and also maintained its outstanding availability and overall performance record with a forced outage rate of 0.01% and availability of 97.96%. Safety During the period the business continued to maintain an outstanding safety record with no lost-time injuries among staff. One lost time injury occurred when a contractor at Neerabup Power Station recorded a trip injury. 2.2.3 Corporate and other $m Revenue Expenses Gas underlying EBITDAF Energy solutions underlying EBITDAF Underlying EBITDAF before interest income Interest income Significant items Statutory EBITDAF including interest income FY2016 FY2015 Change 3.5 (15.5) (12.0) 2.7 (16.6) (13.9) 0.8 1.1 1.9 % 30% (7%) 14% – 1.2 (1.2) N/A (0.3) – (0.3) N/A (12.3) (12.7) 0.3 (7.3) 1.2 (3.1) 0.4 (0.9) (4.2) 3% (75%) 135% (19.3) (14.6) (4.7) (32%) FY2016 performance Corporate and other expenses decreased on the prior year principally as a result of reduced staff performance bonuses. The Group made a small loss on the acquired energy solutions businesses during the period while earnings from the gas business reduced following the disposal of interests in gas assets in the second half of FY2015. Significant items include staff rationalisation, retirement payments and costs associated with the Greensense and Lumaled acquisitions completed during the year. Staff rationalisation costs reflect the Group’s divestment of gas assets and suspension of power generation development activities. An onerous lease provision was also recognised in respect of the Group’s Brisbane head office. ERM POWER ANNUAL REPORT | 2016 (13.1) (0.9) 6.6 0.6 (6.8) 52.1 (16.5) 19.9 (80.3) 22.9 (11.3) (4.3) (17.5) (24.3) (0.3) (6.5) (5.1) (0.1) (2.1) 1.2 11.8 1.0 (0.1) FY2016 FY2015 Change 2.3 Cash flow $m EBITDAF Interest received Non-cash items Tax paid Operating cash flow before working capital changes Transfer from broker account Renewable energy certificates Emissions trading scheme liability Accounts receivable and accrued income Network and other trade payables Wholesale and other counterparty payables net Other working capital Net working capital changes 68.4 81.5 4.3 7.9 – 80.6 60.4 13.8 25.7 (96.2) 62.4 (27.5) 0.7 39.3 5.2 1.3 (0.6) 87.4 8.3 30.3 5.8 (15.9) 39.5 (16.2) 5.0 56.8 Operating cash flow 119.9 144.2 (9.3) (0.6) (0.2) (0.1) (5.8) (2.7) – (5.0) (23.7) Business Energy Australia Business Energy US Oakey Neerabup Acquisition of subsidiaries net of cash acquired Purchase of share investments Sale of Metgasco and Empire Oil shares Other Total investing cash flow Net draw down / (repayment) of borrowings Finance costs Dividends paid Total financing cash flows (9.6) (7.1) (5.3) (0.2) (7.9) (1.5) 11.8 (4.0) (23.8) (21.7) (26.9) (27.9) (76.5) (103.4) 81.7 (25.8) (27.7) (1.1) (0.2) (156.9) 80.4 Effect of exchange rate changes on cash and cash equivalent Total net change in cash Opening cash Closing cash – 19.6 172.8 192.5 0.4 (36.0) 208.8 172.8 (0.4) 55.6 (36.0) 19.7 Operating cash flow before working capital changes was $6.8m lower than the prior year as a result of a decrease in earnings. Working capital changes were $17.5m lower than the prior year principally as a result of timing related to network, wholesale and counterparty settlements and changes in the volume of renewable energy certificates held in inventory. Accounts receivable and accrued income increased with the increase in load both in Australia and the US. Working capital changes and resultant operating cash flows can fluctuate extensively intra-month and between balance dates in our electricity sales businesses both in Australia and the US due to the factors below: • Changes in inventory levels and timing of purchases of renewable energy certificates to cover emissions trading scheme liabilities, • Weekly market settlement terms for electricity pool purchases and counterparty derivative settlements resulting in payments falling after balance date, • Variability of invoice issue dates and resulting payment due dates for network charges and other trade payments resulting in required payment timing falling before or after balance dates, and • Timing of customer receipts after the invoice issue date. Working capital items excluding renewable energy certificates and the associated emissions trading scheme liability generally clear within a short period after balance date. Net finance costs remained consistent with the prior year while investment cash flows were marginally higher with the net cash acquisition cost of Greensense Pty Ltd and Lumaled Pty Ltd of $7.9m and greater intangible asset purchases of $18.0m offset by reduced spend on gas assets of $1.3m and sale proceeds of $11.8m from the sales of investments in Metgasco and Empire during the year. Purchases of property, plant and equipment, intangible assets and customer acquisition costs were $12.4m higher during the year. The increase was mostly attributable to initial capital expenditure for the planned Oakey Power Station maintenance and higher customer acquisition costs during the year. PAGE 9 MANAGEMENT DISCUSSION AND ANALYSIS (CONT.) FOR THE YEAR ENDED 30 JUNE 2016 2.4 Balance sheet and capital structure 2.4.2 Net debt 2.4.1 Balance sheet $m Inventory Receivables and accrued income Payables, provisions and accrued expenses Other assets Net working capital PPE and intangibles Investments Provisions and other liabilities Net capital employed Net tax balances Net derivative balances Net financial debt Total net assets 30 June 2016 22.1 330.6 30 June $m 2015 Change Neerabup free cash 36.4 232.4 (14.3) 98.2 Other free cash Total free cash (367.0) (279.2) (87.8) Neerabup restricted cash 5.4 (8.9) 6.3 (4.1) 470.3 439.7 1.6 (27.4) 435.6 (93.9) 158.7 (29.0) 471.4 15.1 (3.1) 447.6 (13.3) (45.7) (68.9) 319.7 (0.9) (4.8) 30.6 (13.5) (24.3) (12.0) (80.6) 204.4 39.9 151.7 Other restricted cash Total restricted cash Total cash Other debt Total borrowings Net debt / (cash) on balance sheet 30 June 2016 30 June 2015 Change 13.7 53.6 67.3 9.1 116.1 125.2 192.5 9.9 35.5 45.4 8.6 118.8 127.4 172.8 27.9 43.7 221.5 241.7 3.8 18.1 21.9 0.5 (2.7) (2.2) 19.7 (4.4) (15.8) (20.2) 29.0 68.9 (39.9) Neerabup debt (non-recourse) 193.6 198.0 Net assets increased substantially during the year principally as a result of an increase in net derivative balances, which included the positive mark to market carrying value of the electricity swap contract entered into with Sunset Power International Pty Ltd in respect of the Vales Point Power Station. At 30 June 2016 this contract made up approximately 48% of the net derivative balance shown above. Receivables and accrued income includes an amount of $14.9m in respect of a loan made to Empire, which was repaid in August 2016. Part of the increase relates to favourable wholesale counterparty accrued income at 30 June 2016. Net working capital overall decreased whilst property, plant and equipment and intangibles increased primarily as a result of the finalisation of the Source purchase price acquisition (PPA) and subsequent recognition of a trailing commission broker provision for the acquisition of customers contracts and the associated intangible asset. The net deferred tax liability increased at 30 June 2016 principally as a result of the increase in value of derivative contracts. Net financial debt / (cash) excluding Neerabup net debt (141.8) (110.6) (33.1) Total borrowings decreased by $20.2m at 30 June 2016 with less drawn on the receivables working capital facility at 30 June 2016 and continued repayment of the Neerabup term debt. Net debt on balance sheet reduced by $39.9m with more free cash held. Excluded from this net debt figure is certain non-cash backed guarantees provided under banking facilities as detailed in note 27 of the annual financial report. Non cash backed guarantees were higher than the prior year with prudential support of $150m posted with AEMO at 30 June 2016 compared to $80m at 30 June 2015. This was the result of unusually high wholesale electricity prices in Australia in June and a decision by management to utilise lower cost guarantee facilities rather than available reallocation facilities to fund these prudential requirements. Restricted cash remained at similar levels to the prior year. This reflects decreases from our new facilities offset by a combination of higher margining requirements driven by more volatile wholesale prices and additional cash held in restricted accounts under the Australian receivables facility and the US sleeving facility. Overall the Group has strong liquidity with significant unused finance facilities at 30 June 2016 equivalent to an increase in overall liquidity of approximately $100m arising from a capital efficiency program of work, with the Vales Point swap agreement signed and the finalisation of a A$150m unsecured senior bank guarantee facility with Liberty International Underwriters Singapore. PAGE 10 ERM POWER ANNUAL REPORT | 2016 2.4.3 Dividend strategy and history An unfranked final dividend of 6.0 cents per share for FY2016 was declared on 25 August 2016 equating to an annualised pre-tax dividend yield of 14.3% at 30 June 2016. At the present time the company has no franking credits and tax losses in Australia and accordingly does not anticipate being in a position to frank dividends until these losses are utilised. For the year ended 30 June 2016 the Group utilised approximately one third of its available tax losses in Australia. The Company has a progressive dividend policy with consideration of current and future cash flow and growth capital requirements. When determining the dividend payable, directors take into consideration any significant non-recurring items in respect of either earnings or capital expenditure. Directors intend to pay dividends bi-annually after the respective period results are published. The final decision to pay a dividend will be made subject to actual results and other considerations with reference to the underlying cash flow requirements of the business. 3 SAFETY, ENVIRONMENT AND COMMUNITY 3.1 Safety ERM Power’s key safety vision is to achieve “Zero Harm” to any employee or contractor. Our safety performance is measured by recording the number of injuries experienced in a year. The Company has a number of safety measures that are reported to the Board monthly including number of near misses, lost time or permanent injuries (LTI). There were no ERM Power personnel lost time injuries during the period. One lost time injury occurred when a contractor at Neerabup Power Station recorded a trip injury. 3.2 Environment ERM Power’s key environmental value is to care for people and the planet, and environmental performance is measured by recording the number of environmental incidents in a year, and monitoring carbon emissions and water usage. During the year there were no reportable environmental incidents, nor were there any breaches of any environmental licence conditions at Oakey or Neerabup. During the year Oakey and Neerabup’s carbon dioxide emissions were in line with expectations and the carbon emission intensity of the facilities were less than the average carbon emissions intensity in each state. Water usage at the power stations is low in comparison to other technologies, with little domestic fresh water used in the operation of the stations. There were no unexpected changes in water usage at Oakey or Neerabup during the year. 3.3 Community ERM Power is proud to contribute to the communities in which it operates through partnership and sponsorship programs. The Company is committed to building positive and long lasting relationships that harness community spirit, build local skills and leverage combined expertise to deliver tangible outcomes. This is evidenced in ERM Power’s participation in the Vinnies CEO Sleepout and long-term sponsorship of indigenous programs in schools and the performing arts. NON-IFRS FINANCIAL INFORMATION The directors believe the presentation of certain non-IFRS financial measures is useful for the users of this document as they reflect the underlying financial performance of the business. The non-IFRS financial profit measures are used by the managing director to review operations of the Group and include but are not limited to: 1. EBITDAF – Earnings before interest, tax, depreciation, amortisation, impairment and net fair value gains / losses on financial instruments designated at fair value through profit. EBITDAF excludes any profit or loss from associates. 2. Underlying EBITDAF – EBITDAF excluding significant items. 3. Underlying NPAT – Statutory net profit after tax attributable to equity holders of the Company after excluding the after tax effect of unrealised marked to market changes in the fair value of financial instruments, impairment and gains / losses on onerous contracts and other significant items. Underlying NPAT excludes any profit or loss from associates. A reconciliation of underlying NPAT and underlying EBITDAF is detailed in Appendix A1.1 of this document. The above non-IFRS financial measures have not been subject to review or audit. These non-IFRS financial measures form part of the financial measures disclosed in the books and records of the Consolidated Entity, which have been reviewed by the Group’s auditor. The Group is required to value its forward electricity purchase contracts at market prices at each reporting date. Changes in values between reporting dates are recognised as unrealised gains or losses in the particular reporting year either in profit or loss or the hedging reserve. The directors believe that underlying EBITDAF and underlying NPAT provide the most meaningful indicators of the Group’s business performance. Significant items adjusted in deriving these measures are material items of revenue or expense that are unrelated to the underlying performance of the Group. PAGE 11 MANAGEMENT DISCUSSION AND ANALYSIS (CONT.) FOR THE YEAR ENDED 30 JUNE 2016 APPENDICES A1.1 Reconciliation of underlying EBITDAF and underlying NPAT To allow shareholders to make an informed assessment of operating performance for the year, a number of significant items of revenue or expense in each year have been identified and excluded to calculate an underlying EBITDAF and underlying NPAT measure. These items may relate to one-off transactions or revenue or costs recognised during the year that are not expected to routinely occur as part of the Group’s normal operations. A reconciliation of underlying EBITDAF and underlying NPAT are shown in the tables below. FY2016 $m Statutory EBITDAF Significant items a) New business establishment costs b) Unrealised foreign exchange loss c) Effective interest revenue on associate loan d) Staff rationalisation and retirement costs e) Provision for onerous contract f) Counterparty administration g) Loss on sale of associate investment Total significant items Underlying EBITDAF Statutory NPAT Significant items EBITDAF adjustments (above) h) Financing establishment costs i) Tax effect on non-deductible acquisition costs j) Tax effect on sale of shares Tax effect of above adjustments Total significant items Fair value (gain) / loss on financial instruments net of tax Associate profit after tax Underlying NPAT Business Energy AU Business Energy US Generation Other Group 56.9 (0.5) 35.6 (19.3) 72.7 – – – – – 0.4 – 0.4 57.3 0.5 – – – – – – 0.5 0.0 – 0.3 – – – – – 0.3 35.9 0.4 0.2 (1.0) 2.4 1.9 – 3.4 7.3 0.9 0.5 (1.0) 2.4 1.9 0.4 3.4 8.5 (12.0) 81.2 61.6 (1.2) (3.4) (21.2) 35.8 0.4 0.5 0.3 – – – (0.1) 0.3 (31.9) – 30.0 – – – (0.2) 0.3 (4.9) – (5.8) – – – (0.1) 0.2 8.2 – 5.0 7.3 0.4 0.3 4.5 (2.2) 10.3 1.3 (0.4) (10.0) 8.5 0.4 0.3 4.5 (2.6) 11.1 (27.3) (0.4) 19.2 a) Costs incurred in respect of identifying, establishing and integrating new businesses started and new companies acquired. b) Unrealised foreign exchange losses on foreign currencies held. c) Recognition of Empire loan at present value and interest revenue unwind. d) Costs associated with rationalisation and retirement of staff. e) Impairment of the contract to sublease Brisbane office space. f) Default by a wholesale counterparty that went into administration. g) Loss recognised on disposal of Empire shares held. h) Costs incurred for the establishment of the unsecured senior bank guarantee facility with Liberty International Underwriters Singapore. i) Tax impact of non-deductible acquisition costs for Source in FY2015. j) De-recognition of deferred tax asset upon sale of Metgasco and Empire shares. PAGE 12 ERM POWER ANNUAL REPORT | 2016 A1.1 Reconciliation of underlying EBITDAF and underlying NPAT (cont.) FY2015 $m Statutory EBITDAF Significant items a) New business establishment costs b) Unrealised foreign exchange gain c) Arbitration costs d) Staff rationalisation cost e) Effective interest revenue on associate loan f) Swap termination payment Total significant items Underlying EBITDAF Statutory NPAT Significant items EBITDAF adjustments (above) g) Impairment of development and gas assets Tax effect of above adjustments Total significants items Fair value (gain) / loss on financial instruments net of tax Associate profit after tax Underlying NPAT Business Energy AU Business Energy US Generation Other Group 53.7 0.8 46.8 (14.6) 86.7 0.2 – – – – 3.8 4.0 57.7 96.4 4.0 – (1.2) 2.8 (67.8) – 31.4 – – – – – – – 0.8 – – – – – (0.7) – (0.7) – – 0.6 – – – 0.6 47.4 2.0 (0.2) – 1.5 (0.2) – 3.1 (11.5) 2.2 (0.2) 0.6 1.5 (0.2) 3.8 7.7 94.4 (5.9) (24.6) 65.9 0.6 26.9 (8.3) 19.2 (0.5) – 12.8 3.1 16.1 (5.8) 13.4 0.7 (0.7) (11.2) 7.7 43.0 (15.3) 35.4 (68.3) (0.7) 32.3 a) Costs incurred in respect of establishing our metering business and acquiring and integrating Source. b) Unrealised foreign exchange gains on foreign currency held. c) Costs net of contributions received in respect of the Neerabup contractor arbitration. d) Costs associated with changes and rationalisation of staff. e) Recognition of Empire loan at present value and interest revenue unwind. f) Final negotiated payment made in January 2015 as part of arrangement for bringing forward termination date of counterparty swap by 4 years to 30 June 2015. g) Impairment of gas and power station development assets. PAGE 13 MANAGEMENT DISCUSSION AND ANALYSIS (CONT.) FOR THE YEAR ENDED 30 JUNE 2016 A1.2 Reconciliation of movements in cash and cash equivalents $m FY2016 FY2015 Change % Operating activities EBITDAF Interest income Share based payments Provision for onerous contract Sale of equity accounted investment Net change in working capital Net tax paid Net operating cash flows Development investing activities Capital expenditure – development projects Capital expenditure – gas exploration Capital expenditure – other PPE and Intangibles Net capital expenditure cash flows 68.4 4.3 2.6 1.8 3.4 39.4 – 119.9 81.5 5.2 1.3 – (16%) (13.1) (0.9) (17%) 1.3 100% N/A 1.8 – 3.4 N/A 56.8 (0.6) 144.2 (17.4) 0.6 (24.3) (31%) N/A (17%) – – (1.6) 1.6 N/A (1.3) 1.3 N/A (26.2) (12.3) (13.9) 113% (26.2) (15.2) (11.0) 72% (5.9) – (15.8) 11.8 (1.5) Financing and other investing activities Repayment of project borrowings Loan to Empire Net drawdown / (repayment) of electricity sales borrowings Sale of shares Purchase of shares Payment for acquisition of subsidiary, net of cash acquired Dividends paid Net interest paid Other financing and investing cash flows Net increase in cash Effect of exchange rate changes on cash and cash equivalents Net increase / (decrease) in cash and cash equivalents (7.9) (27.9) (26.9) (74.1) 19.6 19.7 0.1 (5.1) (1.5) (96.8) – (2.7) (5.8) (27.7) (25.8) (0.8) 1.5 16% N/A 81.0 11.8 1.2 (84%) N/A (44%) (2.1) (0.2) (1.1) 36% 1% 4% (165.4) (36.4) 91.3 56.0 (55%) N/A 0.4 (0.3) (75%) (36.0) 55.7 N/A Closing cash balances Free cash held in ERM Power Free cash held in projects Total free cash Restricted cash Total closing cash balances A1.3 Power station assets $m Oakey power station 100% PPE Net tangible assets Borrowings PAGE 14 53.6 13.7 67.3 125.2 192.5 32.6 12.8 45.4 127.4 172.8 21.0 0.9 21.9 (2.2) 19.7 64% 7% 48% (2%) 11% FY2016 FY2015 Change % 216.6 225.3 – 219.1 226.9 – (2.5) (1.6) – (1%) (1%) – $m Oakey power station 100% EBITDAF including interest income EBIT Interest expense Depreciation $m Neerabup power station 50% PPE Net tangible assets Borrowings $m Neerabup power station 50% EBITDAF including interest income EBIT Interest expense Depreciation FY2016 FY2015 Change % 11.2 3.4 – (7.9) 22.8 14.9 – (7.9) (11.6) (11.5) – – (51%) (77%) – – FY2016 FY2015 Change % 164.8 (3.8) 193.6 169.6 (8.0) 198.0 (4.8) 4.2 (4.4) (3%) (52%) (2%) FY2016 FY2015 Change % 25.6 21.2 (16.5) (4.4) 25.1 20.7 (16.9) (4.4) 0.5 0.5 0.4 – 2% 2% (2%) – A1.4 Supplementary information $m unless otherwise stated Revenue EBITDAF including interest income Underlying EBITDAF Statutory NPAT attributable to equity holders Underlying NPAT Operating cash flow before working capital changes Load sold (TWh) Shares on issue (millions of shares) Share price ($ per share) Market capitalisation1 Weighted average shares (number of shares) Statutory EPS (cents per share) Underlying EPS (cents per share) Dividends paid in period (cents per share) Franking % Annual pre-tax dividend yield2 CFPS (cents per share)3 FY2016 FY2015 FY2014 FY2013 FY2012 2,763.3 2,316.4 2,076.5 1,569.6 937.9 72.7 81.2 86.7 94.4 74.2 84.6 69.8 78.4 85.4 70.1 35.8 19.2 65.9 32.3 (23.9) 26.3 36.5 20.0 34.2 13.9 80.6 20.5 87.4 16.7 71.8 14.1 64.0 11.1 61.1 8.3 245.8 242.0 2.32 206.5 561.4 0.84 239.3 1.82 435.5 203.3 2.50 508.3 168.3 2.00 336.6 244.7 241.1 226.3 175.7 164.7 14.63 27.4 (10.6) 20.8 20.7 7.8 13.4 11.6 11.4 8.4 12.0 12.0 7.5 11.5 17% 100% 100% 100% 100% 9.5 14.3% 5.2% 6.3% 3.8% 3.8% 37.1 31.7 36.4 36.3 32.9 1 Based on share price at balance date and shares on issue. 2 Total annual dividends paid during financial year as a percentage of closing share price. 3 Operating cash flow before working capital changes per share using weighted average number of shares on issue during the year. ERM POWER ANNUAL REPORT | 2016 A1.5 Historical figures $m Unless indicated FY2016 FY2015 FY2014 FY2013 FY2012 GLOSSARY $m C&I Millions of dollars Commercial and Industrial Interest income by business division Electricity sales Australia Electricity sales US Generation Other Total interest income 2.5 – 0.5 1.3 4.3 3.2 – 0.6 1.4 5.2 3.3 – 0.8 2.2 6.3 2.9 – 0.7 2.3 5.9 3.6 – 1.0 2.8 7.4 Contestable Revenue EBITDAF EBIT Earnings before interest expense and tax ERCOT Electric Reliability Council of Texas Contestable revenue is the electricity sales revenue component on which we earn a margin and excludes pass-through items such as network charges. Earnings before interest expense, tax, depreciation, amortisation, impairment and net fair value gains / losses on financial instruments designated at fair value through profit and loss. EBITDAF excludes any profit or loss from associates. First half of financial year Second half of financial year Financial year ended or ending 30 June Gigawatt hours is a unit of energy representing one billion watt hours International Financial Reporting Standards Megawatt hours is a unit of energy representing one million watt hours The National Electricity Market Net profit after tax Pennsylvania, Jersey, Maryland Power Pool Credit sleeving through intermediary to trade and hedge with third parties. Small to Medium Enterprise SPG Energy Group LLC Terawatt hours is a unit of energy representing one thousand gigawatt hours (GWh) Utility Market Intelligence (UMI) survey of major retail electricity retailers by independent research company NTF Group in 2015 (20th year of Survey). Research based on survey of 300 business electricity customers between November 2015 and January 2016. Four major electricity retailers benchmarked. EBITDAF excluding significant items Statutory net profit after tax attributable to equity holders of the Company after excluding the after tax effect of unrealised marked to market changes in the fair value of financial instruments, impairment and gains / losses on onerous contracts and other significant items. Underlying NPAT excludes any profit or loss from associates. 14.1 59.1 16.1 76.1 18.1 76.1 Electricity sales Australia division statistics1 Load (TWh) Underlying gross margin Underlying operating expenses Underlying gross margin $ per MWh Underlying operating expenses $ per MWh Underlying EBITDAF before interest income (21.2) (1.17) (1.34) (21.5) 4.20 54.6 4.72 54.8 (17.9) 4.20 (1.27) 41.3 11.1 51.7 8.3 36.8 (12.5) (8.7) 4.67 4.45 (1.13) (1.06) 39.1 27.3 0.6 6.7 2.4 15.4 Electricity sales US division statistics1 Load (TWh) Underlying gross margin Underlying operating expenses Underlying gross margin $ per MWh Underlying operating expenses $ per MWh Underlying EBITDAF before interest income (6.45) (15.4) 6.45 0.0 10.01 (8.85) (5.9) 0.8 – – – – – – – – – – – – – – – – – – 1H 2H FY GWh IFRS MWh NEM NPAT PJM Sleeving SME Source TWh Gas division statistics Exploration expenditure capitalised Development expenditure capitalised Underlying EBITDAF before interest income – – – Generation division statistics1 11.5 Oakey 25.1 Neerabup Generation development and operations Underlying EBITDAF before interest income 35.4 (1.2) Corporate division statistics1 Total revenue Total expenses Underlying EBITDAF before interest income 3.5 (15.5) (12.0) 1.6 2.9 7.4 2.6 – 1.3 8.3 – UMI Survey 1.2 0.9 (0.8) (1.0) 22.7 25.2 28.6 23.1 28.5 21.3 26.9 23.1 (1.1) (1.2) (2.2) (2.9) 46.8 50.5 47.6 47.1 2.7 (16.6) 1.6 (16.0) 1.5 (15.0) 2.6 (13.3) Underlying EBITDAF Underlying NPAT (13.9) (14.4) (13.5) (10.7) US or USA United States of America 1 Excluding significant items – refer to A1.1 for further details PAGE 15 DIRECTORS’ REPORT PAGE 16 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 2016 (“the year”). 1. PRINCIPAL ACTIVITIES The principal activities of the Group during the year were: • electricity sales to businesses in Australia and the United States of America; • generation of electricity; and • energy solutions. 2. OPERATING RESULTS FOR THE YEAR A review of the operating results of the Group can be found in the Management Discussion and Analysis (MD&A) on pages 4 to 15. 3. REVIEW OF OPERATIONS A review of the operations of the Group can be found in the MD&A on pages 4 to 15. 4. BUSINESS STRATEGIES AND PROSPECTS A review of the business strategies and prospects of the Group can be found in the MD&A on pages 4 to 15. 5. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS 5.1 Purchase of Greensense Pty Ltd On 6 January 2016 the Group acquired Greensense Pty Ltd (Greensense) for $5.3m. Greensense is an award winning technology business focused on improving the sustainability performance of commercial buildings. A leader in the rapidly developing area of cloud-based, big data and analytics, Greensense software is used by some of Australia’s largest organisations across education, utilities, retail, government and commercial property to drive energy and water efficiency, reduce costs and showcase sustainability achievements. 5.2 Purchase of Lumaled Pty Ltd On 7 March 2016 the Group acquired Lumaled Pty Ltd (Lumaled) for $3.7m including a payment of up to $0.7m which is contingent on first-year earnings. Lumaled specialises in energy-efficient lighting for industrial and commercial businesses. It develops and distributes LED products throughout Australia. 5.3 Bank guarantee Facility with Liberty International Underwriters On 24 February 2016 ERM Power Limited entered into a A$150m unsecured senior bank guarantee facility with Liberty International Underwriters Singapore and put in place an associated Fronting Bank Facility Agreement with CBA. This provides for the issue of guarantees to support our prudential requirements. 5.4 Long term Electricity Swap Contract On 22 February 2016 finalised an agreement with Sunset Power International Pty Ltd (Sunset) providing ERM with access to the respective hedge volumes under the agreement out to 31 December 2022. Further details are contained in Note 30 of the financial report. ERM POWER ANNUAL REPORT | 2016 6. EVENTS AFTER BALANCE DATE On 12 August 2016 the loan of $14.9m to Empire Oil & Gas NL (Empire) was repaid ahead of the scheduled repayment date of 31 August 2016. Since 30 June 2016 there have been no other matters or circumstances not otherwise dealt with in the Financial Report that have significantly or may significantly affect the Group. 7. LIKELY DEVELOPMENTS AND EXPECTED RESULTS Apart from the matters referred to in the MD&A on pages 4 to 15, information as to other 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. 8. PROCEEDINGS ON BEHALF OF THE COMPANY 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. 9. DIVIDENDS Subsequent to year end, the directors have declared a final dividend in respect of the 2016 financial year as follows: Amount: 6.0 cents per share Franking: Unfranked Date Payable: 6 October 2016 The dividend has not been provided for in the 2016 financial statements. During the year the Company paid an interim unfranked dividend of 6.0 cents per share (2015: 6.0 cents fully franked), together with a partially franked final dividend of 6.0 cents per share in respect of the previous year. 10. DIRECTORS AND COMPANY SECRETARIES The directors of the Company during the year and up to the date of this report are: Anthony (Tony) Bellas Independent Non-Executive Chair Trevor St Baker Non-Executive Deputy Chair and Founder Albert Goller Independent Non-Executive Director Martin Greenberg Independent Non-Executive Director Antonino (Tony) Iannello Independent Non-Executive Director Wayne St Baker Non-Executive Director (appointed 1 March 2016) Jonathan (Jon) Stretch Managing Director and CEO Information on Directors and Company Secretaries Anthony (Tony) Bellas MBA, BEc, DipEd, FCPA, FAIM, FAICD Tony was appointed as Chair of the Company on 21 October 2011, having served as director since December 2009. He brings over 25 years of policy and operational experience in the energy industry to the business. Tony was previously CEO of the Seymour Group, one of Queensland’s largest private investment and development 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. Before that, he 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. Tony had a long career with Queensland Treasury, achieving the position of Deputy Under Treasurer. In 2000, as an Assistant Under Treasurer, he was responsible for the Industry and Energy Division of Queensland Treasury and was heavily involved in formulating the State Government’s energy strategy. Tony is a director of the listed companies shown below and is also a director of Loch Explorations Pty Ltd, West Bengal Resources (Australia) Pty Ltd and the Endeavour Foundation. Other listed company directorships in the last three years: GraphiteCorp Limited Since August 2015 Shine Corporate Ltd Since March 2013 Corporate Travel Management Limited Since June 2010 Special Responsibilities Chair of the Nomination Committee and a member of the Audit and Risk Committee, the Remuneration Committee and the Health, Safety, Environment and Sustainability Committee. PAGE 17 DIRECTORS’ REPORT (CONT.) FOR THE YEAR ENDED 30 JUNE 2016 Trevor St Baker AO BEng, BA, FAusIMM, FIEAust, FAIE, MAICD Trevor founded ERM Power and is currently a Non-Executive Director and Deputy Chair. Trevor has over 50 years’ experience in the energy industry, including 23 years in planning and leadership roles within NSW and Queensland public utilities. These roles incorporated the establishment of the first Energy Resources Division in Queensland in 1975 and subsequent deregulation of power station fuel procurement in the State and development of Blackwater and Curragh steaming coal developments and long term coal procurement to underpin the Gladstone, Tarong, Callide B and Stanwell power station developments. In 1980 Trevor founded companies which have evolved into ERM Power. For the first 15 years, as principal of ERM Consultants Pty Ltd, Trevor created a successful boutique energy consulting and advisory firm. In the late 1990’s, as Executive Chair of Energy Resource Managers Pty Ltd, Trevor established one of Australia’s first private power development companies, developing firstly the Oakey power station in Queensland, and then a further five new gas-fired power stations in Western Australia, NSW and Queensland. Trevor plays an active role in the broader energy industry with current positions including alternate director on the Board of Queensland Resources Council Ltd, director roles on the Boards of the Energy Policy Institute of Australia Limited, Sunset Power Pty Ltd, St Baker Energy Holdings Pty Ltd, as well as new-start energy R&D companies: Kortek Industries Pty Ltd, United States company Nth Degree Technologies Worldwide Inc., Southern Cross Printed Electronics Limited, Tritium Pty Ltd (of which he is Chair) and SMR Nuclear Technology Pty Ltd. Special Responsibilities Member of the Nomination Committee and Chair of the operating committee of NewGen Neerabup Partnership. Albert Goller Albert was appointed as a director in January 2015, bringing considerable management and marketing expertise, garnered through a very successful executive career in Germany, Canada, the USA and Australia at the global multinational conglomerate Siemens AG. He was Chair and Managing Director of Siemens Ltd in Australia between 2002 and 2012. Commencing his career as an electronics engineer with Siemens in Germany in 1973, Albert held a number of senior executive positions throughout the world including President and CEO of Siemens Canada Ltd and Head of the Corporate Office for E-business in Munich, Germany. He has a Masters Degree in Information and Telecommunications from Paderborn University in Germany and was consistently nominated as one of Australia’s most influential engineers by Engineers Australia magazine between 2004 and 2010. PAGE 18 Currently a non-executive director, from July 2013 to February 2015 Albert served as the Chair of META, an independent organisation that was funded by the Federal Government and represented the interests of Australian manufacturers across the nation. META had been established to generate innovative thinking and collaboration across Manufacturing to target job growth, enhance productivity and increase export opportunities for Australian Manufacturing companies. Special Responsibilities Member of the Audit and Risk Committee, Remuneration Committee and the Nomination Committee. Martin Greenberg BBus, DipCom, FCPA, JP, FAICD Martin was appointed as a director in July 2007, bringing finance credentials and business experience spanning 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 Chair of Selector Funds Management Ltd. From 1986 to 1999, Martin was a director of Babcock & Brown, an international investment bank. Prior to this he was a director of Morgan Grenfell Australia Limited and a Senior Vice President with Security Pacific Group in London. 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. Special Responsibilities Chair of the Audit and Risk Committee, and member of the Remuneration Committee and the Nomination Committee. Antonino (Tony) Iannello BCom, FCPA, SFFSIA, Harvard Business School Advanced Management Program, FAICD Tony was appointed as a director in July 2010, bringing to the business more than 30 years of banking and energy experience. Tony is a director of the listed companies shown below and Non-Executive Chair of D’Orsogna Ltd. He was previously Chair of HBF Health Ltd, MG Kailis Group of Companies, a director of the Water Corporation of Western Australia 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: Empire Oil & Gas NL (Chair) Since November 2013 AusNet Services Limited June 2006 – July 2015 Energia Minerals Limited March 2010 – October 2014 Special Responsibilities Chair of the Remuneration Committee and member of the Audit and Risk Committee and Nomination Committee. ERM POWER ANNUAL REPORT | 2016 Company Secretary Phil Davis LLB, GAICD, AGIA Phil Davis joined ERM Power in December 2007 and was appointed Group General Counsel and Company Secretary in October 2015. During this time his roles and responsibilities have covered the whole of ERM Power’s business including generation, sales, gas activities, compliance and corporate governance. Phil has practiced as a lawyer for more than 17 years in the corporate, construction, property, energy and resource sectors. Phil has advised ERM Power throughout its transition from a private power station developer to an integrated energy company listed on the Australian Securities Exchange. Former Company Secretary Peter Jans LLB (Hons), MA, MAICD Peter joined the Group in July 2007 and was appointed as Company Secretary from March 2008 until October 2015. He is 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. Wayne St Baker FAICD, GDBA, Dip. Mech.Eng. Wayne was reappointed as a director on 1 March 2016, bringing to the business more than 40 years’ experience as a chair, executive director and non-executive director of listed and private companies in Australia and SE Asia across the industrial sector. Wayne is currently a non-executive director of ProComp Energy Machinery Co. Ltd (China). From March 2010 to April 2016 he was a non-executive director of CAPS Australia, and until 2009 was the Managing Director of Champion Compressors, enabling the company to expand from a small private service and sales company to become a publicly listed manufacturer and market leader in Australia and Asia. Wayne has held global business development roles for divisions of United Technology Corporation (USA). Wayne was previously a non-executive director on the ERM Power Board between July 2007 and June 2010. Jonathan (Jon) Stretch BSc (Melb), MAICD Jon joined ERM Power as Managing Director and Chief Executive Officer (MD & CEO) on 2 February 2015. He is an experienced chief executive with broad international experience in the information technology (IT), telecommunications and industrial sectors. Jon’s background in systems and process engineering, and business-to-business (B2B) and business-to-consumer (B2C) sales and marketing has enabled him to lead business transformation and growth in Australia and internationally. Prior to joining ERM Power, Jon was the Executive Vice President, Europe, Middle East and Africa (EMEA) for Landis+Gyr, the leading provider of smart metering and energy management solutions globally. Jon joined Landis+Gyr as Executive Vice President Asia Pacific in January 2008 and in April 2010 moved to Switzerland to take up the EMEA position. Prior to joining Landis+Gyr, Jon was CEO of AAPT, an Australian based telecommunications company, wholly owned by Telecom New Zealand and was based in Sydney. He has had extensive experience in Asia and Europe in IT and telecommunications, starting his career with IBM in Australia in 1986. He spent six years in Hong Kong with IBM and AT&T running substantial cross regional telecommunications services businesses, and several years running AT&T’s business across Europe, Middle East and Africa, based in Paris. Special Responsibilities Chair of the Health, Safety, Environment and Sustainability Committee, the Workplace Health & Safety Committee, and the Enterprise Risk Committee. PAGE 19 DIRECTORS’ REPORT (CONT.) FOR THE YEAR ENDED 30 JUNE 2016 11. MEETINGS OF DIRECTORS The number of meetings of the Board of directors and each Board committee held during the financial year, and the number of meetings attended by each director are as follows: Meetings of committees Board meetings Audit & Risk Nomination Remuneration HSES A 14 10 13 14 13 6 14 B 14 112 14 14 14 6 14 A 5 ** 6 6 6 ** ** B 6 ** 6 6 6 ** ** A 3 2 3 3 3 ** ** B 3 3 3 3 3 ** ** A 3 ** 4 4 4 ** ** B 4 ** 4 4 4 ** ** A 2 ** ** ** ** ** 3 B 4 ** ** ** ** ** 4 Tony Bellas Trevor St Baker Albert Goller Martin Greenberg Tony Iannello Wayne St Baker1 Jon Stretch 1. Appointed 1 March 2016 2. Trevor St Baker did not attend three Board meetings held during the year as required under s195 of the Corporations Act 2001: a director of a public company who has a material personal interest in a matter to be considered should not be present at the meeting, nor vote on the matter being considered. A = number of meetings attended B = number of meetings held during the time the director held office during the year ** = Not a member of the relevant committee 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: Tony Bellas Trevor St Baker Albert Goller Martin Greenberg Tony Iannello Wayne St Baker Jon Stretch Ordinary shares 106,250 63,516,907 270,000 571,794 202,839 1,685,290 1,446,216 13. ENVIRONMENTAL REGULATION AND PERFORMANCE The Group’s environmental obligations are regulated by relevant federal, state and local government ordinances. During the year ended 30 June 2016, the Group did not experience any reportable environmental incidents, nor were there any breaches of any environmental licence conditions. 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 or 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 included in the Annual Financial Statements which accompany this report. PAGE 20 ERM POWER ANNUAL REPORT | 2016 16. NON AUDIT SERVICES 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: 2016 $ 2015 $ Other agreed-upon procedures in relation to the entity and any other entity in the consolidated Group 134,400 162,000 17. 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 98/100. The Group and the Company are entities to which the class order applies. 18. REMUNERATION REPORT The Remuneration Report is attached and forms part of this report. This report is made in accordance with a resolution of the Board of directors. Tony Bellas Chairman 25 August 2016 PAGE 21 REMUNERATION REPORT The directors present the Remuneration Report for ERM Power Limited (“Company”) and its consolidated entities (“Group”) for the year ended 30 June 2016. 1. REMUNERATION FRAMEWORK 1.1 Role of the Remuneration Committee The Remuneration Committee (Committee) ensures that the remuneration of directors and senior executives is consistent with market practice and is sufficient to ensure that the Company can attract, develop and retain the best individuals. The committee reviews the remuneration of the Managing Director and Chief Executive Officer (MD & CEO) and senior executives against the market, and against Group and individual performance. It also reviews non-executive directors’ fees against the market, with due regard to responsibilities and demands on time. The Committee oversees governance procedures and policy on remuneration including: • General remuneration practices, • Performance management, • Equity plans and incentive schemes, and • Recruitment and termination. Through the Committee, the Board ensures that the Group’s remuneration philosophy and strategy continues to be focused to: • Attract, develop and retain first class director and executive talent, • Create a high performance culture by driving and rewarding executives for achievement of the Group’s strategy and business objectives, and • Link incentives to the creation of shareholder value. In undertaking its role, the Committee may seek the advice of external remuneration consultants who provide analysis to ensure remuneration levels are set to reflect the market for comparable roles. In reviewing remuneration levels for FY2016 and FY2017, the committee referred to the benchmarking analysis provided by Hay Group Pty Limited in May 2015, the process for reporting this information to the Committee was outlined in the FY2015 Remuneration Report. PAGE 22 ERM POWER ANNUAL REPORT | 2016 2. REMUNERATION 2.1 Fees payable to Non-Executive Directors Fees are determined by the demands on, and responsibilities of directors and are reviewed annually by the Board. Independent advice may be sought from remuneration consultants to ensure directors’ fees are appropriate and in line with the market. The last review of fees was conducted in May 2015. Non-executive directors’ fees are determined within an aggregate fee pool limit of $1,100,000, an amount approved by shareholders at the Annual General Meeting held on 31 October 2013. Any director who devotes special attention to the business of the Company, or who otherwise performs services which in the opinion of the directors are outside the scope of the ordinary duties of a director, or who at the request of the directors engage in any journey on the business of the Company, may be paid extra remuneration as determined by the directors which will not form part of the aggregate fee pool limit above. Fees received by each non-executive director comprise a base fee together with additional fees dependent on the various offices they hold as set out in Table 1, with superannuation contributions made at the rates and limits prescribed from time to time by legislation. Non-executive directors do not receive any performance-related remuneration or retirement allowances outside of statutory superannuation entitlements. The accounting value of fees paid to each non-executive director is shown in Table 2. 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 Group, directly or indirectly and include directors of the Company. The term KMP refers to the following persons who were KMPs during the entire financial year unless otherwise indicated. Non-Executive Directors Tony Bellas Trevor St Baker Albert Goller Martin Greenberg Tony Iannello Wayne St Baker (appointed 1 March 2016) Senior Executives Jonathan (Jon) Stretch William (Mitch) Anderson Gregg Buskey David Guiver Derek McKay MD & CEO Executive General Manager (EGM) Business Energy (US) EGM Corporate Finance & Strategy EGM Trading EGM Generation, Gas & Metering Stephen (Steve) Rogers EGM Business Energy (AU) Alastair (James) Spence (appointed 28 September 2015 Chief Financial Officer (CFO) Peter Jans (until 1 October 2015) Graeme Walker (until 28 September 2015) Group General Counsel & Company Secretary CFO There have been no changes to KMP from the end of the reporting period up to the date of this Remuneration Report. PAGE 23 REMUNERATION REPORT (CONT.) FOR THE YEAR ENDED 30 JUNE 2016 Table 1 Non-executive Director Fees (excluding superannuation) Chair Non-executive directors Deputy Chair (in addition to above fee)* Additional fees Strategy Lead* Audit Committee – chair Audit Committee – member Remuneration Committee – chair Remuneration Committee – member FY2016 $ 190,000 108,000 30,000 25,000 20,000 10,000 10,000 5,000 FY2015 $ 190,000 108,000 N/A N/A 20,000 10,000 10,000 5,000 Representation on non-wholly owned subsidiary Boards 25,000 each 25,000 each * Effective 1 July 2015 Table 2 – Directors’ Fees Tony Bellas Trevor St Baker Albert Goller3 Martin Greenberg Tony Iannello Wayne St Baker4 Total Short-term benefits Post-employment benefits Cash salary and fees $ 205,000 205,000 188,000 139,705 123,000 58,943 133,000 133,000 128,000 128,000 36,000 – 813,000 664,648 FY 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 Additional fees1 $ Non-monetary benefits2 $ Superannuation entitlement $ – 75,000 – 45,000 – 10,000 – 45,000 – 45,000 – – – 220,000 8,848 10,712 14,487 22,509 1,080 – – – – – – – 24,415 33,221 19,308 18,783 16,554 14,572 11,685 5,600 12,635 14,172 12,160 13,816 3,420 – 75,762 66,943 Total remuneration per income statement $ 233,156 309,495 219,041 221,786 135,765 74,543 145,635 192,172 140,160 186,816 39,420 – 913,177 984,812 1. Special exertion fees are in accordance with the ERM Power Limited constitution as were outlined in the FY2015 Remuneration Report. 2. Non-monetary benefits include health assessments, car parking benefits and associated FBT. 3. Appointed 1 January 2015. 4. Appointed 1 March 2016. PAGE 24 ERM POWER ANNUAL REPORT | 2016 2.2 Remuneration policy of MD & CEO and Senior Executives and link to performance 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 value for shareholders, and conforms to market practice. The Board ensures that executive reward satisfies the following key criteria for good governance practices: • Competitiveness and reasonableness, • Acceptability to shareholders, • Performance linkage/alignment of executive remuneration, and • Transparency. Remuneration and other terms of employment for the MD & CEO and the other senior executives are formalised 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, other benefits including superannuation, salary continuance insurance and notice periods required on termination. 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 for Australian employees, or retirement contributions for US employees, • Short term and long term incentives, and • Other discretionary cash or equity based incentives. In accordance with the objective of ensuring that executive remuneration is aligned to Group performance without encouraging undue risk-taking, a significant portion of executive’s target pay is at risk. The Board considers this combination an effective way to align incentives to shareholder value (refer section 2.2.2). Short term incentives (STIs) are focused on achieving annual profit and operational targets, whilst long term incentives (LTIs) are focused on alignment with growth in shareholder returns assessed over a three year period, as well as encouraging talent retention. Table 3 sets out the current named Senior Executives’ target remuneration mix for FY2016. It reflects the STI opportunity for the current year that would be available if the performance conditions are satisfied at target, and the value of the LTI as determined by the 10 day volume weighted average price (VWAP) of the Company’s shares as awarded at the beginning of the period. Table 3 – FY2016 Executive Target Remuneration Mix Base pay and super- annuation or retirement benefit Target short term incentive Target long term incentive Total target remuneration MD & CEO 40.3% 30.2% 29.5% CFO 54.5% 18.2% 27.3% 100% 100% Other Senior Executives 56.6% 16.3% 27.1% 100% 2.2.1 Base salary and benefits Remuneration is reviewed annually and external remuneration consultants are engaged periodically to provide analysis and advice to ensure executive remuneration is set at levels that reflect the market for comparable positions. The remuneration target is for a fixed remuneration level around the midpoint and a total remuneration close to or above the 75th percentile of comparator groups on achieving strong performance, with flexibility to take into account capability, experience and value to the organisation and performance of the individual. Remuneration is also reviewed on promotion or change of role. There are no guaranteed base salary increases included in executive service agreements. In January 2016, the Company enacted a basic safe harbor 401k retirement plan for the Group’s US employees, by matching employee contributions on the first 3% of deferred compensation plus a 50% match on deferrals between 3% and 5%, up to the employee elective deferral limits which for calendar 2016 was US$18,000 or US$24,000 for those aged 50 or over at the end of the calendar year. For Australian employees, superannuation is included in fixed remuneration up to the maximum superannuation contribution base set by the relevant legislation. For FY2016, consistent with the process for all employees, fixed remuneration was increased by CPI for Senior Executives, applied prorate if there had been a change in role and associated remuneration during the prior period, with the exception of the MD & CEO who maintained the same fixed remuneration as granted at commencement of employment, one Senior Executive receiving an additional increase in order to align remuneration with the median level of comparative roles, and the benefit of the US retirement scheme as applied to the EGM Business Energy (US). PAGE 25 Malus and Clawback During FY2016, the Company introduced malus and clawback provisions to its incentive schemes. Under these provisions, awards will lapse, be forfeit or a participant may be required to reimburse the Company all or part of the cash received as net proceeds on the sale of any award if, in the opinion of the Board: • a participant is found to have acted fraudulently or dishonestly or is in material breach of obligations to the Group; • the Company becomes aware of a material misstatement or omission in the financial statements in relation to the Group; or • any circumstances occur that the Board determines in good faith to have resulted in an unfair benefit to the participant. Short term incentives STIs are provided to most employees. The awarding of STIs is based on performance against Key Performance Indicators (KPIs) or targets across three components; individual, team and corporate. Each of these components is allocated a weighting and include both targets and stretch targets that are set at the beginning of each financial year. The MD & CEO’s targets and the corporate targets are set by the Board, whilst the individual and team targets are set under the direction of the MD & CEO. The Committee is responsible for determining the STI to be paid based on an assessment of whether the KPIs are met. To assist in this assessment, the Committee receives detailed reports on performance from management. The Committee has the discretion to adjust STIs downwards in light of unexpected or unintended circumstances. At the end of each financial year, achievement of targets is measured and applied against the target participation rate determined for each individual. These participation rates range between 10% and 30% of annual average base salary, with the potential to achieve up to 150% of these levels (i.e. 15% to 45%) for employees other than the MD & CEO and CFO, whose maximum for the FY2016 STI was 100% and 50% respectively (see Table 4 below). STI payments may be offered by way of cash and/or equity at the election of the Board. Any equity normally vests immediately. The following apply to STI in the event of cessation of employment: • Termination (without cause) – entitlement to pro rata STI for the year is subject to Board discretion. • Termination (with cause) – STI is not awarded. During the reporting period Jon Stretch’s FY2015 STI was paid as per his contractual arrangements agreed on commencement of employment and advised to the ASX on 30 October 2014. As per Table 7, half was paid in cash following the release of the FY2015 financial results and the remaining half in equity as approved at the 2015 Annual General Meeting and which vested on 30 June 2016. REMUNERATION REPORT (CONT.) FOR THE YEAR ENDED 30 JUNE 2016 2.2.2 Incentive Schemes Variable remuneration is in the form of short term and long term incentives (STIs and LTIs) which represent “at risk” remuneration. STIs are generally paid annually against agreed key performance indicators (KPIs) which are focused on achieving profit and operational targets set by the Board annually. LTIs are designed to align the interests of the Senior Executives with the Company’s shareholders, being accrued over a three year period and earned through satisfaction of both performance and service conditions. STIs are paid in the form of cash or equity, or a combination of these. LTIs are paid in the form of equity. The trading of equities which vest under incentive schemes is required to comply with the Company’s Securities Trading Policy. This policy 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 authorised by the Board. For shareholders, benefits associated with the incentive schemes include: • Focus on performance improvement at all levels of the Group, with year-on-year earnings growth a core component, • Focus on sustained growth in shareholder wealth, consisting share price growth, and delivering the greatest returns on assets, and • The ability to attract and retain high caliber executives. For employees, benefits associated with the incentive schemes 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. KPIs include both financial and non-financial measures using 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: • Financial measures – including underlying net profit after tax (underlying NPAT), underlying earnings before interest, tax, depreciation, amortisation, impairment and net fair value gains/ losses on financial Instruments designated at fair value through profit and loss, excluding significant items (underlying EBITDAF), and/or operating cash flow, etc. • Zero harm – safety and environment performance measures, including lost time injury frequency rates, medically treated injury frequency rates and environmental measures. • Market based – total shareholder return (TSR), earnings per share, share price improvement, etc. PAGE 26 ERM POWER ANNUAL REPORT | 2016 Long term incentives The provision of LTI awards exposes executive KMP to long-term movements in the price of the Company’s shares, by aligning the long-term interests of executives with shareholders through the use of a total shareholder return (TSR) performance hurdle. This reflects the Company’s strategy of adopting a long-term approach to decision making and sustained value creation for shareholders. For Australian employees, LTIs are provided to selected employees in the form of units in the Company’s Long Term Incentive Share Trust (LTIST) as established in 2010. The corresponding equity is issued into the LTIST and units may vest subject to satisfaction of performance and service conditions. During the vesting period, the units are held beneficially on behalf of the participants, and thus the participant enjoys many of the same benefits as the holder of ordinary shares; with entitlement to dividends and the right to direct the trustee as to how to cast their vote at a meeting of members, although participants are not eligible for the Dividend Reinvestment Plan. For US employees, a “Phantom Equity Plan” has been established to emulate, as much as possible, the Australian LTIST plan, however no equity is actually issued. Instead, US participants are given an award of “phantom shares”, based on the relevant ASX:EPW market value of shares as at the grant date. The number of phantom shares will convert to a cash salary payment after the expiry of the performance period at which time the value to be paid is determined based on the market value of shares at the end of the performance period, with the same performance and service criteria as Australian participants. No dividend or voting rights are associated with the phantom shares. Early vesting may occur on a change of control of the Company or Source, as relevant. A change of control for the Company is determined as 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. Corporate targets for FY2016 included the following elements and weightings as set by the remuneration committee at the beginning of the reporting period, which aligned to the Group’s strategic and business objectives with the following factors and weightings to be considered: Weighting KPI 40% 30% 10% 20% Profit delivery against the approved business plan. Positioning of the Company through growth in customer numbers and increases in: • C&I Sales Gross Margin, • SME Sales Growth, and • US Sales. Oakey Power Station optimization. Execution of Board approved strategies and effective governance and management processes. • No deductions if all safety and compliance targets and other governance standards are met. For FY2016, the Committee exercised its discretion and withheld all performance-based STI awards for both Senior Executives and other employees within the Group. This is consistent with the Company’s strategy of aligning reward to performance. During the Group’s transformation and investment in new businesses, management recognises the ongoing commitment of employees to the medium-term strategy for growth and will consider other means of remuneration in FY2017 in the form of long-term incentives to support retention and alignment to business outcomes. Table 4 provides details of the STI outcomes for current KMP in the reporting period and the comparatives for the FY2015 STI paid in the reporting period. Table 4 – STI Achievement FY2016 STI FY2015 STI Paid in FY2016 Actual Maximum Actual Maximum 0% 0% 0% 0% 0% 0% 0% 100% 100% 100% 45% 45% 45% 45% 45% 50% 27% 32% 37% 30% 32% N/A 45% 45% 45% 45% 45% N/A Jon Stretch Mitch Anderson Gregg Buskey David Guiver Derek McKay Steve Rogers James Spence1 1. Appointed 28 September 2015. PAGE 27 The Committee is responsible for assessing performance and the LTIs to be paid. To assist in this assessment, the Committee receives detailed independent reports from Orient Capital Pty Ltd calculating the TSR performance and ranking against the comparator group. For the FY2013 LTI award the Company’s TSR was determined to be 47.42%, falling in the 84th percentile of the comparator group which in accordance with the vesting conditions resulted in 100% vesting. The TSR for the FY2014 LTI, for which the three year performance period expired on 30 June 2016, was significantly affected by the falls in the Company’s share price in October 2015 and June 2016. In August 2016 the Committee determined that the TSR vesting conditions required at the date of grant have not been met, and the FY2014 LTIs will be forfeited by all participants. This forfeiture will be shown in the FY2017 Remuneration Report. 2.2.3 Share price and consequences of performance on shareholder wealth We aim to align our Senior Executive remuneration to our strategic and business objectives and the creation of shareholder wealth. Table 5 below shows the Group’s financial performance over the last five financial years as required by the Corporations Act 2001, together with the proportion of performance-based LTI vesting for KMP which metric is designed to align the interests of Senior Executives to the Company’s shareholders. There will not always be a direct correlation between the statutory key performance measures and total variable remuneration awarded to Senior Executives due to the remuneration mix (see Table 3), which consists of a mixed focus (STI and LTI) on annual profit and operational targets set by the Board, and the ranking of TSR performance against peers. REMUNERATION REPORT (CONT.) FOR THE YEAR ENDED 30 JUNE 2016 Subject to Board discretion, the following will apply to LTI awards on termination of employment: Circumstance Potential benefit/treatment Death, serious injury, disability or serious illness that results in the employee leaving ERM Power “prematurely”. All LTI units will vest. Resignation or termination for cause. All unvested LTI units will be forfeit. Redundancy, retirement or termination by mutual agreement. The leaver will continue to be a participant in the LTI plan for unvested LTI units until the end of the performance period. If the participant dies prior to vesting, the LTI units will immediately vest (subject to limits outlined in Corporations Act 2001 as they relate to Termination Payments). The LTI target rate determined for each individual is based on a percentage of annual average salary, and for the reporting period it was based on awards of 75% for the MD & CEO as approved by shareholders at the 2015 AGM, and 50% for executive KMP (pro-rata for commencement during the period). LTI issues made in the reporting period will vest subject to continuation of employment through to 30 June 2018 and total security holder return (TSR) performance. The TSR vesting condition will be determined by the Company’s relative TSR performance over the three year period commencing 1 July 2015, measured against the TSR performance of a comparator group being those companies in the Standard & Poor’s (S&P) ASX 300 index at the beginning of the performance period. At the end of the three year period, vesting is determined on the following basis: • Less than or equal to 50th percentile = 0% • Greater than 50th to less than the 75th percentile = 50% to 100% (linear) • 75th percentile and higher = 100%. The performance hurdle will only be satisfied where the TSR value is positive. If the TSR value is negative, the performance hurdle will not be satisfied, and the underlying shares in the LTIST will not vest. Table 7 details the equity allocated to KMP in the reporting period, and for which the allocation to the MD & CEO was approved by shareholders at the 2015 Annual General Meeting. For accounting purposes, LTIs are shown at fair value as determined by the accounting standards and expensed over the performance period. PAGE 28 ERM POWER ANNUAL REPORT | 2016 Table 5 – Shareholder Wealth Financial Data Revenue and other income EBITDAF1 Statutory NPAT2 attributable to equity holders Underlying NPAT3 Basic earnings / (loss) per Share Underlying earnings per share Dividend per share Closing share price at 30 June 3 year Total Shareholder Return (TSR)4 LTI vesting ($m) ($m) ($m) ($m) (cents) (cents) (cents) ($) % % Year ended 30 June 2016 Year ended 30 June 2015 Year ended 30 June 2014 Year ended 30 June 2013 Year ended 30 June 2012 Actual Actual Actual Actual Actual 2,763.3 68.4 2,316.4 81.5 2,076.5 67.9 1,569.6 63.9 937.9 78.0 35.8 19.2 14.6 7.8 12.0 0.84 (51.2) 0.0 65.9 32.3 27.4 13.4 12.0 2.32 47.4 100.0 (23.9) 26.3 (10.6) 11.6 12.0 1.82 32.8 77.9 36.5 20.0 20.8 11.4 10.5 2.50 N/A N/A 34.2 13.9 20.7 8.4 8.5 2.00 N/A N/A 1. Earnings before net interest costs, tax, depreciation, amortisation, impairment and net fair value gains / losses on financial instruments designated at fair value through profit and loss. EBITDAF excludes any profit or loss from associates. 2. Statutory net profit after tax attributable to equity holders of the Company. 3. Underlying NPAT excludes the after tax effect of unrealised marked to market changes in the fair value of financial instruments, impairment and gains / losses on onerous contracts and other significant items. Underlying NPAT excludes any profit or loss from associates. 4. TSR outcomes are provided by an external supplier. The basic calculation of TSR is: TSR = (end average share price x re-investment factor) – 1 x 100 start average share price Average share prices are based on a 60 trading day volume weighted average price (VWAP). All share prices (and dividends) used are adjusted prices, which take into account the impact of any capital changes such as return of capital dividend, rights and bonus issues. The re-investment factor represents the cumulative number of shares held at the end of the performance period. It commences with a notional shareholding of one share and assumes dividends are reinvested during the performance period, resulting in a notional shareholding of greater than one share at the end of the performance period (assuming dividends are paid in the period). Franking credits are excluded from TSR calculations. PAGE 29 REMUNERATION REPORT (CONT.) FOR THE YEAR ENDED 30 JUNE 2016 2 1 n o i t a m r o f n I y r a t n e m e p p u S l s t i f e n e b m r e t g n o L - t s o P t n e m y o p m e l s t i f e n e b t n e m e t a t S e m o c n I n i d e s n e p x E l a t o T g n o L : d d A I T S : d d A : s s e L d e t s e v g n i t s e v 3 1 r a e y t n e r r u c l s a u r c c a n o i t a r e n u m e r y t i u q e m r e t n i g n i t s e v g n i t n u o c c A l a t o T e m o c n i r e p 2 1 t n e m e t a t s n o i t a r e n u m e r m r e t - g n o L / n o i t a u n n a - r e p u S n o i t a n m r e T i L S L r e h t O y t i u q e 6 s t i f e n e B l a u r c c A 1 1 s t i f e n e b n a P l 0 1 t n e m e l t i t n e 9 e v i t n e c n i 8 s t i f e n e B 7 l a u r c c a 6 h s a c e v i t n e c n I t n e m e r i t e r m r e t - t r o h S r e h t O e v a e l l a u n n a l y r a a s e s a B s t i f e n e b m r e t t r o h S - n o N y r a t e n o m d n a s t i f e n e b . ) 3 3 e g a p n o s e t o n e e s ( d o i r e p t a h t n i P M K e h t i y b d e v e c e r n o i t a r e n u m e r d e t s e v f l o e u a v e h t t c e l f i e r o t d e d v o r p n o i t a m r o n f i y r a t n e m e p p u s h t i l w , s d r a d n a t s g n i t n u o c c a e h t f o s t n e m e r i u q e r e h t h t i w e c n a d r o c c a n i d e s n e p x e d o i r e p g n i t r o p e r i s u o v e r p d n a t n e r r u c e h t r o f P M K e v i t u c e x e s ’ p u o r G e h t r o f i d e s n g o c e r e s n e p x e n o i t a r e n u m e r e h t f o s l i a t e d s w o h s e b a t g n w o i l l l o f e h T n o i t a r e n u m e R e v i t u c e x E – 6 e b a T l PAGE 30 4 0 9 , 8 5 3 0 8 1 , 7 6 5 6 8 8 , 9 1 1 , 1 – – – 5 6 0 , 0 4 1 7 2 9 , 7 1 1 7 6 8 , 7 7 1 – 5 5 2 , 0 2 6 4 3 8 , 0 0 1 8 6 9 , 3 6 4 1 4 0 , 5 6 5 6 4 , 7 7 – 5 3 5 , 7 7 4 2 6 5 , 5 6 3 8 2 , 2 8 – 8 3 2 , 7 1 7 7 2 9 , 7 1 1 3 1 5 , 5 5 6 4 3 8 , 0 0 1 4 8 5 , 2 6 4 7 0 3 , 4 5 – 2 8 2 , 2 8 5 7 1 , 3 3 4 – – – 1 8 2 , 9 0 1 – 7 3 2 , 0 3 4 6 7 1 , 8 1 1 1 1 6 , 3 6 6 7 4 0 , 1 0 1 6 6 4 , 2 2 4 0 0 2 , 6 0 1 8 3 4 , 9 9 1 – – – 6 0 1 , 5 2 5 2 9 3 , 5 8 – c – – e e – e – e e e – – – e e e e – e – – ) 6 2 6 , 1 9 1 ( 0 3 5 , 0 5 5 0 0 0 , 8 0 1 ) 1 5 3 , 9 2 ( 1 3 5 , 8 8 4 – – 8 6 4 , 7 1 1 ) 9 5 1 , 6 3 ( 7 9 2 , 8 5 ) 1 2 8 , 7 5 ( ) 2 2 2 , 8 9 1 ( 8 8 6 , 5 3 2 5 7 1 , 0 0 6 4 9 2 , 2 2 ) 1 7 3 , 8 1 1 ( 4 0 0 , 5 9 4 – ) 8 3 4 , 1 4 ( 3 0 9 , 8 1 1 1 5 3 , 7 2 ) 8 7 6 , 1 6 1 ( 0 0 3 , 6 4 5 – ) 7 9 3 , 0 6 ( 0 8 6 , 2 4 1 2 6 1 , 3 2 1 ) 3 1 8 , 9 0 2 ( 2 6 9 , 5 8 6 1 0 1 , 2 0 1 ) 9 4 7 , 9 5 2 ( 7 2 3 , 2 1 7 5 5 6 , 3 2 ) 6 2 6 , 4 4 1 ( 8 4 2 , 9 2 5 – – – ) 4 1 8 , 8 4 ( 6 9 0 , 1 3 1 – – ) 0 1 9 , 0 8 ( 5 8 0 , 4 1 5 1 5 1 , 3 9 1 ) 7 8 5 , 0 9 ( 7 9 4 , 9 0 2 7 1 3 , 2 0 1 ) 1 6 9 , 0 1 3 ( 8 0 2 , 1 7 7 1 8 2 , 9 0 1 – – 1 0 2 , 6 9 1 ) 5 4 6 , 0 4 2 ( 0 1 7 , 0 6 3 – 3 1 5 , 5 9 ) 0 0 7 , 2 2 1 ( ) 0 6 7 , 8 7 2 ( 8 3 1 , 2 2 3 1 6 9 , 2 2 6 – – – e & c 5 7 6 , 7 1 3 ) 6 4 0 , 6 1 9 ( 7 5 2 , 8 1 7 , 1 – – – – – – – – – – – – – – – – – – – – – – – 8 2 5 , 3 2 3 , 1 2 7 4 , 6 4 2 e & c 2 1 4 , 8 1 3 3 9 6 , 9 1 3 1 5 9 , 8 3 4 2 7 5 , 1 8 4 – 5 9 5 ) 4 2 1 , 9 4 ( – 6 8 2 , 7 7 2 4 , 4 1 2 0 1 , 1 – – – – – – – – – 2 6 7 , 2 1 4 0 3 , 7 1 3 2 2 , 6 1 – – 4 6 4 , 4 1 ) 1 7 8 , 6 4 ( – – – – – – – – – 1 5 7 2 5 6 , 9 2 4 1 4 , 7 3 1 8 4 , 4 1 7 1 8 , 7 1 0 1 1 , 0 5 6 6 7 , 3 8 8 0 3 , 9 1 – 7 1 6 , 4 1 0 1 1 , 0 5 7 2 3 , 7 3 1 8 0 3 , 9 1 – 7 3 8 , 3 2 4 5 , 0 1 0 0 3 , 3 1 6 5 0 , 4 1 5 3 , 7 2 1 8 8 , 5 1 9 9 1 , 8 3 1 6 5 , 9 8 7 7 5 , 0 3 2 6 1 , 3 2 1 7 1 4 , 1 1 0 1 1 , 0 5 7 3 1 , 3 8 8 0 3 , 9 1 – 0 2 8 , 3 8 5 0 , 8 1 8 2 , 2 1 6 5 0 , 4 5 5 6 , 3 2 3 0 6 , 9 0 1 8 0 3 , 9 1 – 3 4 5 , 7 1 6 5 0 , 4 4 9 2 , 2 2 – – 0 4 8 , 8 7 7 2 8 , 4 – – – – – – 6 0 8 , 0 9 4 3 9 , 8 2 1 5 1 , 3 9 1 0 9 9 , 3 6 1 7 2 8 , 4 8 3 3 , 1 5 9 1 4 , 3 1 3 0 3 , 7 1 1 8 2 , 9 0 1 0 8 8 , 8 8 3 9 4 , 0 2 3 6 8 , 4 4 1 – – – ) 3 7 6 , 5 8 3 ( 3 5 6 , 3 3 4 5 8 , 2 7 – – – – – – – – ) 6 2 9 , 3 ( 2 9 5 , 5 5 3 4 7 8 4 3 0 , 3 7 7 4 5 , 3 1 2 5 7 , 1 6 3 7 6 8 , 5 7 2 7 , 7 7 8 7 5 , 3 2 2 2 0 , 1 4 4 ) 7 1 0 , 4 ( 4 2 5 , 3 9 9 4 , 1 4 6 9 , 8 1 4 2 5 7 , 1 6 3 7 2 7 , 7 7 1 2 4 , 0 5 5 6 1 , 5 1 1 0 2 , 6 6 3 – – – – – – – – – – – ) 5 1 0 , 1 ( 3 8 0 , 4 1 1 0 0 7 , 9 3 1 3 , 1 3 4 – – – – 9 4 2 , 0 1 3 8 0 , 4 1 1 – 5 3 1 , 2 8 1 1 2 9 , 2 3 0 4 3 , 1 2 3 0 7 5 , 0 4 6 4 8 , 2 4 2 $ A $ A $ A $ A $ A $ A $ A $ A $ A $ A $ A $ A $ A $ A $ A $ A $ A $ A $ A 5 1 0 2 6 1 0 2 5 1 0 2 6 1 0 2 5 1 0 2 6 1 0 2 5 1 0 2 6 1 0 2 5 1 0 2 6 1 0 2 5 1 0 2 6 1 0 2 5 1 0 2 6 1 0 2 6 1 0 2 5 1 0 2 5 1 0 2 6 1 0 2 5 1 0 2 ) 5 1 0 2 l i r p A 4 1 n o t n e m t n o p p a i P M K r o f r a e y - t r a p 5 1 0 2 ( 3 y e k s u B g g e r G ) 5 1 0 2 l i r p A 4 1 n o t n e m t n o p p a i P M K r o f r a e y - t r a p 5 1 0 2 ( y a K c M k e r e D ) 5 1 0 2 l i r p A 4 1 n o t n e m t n o p p a i P M K r o f r a e y - t r a p 5 1 0 2 ( 3 s r e g o R e v e t S ) 5 1 0 2 t p e S 8 2 n o t n e m t n o p p a i P M K r o f r a e y - t r a p 6 1 0 2 ( e c n e p S s e m a J ) 5 1 0 2 t c O 1 n o n o i t a s s e c P M K r o f r a e y - t r a p 6 1 0 2 ( 4 s n a J r e t e P ) O E C ( l r e k a W e m e a r G 5 ) O F C ( l r e k a W e m e a r G ) O E C ( l r e k a W e m e a r G ) O F C ( l r e k a W e m e a r G ) 4 1 0 2 r e b o t c O 1 3 o t O E C & D M r e m r o F ( r e k a B t S p i l i h P i 3 r e v u G d v a D i 1 7 6 , 1 3 2 1 , 5 9 5 9 3 1 , 4 4 1 8 0 3 , 9 1 5 7 1 , 1 5 1 9 3 1 0 1 0 , 6 2 2 9 6 , 0 8 7 – 2 9 3 , 9 0 0 5 , 6 6 1 0 7 5 , 5 2 1 3 5 , 4 2 2 4 9 , 3 2 3 $ A $ A 6 1 0 2 ) O E C & D M ( 1 h c t e r t S n o J 5 1 0 2 ) 5 1 0 2 b e F 2 n o t n e m t n o p p a i P M K r o f r a e y - t r a p 5 1 0 2 ( 1 5 3 , 0 0 1 8 0 2 , 5 2 1 6 1 , 5 7 4 9 5 , 3 0 1 8 2 2 , 3 2 7 4 3 , 5 6 2 – 9 2 8 , 5 0 1 – – 3 6 7 , 3 1 8 7 2 , 7 0 0 0 , 5 4 – 1 2 0 , 4 2 7 6 6 , 6 6 1 $ S U 5 1 0 2 – – 5 0 9 , 0 2 ) 3 1 3 , 9 1 ( – $ A 6 1 0 2 7 0 7 , 0 2 3 8 3 , 6 3 0 0 4 , 0 1 4 $ S U 6 1 0 2 2 n o s r e d n A h c t i M ERM POWER ANNUAL REPORT | 2016 m u m x a M i e u a V l l a t o T l i a c n a n F i t a h t d r a w a f o d r a w a r a e Y y t i u q E t a e c n a a b l f o d n e e h t r a e y e h t t i e f r o F d e t s e V s a d e t n a r G % n o i t a s n e p m o c y t i u q E t a e c n a a b l f o t r a t s e h t r a e y e h t e t a D t n a r G l t a e u a V r i a F f o e r u t a N d n a e c v r e S i e c n a m r o f r e p t n e r r u c e h t n i s e v i t u c e x e d e s o c s d i l f o n o i t a s n e p m o c g n i t c e f f a t i f e n e b n o i t a s n e p m o c d e s a b - e r a h s r o l s u n o b d e t a e r - e c n a m r o f r e p , s u n o b h s a c a f o t n a r g h c a e f o s n o i t i d n o c d n a s m r e t e h T s t i f e n e b m r e t g n o l d n a s t n a r g y t i u q e f o s n o i t i d n o c d n a s m r e T – 7 e b a T l : l w o e b n w o h s s i s r a e y l i a c n a n i f e r u t u f n i t s e v y a m t a h t t n a r g e h t f o i l e u a v m u m x a m e h t d n a , d o i r e p g n i t r o p e r e r u t u f a r o r e b m u N % r e b m u N d e t s e v n U t i n u r e p $ l a t o T n o i t a s n e p m o c e t a D t n a r G a i r e t i r c 1 d r a w A – $ A – $ A 6 1 0 2 6 1 0 2 – – 8 7 8 , 4 $ A 7 1 0 2 6 1 2 , 3 8 3 4 9 6 , 5 9 $ A 8 1 0 2 7 4 8 , 9 3 2 $ A 9 1 0 2 7 5 0 , 0 4 1 0 8 9 , 3 5 2 – $ A – $ A – $ S U 1 9 3 , 5 5 $ A 6 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 – – 6 2 6 , 6 6 3 8 6 , 6 2 1 0 2 5 , 3 6 $ S U 9 1 0 2 9 4 9 , 1 0 1 – $ A – $ A – $ A 5 3 9 , 9 3 $ A 5 1 7 , 2 7 $ A – $ A – $ A – $ A 7 3 6 , 3 2 $ A 6 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 9 1 0 2 6 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 – – 3 1 9 , 4 4 4 3 3 , 1 9 1 6 2 , 5 7 – – 5 1 5 , 1 3 9 5 0 , 4 5 1 9 7 , 6 0 1 $ A 9 1 0 2 5 8 2 , 2 9 – $ A – $ A – $ A 5 7 9 , 3 7 $ A 1 8 2 , 0 5 $ A 5 8 1 , 0 9 $ A 9 1 0 2 6 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 9 1 0 2 – – 5 6 5 , 6 7 9 4 5 , 6 5 7 9 9 , 4 1 1 2 4 3 , 3 9 3 9 6 , 1 6 1 $ A 0 2 0 2 7 5 0 , 0 4 1 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 1 t s e v y a m t s e v y a m d e t s e v n U % r e b m u N % – % 0 0 1 4 5 6 , 6 7 % 0 0 1 4 5 6 , 6 7 – – – – – – – – – – – – – – % 0 0 1 9 4 1 , 8 7 % 0 0 1 6 1 2 , 3 8 3 – – – % 0 0 1 % 0 0 1 % 0 6 – – – – 7 5 0 , 0 4 1 0 8 9 , 3 5 2 % 0 0 1 9 4 9 , 1 0 1 % 1 7 1 3 0 , 8 4 % 1 7 1 3 0 , 8 4 – – – – – – % 0 0 1 2 0 1 , 3 4 – – – – – – % 0 0 1 1 6 2 , 5 7 % 2 8 5 7 6 , 5 5 % 2 8 5 7 6 , 5 5 – – – – – – – – % 0 0 1 7 4 4 , 3 4 – – – – – – – – % 0 0 1 5 6 5 , 6 7 % 7 6 2 0 7 , 6 5 % 7 6 2 0 7 , 6 5 – % 0 0 1 – – – – – – – – – % 0 0 1 9 4 1 , 8 7 – – – – – – – – – – – – 9 4 1 , 8 7 6 2 6 , 6 6 – 7 6 6 , 6 6 1 $ A 7 9 . 1 $ 8 0 0 , 1 5 1 $ A 7 5 . 1 $ 1 0 0 , 0 0 6 $ A – 4 1 . 1 $ 6 2 . 1 $ 1 5 . 1 $ 9 9 . 1 $ 5 6 6 , 9 5 1 $ A 5 1 0 , 0 2 3 $ A 7 2 9 , 7 1 1 $ A 6 8 5 , 2 3 1 $ A 0 0 0 , 8 0 1 $ S U 3 8 6 , 6 2 1 5 1 . 1 $ 5 8 6 , 5 4 1 $ A – – – – 2 0 1 , 3 4 3 1 9 , 4 4 4 3 3 , 1 9 8 4 . 1 $ 5 8 8 , 0 5 1 $ A 7 1 . 2 $ 1 5 . 1 $ 9 9 . 1 $ 5 1 . 1 $ 4 4 . 1 $ 7 1 . 2 $ 8 2 3 , 4 0 1 $ A 1 4 0 , 5 6 $ A 7 7 3 , 9 8 $ A 4 3 0 , 5 0 1 $ A 6 7 3 , 8 0 1 $ A 2 3 9 , 0 2 1 $ A 7 4 4 , 3 4 1 5 . 1 $ 2 6 5 , 5 6 $ A 5 1 5 , 1 3 9 5 0 , 4 5 9 9 . 1 $ 5 1 . 1 $ 5 1 7 , 2 6 $ A 8 6 1 , 2 6 $ A 5 8 2 , 2 9 1 7 . 2 $ 0 0 0 , 0 5 2 $ A – – 9 4 1 , 8 7 9 4 5 , 6 5 4 4 . 1 $ 7 1 . 2 $ 1 5 . 1 $ 9 9 . 1 $ 4 5 2 , 0 1 1 $ A 2 6 1 , 3 2 1 $ A 7 2 9 , 7 1 1 $ A 3 3 5 , 2 1 1 $ A 7 9 9 , 4 1 1 5 1 . 1 $ 7 4 2 , 2 3 1 $ A % 0 0 1 2 4 3 , 3 9 – 4 4 . 1 $ 2 1 4 , 4 3 1 $ A – – 7 5 0 , 0 4 1 9 7 . 1 $ 2 0 0 , 0 5 2 $ A h s a C y t i u q E r o h s a C y t i u q E y t i u q E y t i u q E h s a C y t i u q E y t i u q E y t i u q E m o t n a h P s e r a h S y t i u q E y t i u q E y t i u q E y t i u q E y t i u q E y t i u q E y t i u q E y t i u q E y t i u q E r o h s a C y t i u q E y t i u q E y t i u q E y t i u q E y t i u q E y t i u q E y t i u q E r o h s a C y t i u q E 5 1 0 2 / 9 0 / 5 1 5 1 0 2 / 0 1 / 0 3 2 e t o N 2 e t o N 4 1 0 2 / 0 1 / 1 3 3 e t o N 5 1 0 2 / 0 1 / 0 3 5 1 0 2 / 0 1 / 0 3 5 1 0 2 / 9 0 / 1 1 2 1 0 2 / 0 1 / 6 2 3 1 0 2 / 1 1 / 8 4 1 0 2 / 1 1 / 3 1 6 e t o N 7 e t o N 2 e t o N 4 e t o N 5 e t o N 6 e t o N 5 1 0 2 T S T S I e c n a m r o f r e P s t h g R i 5 1 0 2 T S T L I 6 1 0 2 T S T L I 5 1 0 2 I T S 3 1 0 2 T S T L I 4 1 0 2 T S T L I 5 1 0 2 T S T L I 6 1 0 2 / 3 0 / 4 1 7 e t o N 6 1 0 2 I T L 5 1 0 2 / 9 0 / 1 1 2 1 0 2 / 0 1 / 6 2 3 1 0 2 / 1 1 / 8 4 1 0 2 / 1 1 / 3 1 5 1 0 2 / 7 0 / 8 5 1 0 2 / 9 0 / 1 1 2 e t o N 4 e t o N 5 e t o N 6 e t o N 7 e t o N 2 e t o N 6 1 0 2 T S T S I 3 1 0 2 T S T L I 4 1 0 2 T S T L I 5 1 0 2 T S T L I 6 1 0 2 T S T L I 6 1 0 2 T S T S I 2 1 0 2 / 0 1 / 6 2 4 e t o N 3 1 0 2 T S T L I n o s r e d n A h c t i M y e k s u B g g e r G i r e v u G d v a D i 5 1 0 2 I T S h c t e r t S n o J 3 1 0 2 / 1 1 / 8 4 1 0 2 / 1 1 / 3 1 5 e t o N 6 e t o N 3 1 0 2 / 8 0 / 9 1 8 e t o N 5 1 0 2 / 7 0 / 8 5 1 0 2 / 9 0 / 1 1 2 1 0 2 / 0 1 / 6 2 3 1 0 2 / 1 1 / 8 4 1 0 2 / 1 1 / 3 1 5 1 0 2 / 7 0 / 8 7 e t o N 2 e t o N 4 e t o N 5 e t o N 6 e t o N 7 e t o N 4 1 0 2 / 9 0 / 4 2 8 e t o N 3 1 0 2 T S T L I 4 1 0 2 T S T L I 5 1 0 2 T S T L I 6 1 0 2 T S T L I e c n a m r o f r e P s t h g R i 4 1 0 2 T S T L I 5 1 0 2 T S T L I e c n a m r o f r e P s t h g R i 6 1 0 2 T S T L I 5 1 0 2 T S T S I y a K c M k e r e D PAGE 31 REMUNERATION REPORT (CONT.) FOR THE YEAR ENDED 30 JUNE 2016 1 t s e v y a m t s e v y a m d e t s e v n U % r e b m u N % r e b m u N % r e b m u N d e t s e v n U t i n u r e p $ l a t o T n o i t a s n e p m o c e t a D t n a r G a i r e t i r c 1 d r a w A m u m x a M i e u a V l l a t o T l i a c n a n F i t a h t d r a w a f o d r a w a r a e Y y t i u q E t a e c n a a b l f o d n e e h t r a e y e h t t i e f r o F d e t s e V s a d e t n a r G % n o i t a s n e p m o c y t i u q E t a e c n a a b l f o t r a t s e h t r a e y e h t e t a D t n a r G l t a e u a V r i a F f o e r u t a N d n a e c v r e S i e c n a m r o f r e p ) . t n o c ( s t i f e n e b m r e t g n o l d n a s t n a r g y t i u q e f o s n o i t i d n o c d n a s m r e T – 7 e b a T l PAGE 32 – $ A – $ A – $ A 7 3 6 , 3 2 $ A 5 7 9 , 3 7 $ A 6 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 9 1 0 2 – – 2 8 6 , 0 3 9 5 0 , 4 5 5 6 5 , 6 7 3 9 6 , 1 6 1 $ A 0 2 0 2 7 5 0 , 0 4 1 6 1 4 , 8 $ A 7 1 0 2 0 5 4 , 3 2 5 9 4 , 1 2 $ A 8 1 0 2 0 5 4 , 3 2 0 2 8 , 4 8 $ A 9 1 0 2 8 3 9 , 7 8 – $ A – $ A – $ A – $ A – $ A – $ A – $ A – $ A – $ A – $ A – $ A – $ A – $ A – $ A 6 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 8 1 0 2 9 1 0 2 6 1 0 2 6 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 8 1 0 2 8 1 0 2 9 1 0 2 – – 8 6 6 , 6 5 4 8 4 , 5 0 4 2 , 5 1 1 3 8 5 , 6 9 – – – 0 0 0 , 5 5 6 2 7 , 6 5 1 9 , 8 4 5 4 0 , 2 1 1 3 8 5 , 6 9 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – % 0 0 1 % 0 0 1 – – – – % 0 0 1 % 0 0 1 % 0 0 1 – – – – – – – – – – – – 4 2 9 , 8 8 % 0 0 1 4 2 9 , 8 8 – – – – 4 1 3 , 8 7 – – – – – – – – % 0 0 1 3 8 5 , 6 9 2 7 7 , 6 6 % 0 0 1 2 7 7 , 6 6 4 0 0 , 7 1 1 % 0 0 1 4 0 0 , 7 1 1 – – – – – 8 7 3 , 0 7 – – – – – – – – – – % 0 0 1 0 5 4 , 3 2 % 0 0 1 0 5 4 , 3 2 % 0 0 1 8 3 9 , 7 8 – – – – 4 1 3 , 8 7 8 6 6 , 6 5 4 8 4 , 5 0 4 2 , 5 1 1 5 1 . 1 $ 6 2 5 , 2 3 1 $ A – – – 8 7 3 , 0 7 0 0 0 , 5 5 6 2 7 , 6 5 1 9 , 8 4 4 4 . 1 $ 4 5 . 1 $ 7 1 . 2 $ 1 5 . 1 $ 9 9 . 1 $ 5 1 . 1 $ 5 1 . 1 $ 0 8 0 , 9 3 1 $ A 5 7 6 , 2 0 1 $ A 4 4 1 , 4 5 2 $ A 0 0 2 , 6 0 1 $ A 0 5 4 , 9 0 1 $ A 5 3 7 , 7 $ A 2 5 2 , 6 5 $ A 5 4 0 , 2 1 1 5 1 . 1 $ 2 5 8 , 8 2 1 $ A 9 3 . 1 $ 7 1 . 2 $ 1 5 . 1 $ 9 9 . 1 $ 5 1 . 1 $ 4 3 2 , 2 2 1 $ A 2 5 1 , 3 9 1 $ A 6 7 1 , 8 1 1 $ A 9 6 7 , 2 1 1 $ A 7 0 3 , 6 $ A % 0 0 1 3 8 5 , 6 9 – 4 4 . 1 $ 0 8 0 , 9 3 1 $ A y t i u q E y t i u q E y t i u q E y t i u q E y t i u q E y t i u q E y t i u q E y t i u q E y t i u q E y t i u q E y t i u q E y t i u q E y t i u q E y t i u q E y t i u q E % 0 0 1 9 8 9 , 5 3 % 1 7 1 5 1 , 8 4 % 1 7 1 5 1 , 8 4 – % 0 0 1 5 6 5 , 6 7 – – – – – – – 9 8 9 , 5 3 2 8 6 , 0 3 9 5 0 , 4 5 7 1 . 2 $ 1 5 . 1 $ 9 9 . 1 $ 5 1 . 1 $ 4 4 . 1 $ 9 8 5 , 4 0 1 $ A 7 0 3 , 4 5 $ A 7 5 0 , 1 6 $ A 8 6 1 , 2 6 $ A 4 5 2 , 0 1 1 $ A – – 7 5 0 , 0 4 1 9 7 . 1 $ 2 0 0 , 0 5 2 $ A y t i u q E y t i u q E y t i u q E y t i u q E y t i u q E r o h s a C y t i u q E 5 1 0 2 / 9 0 / 1 1 2 1 0 2 / 0 1 / 6 2 3 1 0 2 / 1 1 / 8 4 1 0 2 / 1 1 / 3 1 5 1 0 2 / 7 0 / 8 2 e t o N 4 e t o N 5 e t o N 6 e t o N 7 e t o N 4 1 0 2 / 9 0 / 4 2 8 e t o N 1 2 . 1 $ 5 7 3 , 8 2 $ A y t i u q E 5 1 0 2 / 0 1 / 2 9 e t o N 3 3 . 1 $ 9 8 1 , 1 3 $ A y t i u q E 5 1 0 2 / 0 1 / 2 9 e t o N 5 1 0 2 / 7 0 / 8 5 1 0 2 / 9 0 / 1 1 2 1 0 2 / 0 1 / 6 2 3 1 0 2 / 1 1 / 8 5 1 0 2 / 2 0 / 3 4 1 0 2 / 1 1 / 3 1 5 1 0 2 / 7 0 / 8 7 e t o N 2 e t o N 4 e t o N 5 e t o N 6 e t o N 6 e t o N 7 e t o N 6 1 0 2 / 1 0 / 1 1 0 1 e t o N 6 1 0 2 T S T S I 5 1 0 2 / 9 0 / 1 1 2 1 0 2 / 0 1 / 6 2 3 1 0 2 / 1 1 / 8 5 1 0 2 / 2 0 / 3 4 1 0 2 / 1 1 / 3 1 4 1 0 2 / 1 1 / 3 1 5 1 0 2 / 7 0 / 8 2 e t o N 4 e t o N 5 e t o N 6 e t o N 6 e t o N 6 e t o N 7 e t o N 5 1 0 2 T S T S I 3 1 0 2 T S T L I 4 1 0 2 T S T L I ) 3 ( 5 1 0 2 T S T L I ) 2 ( 5 1 0 2 T S T L I ) 1 ( 5 1 0 2 T S T L I 6 1 0 2 T S T L I e m e a r G 2 1 r e k a W l . s e t o n 7 l e b a t r o f 3 3 e g a p o t f r e e R 3 1 0 2 T S T L I 4 1 0 2 T S T L I 5 1 0 2 T S T L I 6 1 0 2 T S T L I e c n a m r o f r e P s t h g R i t n e m e c n e m m o C ) 1 ( d r a w A t n e m e c n e m m o C ) 2 ( d r a w A 6 1 0 2 T S T L I e c n e p S s e m a J 5 1 0 2 T S T S I s r e g o R e v e t S 3 1 0 2 T S T L I 4 1 0 2 T S T L I ) 3 ( 5 1 0 2 T S T L I ) 1 ( 5 1 0 2 T S T L I 6 1 0 2 T S T L I 5 1 0 2 T S T S I 2 1 s n a J r e t e P ERM POWER ANNUAL REPORT | 2016 Table 6 Notes 1. Appointed 2 February 2015. 2. Transferred to US on 1 February 2015 with relocation expenses met by the Group. Existing LTI awards will continue to be expensed in Australia, whilst new LTI awards under the Phantom Equity Plan will be expensed and paid in US$. Australian entitlement to LSL reversed. 3. Appointed as KMP on 14 April 2015. FY2015 remuneration expensed in that period whilst serving in previous role/s prior to the appointment as KMP is not disclosed, although award received during that time which will vest in a future period, are disclosed in Table 7. 4. Ceased as KMP (Group General Counsel & Company Secretary) on 1 October 2015. Only the compensation related to the services rendered whilst a KMP is disclosed. 5. Ceased as KMP (CFO) on 28 September 2015. Only the compensation related to the services rendered whilst a KMP is disclosed. 6. Each Senior Executive is employed under an on-going employment contract, for which the termination benefits are payable at the option of the Company in lieu of notice. The notice periods (by the employee or the Company) in respect of each of the executives listed is 6 months with the following exceptions: • Peter Jans and Graeme Walker: 9 months by the Company in certain circumstances. • Jon Stretch: 3 months by the Company in certain circumstances. 7. Non-monetary benefits include salary continuance insurance premiums paid for Australian employees, health insurance coverage for US residents, executive health assessments, use of company vehicle, car parking and other benefits associated with FBT. 8. Other benefits include one-off relocation expenses in regards to international relocations, and professional tax advice in respect of changes in residency. 9. No STIs in respect of FY2016 have been accrued. Jon Stretch’s FY2015 STI payment by way of cash was accrued in FY2015. The balance awarded by way of equity was expensed at fair value as required under AASB2 in FY2016 after shareholder approval at the 2015 AGM. 10. During FY2015 Australian base salaries were increased but offset by an equivalent reduction in superannuation contributions to maintain total fixed remuneration. 11. Other equity benefits refer to the accounting expense of retention and commencement awards which will vest subject to service and performance conditions. 12. The amounts shown are as expensed in the income statement but which may not reflect the benefit actually received by the executive in that year. In accordance with AASB2, equity benefits include a portion of the value of equity that has not vested during the financial year as well as the present value of expected dividends over the vesting period. The amount included as remuneration does not necessarily reflect the benefit (if any) that may ultimately be realised by the executive if vesting occurs. Supplementary Information is provided to reflect the value of vested remuneration actually received by the executive in that year, with equity values based on the fair value as at the date of grant. Note: the 2015 comparative for Jon Stretch and Mitch Anderson has been restated due to Other Benefits (relocation expenses) incorrectly backed out as an “accounting accrual” to determine Total Remuneration Vested for the period. 13. STIs awarded during the period for prior year performance. Payments made in cash (“c”) or equity (“e”) Table 7 Notes 1. There have been no alterations in terms or conditions since grant date. 2. Jon Stretch’s FY2015 STI was paid as per contractual arrangements agreed on commencement of employment and advised to the ASX on 30 October 2014. Half was paid in cash following the release of the FY2015 financial results and the remaining half in equity as approved at the 2015 Annual General Meeting. Other KMP FY2015 STI was accrued in FY2015 and awarded in FY2016 (Refer Table 4). 3. Performance rights awarded as per contractual arrangements agreed on commencement of employment, advised to the ASX at the time and approved by shareholders at the 2015 AGM. Vesting on 4 July 2016 and satisfied at the Board’s discretion, in cash or equity, at a value based on the number of Performance Rights held, multiplied by the higher of either the notional issue price, or the 10 day VWAP prior to the date of vesting, giving a minimum value of $600,000. FY2015 STI for all other executives was accrued in FY2015 and paid in FY2016. The percentage relates to the actual amount awarded against the maximum (see Table 4). 4. LTI FY2013 TSR was determined to be 47.42%, falling in the 84th percentile of the comparator group, which in accordance with the vesting conditions resulted in 100% vesting. 5. LTI FY2014 vesting is subject to continuation of employment through to 30 June 2016 and TSR performance measured against the TSR performance of a comparator group being those companies in the Standard & Poor’s (S&P) ASX 300 index at the beginning of the performance period. On 17 August 2016 the Committee determined that the TSR vesting conditions required at the date of grant had not been met, and the LTI FY2014 awards will be forfeited by all participants. 6. LTI FY2015 vesting is subject to continuation of employment through to 30 June 2017 and TSR performance measured against the TSR performance of a comparator group being those companies in the Standard & Poor’s (S&P) ASX 300 index at the beginning of the performance period. 7. LTI FY2016 vesting is subject to continuation of employment through to 30 June 2018 and TSR performance measured against the TSR performance of a comparator group being those companies in the Standard & Poor’s (S&P) ASX 300 index at the beginning of the performance period. 8. Performance Rights granted under an employee retention strategy, subject to a 5 year vesting period and satisfied, at the Board’s discretion, in cash or shares, subject to continuous full-time employment with the Company. The vesting value will be the number of Performance Rights held, multiplied by the higher of either the notional issue price, or the 10 day VWAP prior to the date of vesting. 9. Commencement award of $100,000 of units in the Long Term Incentive Share Trust. Vesting subject to continued employment to each vesting date. 50% to vest on the first anniversary of the commencement date, and 50% to vest on the second anniversary of the commencement date. Fair value as determined by AASB2 and expensed over the vesting period. 10. Full value of FY2016 STI awarded as part of retirement benefits prorate to cessation of employment on 31 December 2015. 11. The maximum value yet to vest for Australian awards has been determined as the amount of fair value as at grant date that is yet to be expensed in a future accounting period. The maximum value yet to vest for the US award has been determined as the amount that may be expensed in a future accounting period based on the closing share price and exchange rate as at 30 June 2016. The minimum value yet to vest is nil, as equity will be forfeited if the vesting conditions are not met. 12. As per the rules of the LTI plan, and subject to Board approval, for redundancy, retirement or termination by mutual agreement the leaver will continue to be a participant in the LTI plan for unvested LTI units until the end of the performance period; however the remaining expense for the unvested award is recognised in the year of departure. PAGE 33 REMUNERATION REPORT (CONT.) FOR THE YEAR ENDED 30 JUNE 2016 3. ADDITIONAL DISCLOSURES 3.1 Details of shares, options and rights 3.1.1 Unissued shares As at the date of this report, there were 1,267,786 options on issue, exercisable into fully paid ordinary shares. The options do not carry any entitlement to participate in any share issue of the Company. Expiry date 1 November 2017 8 November 2017 Quantity Exercise price 1,025,080 275 cents 242,706 275 cents No shares were issued during the year on the exercise of any options. The number of shares and options held at the date of this report by each director of the Company are disclosed in Section 12 of the Directors’ Report. No options were granted to directors or any of the five highest remunerated officers of the Group during the reporting period or since the end of FY2016, other than the performance rights issued to Jon Stretch as approved by shareholders at the 2015 AGM. The numbers of options or rights over ordinary shares in the Company granted under executive incentive schemes that were held during the financial year by each disclosed executive of the Group, including their related parties, are set out below: Table 8 – Rights and Option Holdings Balance at the start of the year Vested and exercisable Unvested Granted as compensation Options Exercised Jon Stretch1 Mitch Anderson Gregg Buskey David Guiver Derek McKay Steve Rogers James Spence Peter Jans2 Graeme Walker2 – 106,364 61,634 55,228 106,364 45,410 – 106,590 92,700 – – – 92,285 140,057 140,057 – – – 383,216 – – – – – – – – – – – – – – – – – Appointment or cessation as KMP Balance at the end of the year Vested and exercisable Unvested – – – – – – – (106,590) (92,700) – 383,216 106,364 61,634 55,228 106,364 45,410 – – – – – 92,285 140,057 140,057 – – – 1. Performance Rights approved by shareholders at the 2015 AGM. 2. Ceased as KMP during the year and therefore balances at the end of the year do not necessarily reflect holdings as a non-KMP. The numbers of shares in the Company held during the financial year by each director and other disclosed executives of the Group, including their related parties, are set out in Tables 9 and 10 below: Table 9 – Non-executive director’s share holdings Non-executive directors1 Tony Bellas Trevor St Baker Albert Goller Martin Greenberg Tony lannello Wayne St Baker2 Balance at the start of the year Appointment or cessation as KMP Other Changes3 Balance at the end of the year 106,250 75,040,647 100,000 571,794 139,946 – – – – – – 106,250 (11,523,740) 63,516,907 170,000 – 62,893 270,000 571,794 202,839 – 1,645,290 40,000 1,685,290 1. No shares were held nominally other than by Trevor St Baker for which the balances above include 3,025,242. 2. Appointed on 1 March 2016. 3. On and off market movements, dividend reinvestment plan etc. PAGE 34 ERM POWER ANNUAL REPORT | 2016 Table 10 – Executive’s share holdings Executives1 Jon Stretch – – 470,691 Mitch Anderson 1,146,949 271,458 Gregg Buskey 142,408 179,349 David Guiver 174,615 129,021 Derek McKay 371,734 249,695 Steve Rogers 104,213 120,730 James Spence2 – – Peter Jans3 53,337 255,706 Graeme Walker3 94,905 293,064 1. No equity was held nominally by the named executives. 2. Appointed as KMP on 28 September 2015. – 123,292 132,240 150,044 124,716 134,838 185,507 213,587 Balance at the start of the year Vested Unvested Granted as compensation Forfeit Appointment or cessation as KMP Other changes4 Balance at the end of the year Vested Unvested – – – – – – – – – – – – – – – – 320,000 396,654 394,037 279,157 1,504,255 193,309 (91,127) 142,414 211,508 (93,510) 180,227 162,139 (49,996) 456,589 264,888 (35,989) 152,364 161,306 82,792 82,792 134,838 (494,550) (601,556) – – – – – – 3. Ceased as KMP during the year and therefore the balances at the end of the year do not necessarily reflect holdings as a non-KMP. 4. On and off market movements, dividend reinvestment plan etc. 3.2 Loans to KMP Details of loans made to KMP or close members of the family of a member of the KMP, or an entity over which the KMP has control or significant influence, are set out below: Aggregate amounts FY2016 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 $ 57,322 2,963 – 47,998 1 The above loan represents an employee shareholder loan that was offered to certain senior executives in 2007 and 2008 to participate in a share loan incentive plan which enabled them to subscribe for shares. The loan is subject to a loan deed and is interest bearing at the FBT benchmark rates with recourse limited to the value of the shares. The loan is repayable in the event of cessation of employment or otherwise ten years from the date of advance. The amount shown for interest not charged in the table above represent the difference between the amount paid and payable for the year and the amount of interest that would have been charged on an arm’s-length basis. No loans were made, guaranteed or secured, nor remain outstanding in the reporting period to any KMP or close member of the family of any KMP for an amount greater than $100,000. No write-downs or allowances for doubtful receivables have been recognised in relation to any loans made to KMP. 3.3 Other transactions with KMP During the period the Company entered into certain transactions with KMP or their related entities as outlined in note 31 of the Financial Statements. The Board is satisfied that those transactions: • were on terms and conditions no more favourable than those that would have been adopted if dealing at arm’s length with an unrelated person, • did not have the potential to affect adversely decisions about the allocation of scarce resources made by users of the financial statements, or the discharge of accountability by the KMP, or • were trivial or domestic in nature. 3.4 Voting and comments received at the 2015 Annual General Meeting 81.8% of proxies received prior to the 2015 Annual General Meeting (AGM) were received in favour of the FY2015 Remuneration Report. The Company responded to queries regarding the operation of its incentive plans at the AGM and the FY2015 Remuneration Report was approved by shareholders by a show of hands. PAGE 35 ERM Power Limited’s (Company) board (Board) and management are committed to achieving and demonstrating the highest standards of corporate governance. The Board continues to review the framework and practices to ensure they meet the interests of shareholders. The Company and its controlled entities together are referred to as the ERM Power Group (Group) in this statement. A description of the Group’s main corporate governance practices is set out below. All these practices, unless otherwise stated, were in place for the entire year ending 30 June 2016 (reporting period). The Company complies with all of the ASX Corporate Governance Principles and Recommendations (Principles and Recommendations). This Corporate Governance statement was approved by the Board and is current as at 24 August 2016. Principle 1 – Lay solid foundations for management and oversight The role of the Board and management The Board is responsible for governance and provides overall strategic guidance for the Group and effective oversight of management. The role of the Board and ability to delegate to management has been formalised in the Company’s Board Charter. The Board Charter, along with other charters and policies of the Company, can be found on the Company’s website. As set out in the Board Charter, the responsibilities of the Board include; • oversight of financial and capital management; • reporting to shareholders in accordance with the requirements of the Corporations Act or other relevant law; • providing strategic guidance to the Group including contributing to the development of and approving the corporate strategy; • appointment, performance assessment and, if necessary, removal of the Managing Director (MD); • ratifying the remuneration, succession plans, appointment and/ or removal of the members of the senior management team including the Chief Financial Officer and the Company Secretary; • reviewing and approving business plans, the annual budget and financial plans including capital structure and financing arrangements; • determining the dividend policy and approval of dividends; • recommendations to shareholders regarding the appointment of auditors; • reviewing and ratifying policies and systems of risk management, codes of conduct, legal compliance and corporate governance; and • approving and monitoring policies in regards to environmental, employment and occupational, health and safety matters as well as relationships with other stakeholders, including the community at large. CORPORATE GOVERNANCE STATEMENT COMPLIANCE WITH ASX CORPORATE GOVERNANCE PRINCIPLES AND RECOMMENDATIONS PAGE 36 ERM POWER ANNUAL REPORT | 2016 The Board has delegated to the MD responsibility for the day to day affairs, financial performance, and operation of the Group, and the authority to control all affairs in relation to all matters other than those responsibilities reserved by the Board in the Board Charter. The MD has made further delegations to senior executives related to the Company’s day to day affairs, within the Board approved delegations and is accountable to the Board for the exercise of those delegated powers. Appointments to the Board Prior to appointment of any proposed director, appropriate background and other checks are undertaken and considered before the Nomination Committee will recommend a candidate(s) for consideration by the Board as a whole. New directors are issued with a formal letter of appointment that sets out the key terms and conditions of their appointment, and the appointment is subject to signed acceptance of the Company’s Board governance protocols. These protocols outline their director’s duties, conduct expected of directors, meeting procedures, rights and responsibilities, and the Board’s expectations regarding time commitment. The Company provides security holders with all material information in its possession relevant to a decision on whether or not to elect or re-elect a non-executive director in the AGM notice of meeting. The Company Secretary The Company Secretary is accountable directly to the Board, through the Chair, on all matters to do with the proper functioning of the Board, including agendas, Board papers and minutes, advising the Board and its committees on governance matters, monitoring that the Board and committee policies and procedures are followed, communication with regulatory bodies and the ASX and statutory and other filings. Gender Diversity ERM Power is committed to building a workplace which supports and encourages diversity. The Company’s Diversity Policy, available on the website, outlines the commitment to fostering a corporate culture that embraces diversity. This helps build understanding that each individual is unique and recognises that these differences include but aren’t limited to gender, age, physical abilities, ethnicity and cultural background. Diversity reporting allows the Board to determine measurable objectives for achieving gender diversity and to assess annually both the objectives and progress. Responsibility for diversity is included in the Nomination Committee charter (related to the Board) and the Remuneration Committee charter (related to diversity at all levels of the Company, excluding the Board). In FY2016, the Company made good progress on the objectives as set by the Board and that progress is detailed below in Table 1. For FY2017, additional clear and measurable gender diversity objectives have been put in place and these are outlined in the next section. Table 1: Progress against objectives FY2016 Measurable Objective Progress Ensure diversity programs reflect the company’s policy and approach to diversity and ensure that they are communicated to all employees. • The HR Framework, reviewed annually, is a comprehensive guide for leaders on key policy and process and specifically references diversity. • The Company commitment to leveraging the diverse backgrounds, experiences and perspectives of staff is reflected in policies and practice which are accessible and case studied for all employees via the intranet. • Additional practices and forums that address issues and inform staff on the Company’s approach to diversity, respect and inclusion are referenced in the: Code of Business Conduct New employee induction process Annual online compliance training Profiles of women in leadership Gender targets for participation at Board and senior management levels Gender targets in the recruitment process Review all recruitment remuneration processes to ensure they are free from gender bias and encourage greater female participation and opportunity. • The Remuneration policy and process, which form part of the HR Framework, were reviewed to inform and support updated diversity targets. • Greater rigour has been applied around any out of cycle remuneration changes. • Remuneration is benchmarked annually against market expectations for similar roles in similar industries. It is non-gender related. • A review of gender remuneration reveals any differences to be related to factors such as experience, tenure and complexity of the role. PAGE 37 CORPORATE GOVERNANCE STATEMENT (CONT.) Table 1: Progress against objectives FY2016 (cont.) Measurable Objective Progress 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. • The Company’s commitment to recognising the importance of diversity extends to all areas of the business including talent development, skills enhancement, retention and mentoring and coaching programs. • The HR Framework includes Leadership Development and Succession Planning goals. • An annual leadership training program for all newly promoted or hired managers is in place with more than 70 staff attending tailored courses during the year. • Guidance from HR during recruitment supports recognition of candidate attributes and raises awareness of unconscious bias. 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. • Improved commitment on reviewing and establishing KPIs, professional development plans and Manager Once Removed conversations has supported employee clarity on career progression as well as provided leaders with an opportunity to give structured guidance on achieving goals aligned to strategy. • The above have supported identification and development of female talent. A review of the recruitment process for the reporting period reveals the following results that reinforce a gender-neutral hiring process. Women were offered 52% of roles in the year. Male 2015 64% 56% 50% 2016 41% 58% 48% Female Unknown 2014 2016 2015 2014 60% 54% 49% 31% 42% 52% 30% 44% 50% 22% 45% 51% 2016 28% 2015 6% 2014 18% – – – – – – Applicants Interviews Offers NB: data only available for Australia ‘Unknown’ refers to those candidates who do not advise their gender at application time. The proportion of women employed across the Group increased by 7% between FY2015 and FY2016 as shown below: Board (excluding the MD) Senior executives1 Total Group FY2016 0% 14% 47% Female FY2015 0% 12% 40% Change 0% 2% 7% Reporting requirements were introduced on 1 April 2013 which incorporated a revised workplace profile and a reporting questionnaire for each of the ‘gender equality indicators’ (GEIs). A copy of the Company’s public report for the year ended 31 March 2016 was lodged with the Workplace Gender Equality Agency and is available on the Company’s website at http://www.ermpower.com.au/investor-centre/ financial-reports/. The WGEA report is specific to the Australian workforce. 1. Senior executives include the MD& CEO, other executives/general managers and senior managers as defined by the Workplace Gender Equality Agency (WGEA) management categories. PAGE 38 ERM POWER ANNUAL REPORT | 2016 FY2017 Gender Diversity Targets The Company recognises the value of a diverse and skilled workforce and is committed to creating and maintaining an inclusive and collaborative workplace environment. The Board and senior executives have reviewed progress against the measurable objectives and set updated targets, as follows, to support gender diversity in the year ahead: Further information on senior executive remuneration is contained in the Remuneration Report. 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 their term of office, duties, rights and responsibilities, and entitlements on termination. • Initiate formal talent identification and succession planning; • Ensure a woman is on the shortlist for all vacant roles; • Undertake gender pay equity reviews annually; • Sponsor ‘women in the industry’ events and facilitate ‘women in leadership’ training; • Aim to achieve 65% female representation among new hires by 2018 (currently 57%); • Actively support flexible working arrangements; • Build the program of communicating policies which support equality; and • Appoint a female director to the Board by 2017. Board, committee and director performance evaluations Through the Nomination Committee, the directors periodically review the performance of the whole Board and Board committees. An external facilitator was engaged to conduct a full Board performance review in July 2015 which was based on a Board evaluation survey assessing Board performance in four “Areas of Focus”, being “Do, Enable, Facilitate and Act”. The model referenced key principles and guidelines, including the Australian Standard AS 8000 – Good Governance Principles and the ASX and APRA guidelines. The Board identified opportunities for improvement in the areas of diversity, succession planning and performance evaluation for the MD’s role, relationships with key stakeholder groups and management of related party matters. Senior executive performance evaluations The performance of all senior executives, including the MD, 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 makes recommendations to the Board concerning the MD’s remuneration package and incentive payments. The Remuneration Committee also approves the fixed remuneration and incentive packages for all senior executives who report directly to the MD (the “Executive Management Team”) with reference to external benchmarking indicators. Performance reviews for the Executive Management Team were conducted during the reporting period in accordance with this process. Principle 2 – Structure the Board to add value At the end of the reporting period, the Company had a seven-member Board comprising an independent non-executive Chair, three independent non-executive directors, two non- executive directors and a Managing Director, which accords with Recommendations 2.4 and 2.5. 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 Company’s 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 and details of their skills, experience and special expertise are set out in the Directors’ Report. The Chair The principal role of the Chair is to provide leadership to the Board, to ensure the Board works effectively and discharges its responsibilities, and to encourage a culture of openness and debate fostering a high-performing and collegial team. The Chair will not be the same person as the CEO to ensure there is effective Board oversight of management’s activities. The Chair: • Represents the Board to the shareholders and communicates the Board’s position, • Serves as the primary link between the Board and management, and • Sets the agenda for each Board meeting in consultation with the MD and Company Secretary and is responsible for ensuring that all directors are adequately briefed in relation to issues addressed at Board meetings. The Board is conscious of the time commitment required of directors and the Chair in particular. The Board is satisfied that the Chair makes sufficient time available to serve the Group effectively and that none of his other commitments interfere with the discharge of his responsibilities to the Group. PAGE 39 CORPORATE GOVERNANCE STATEMENT (CONT.) Director’s Independence In accordance with Recommendation 2.3 of the Principles and Recommendations, the Board considers each director’s independence on a regular basis and formed the view that for the reporting period, Tony Bellas, Martin Greenberg, Tony Iannello and Albert Goller were independent. The Board considered the skills and experience, and endorsed the appointment of Wayne St Baker on 1 March 2016 as nominee director for the St Baker family interests. As brother to Trevor St Baker who is a substantial shareholder in the Company, Wayne is not considered to be independent. In defining the characteristics of an independent director, the Board uses the Principles and Recommendations, 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. The Board considers that the independent directors do not have any interests, positions, associations or relationships of the type described in Box 2.3 of Recommendation 2.3. 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. The MD & CEO also provides the Board each month with a report which outlines the activities of the Group over the preceding period. This report includes; financial progress against key KPIs, business unit activity, a health, safety, environment and sustainability report, and reports on the progress of strategic projects, funding, corporate affairs, and, as appropriate, 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. A list of the members of each committee and their attendance at committee meetings is set out in the Directors’ Report. The Nomination Committee 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 having regard to the Board skills matrix and the attributes of existing directors and potential candidates; • establishing processes for evaluating the performance of the Board as a whole, its committees and individual directors; • 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; • making recommendations to the Board on directors’ appointments or Board and committee structures; and • ensuring there are plans in place to manage the succession of the CEO and other senior executives. Each year one third of the Board, other than the MD, retires in accordance with the constitution, and is eligible for re-election by shareholders at the Annual General Meeting (AGM). Any director appointed to fill a casual vacancy since the previous AGM must submit themselves to shareholders for election at the next AGM. Wayne St Baker, having been appointed by the Board on 1 March 2016, will stand for election at the 2016 AGM. Prior to each AGM 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. We will provide our shareholders with information relevant to a director’s election or re-election in the notice of meeting for the 2016 AGM. Board skills matrix, induction and professional development During the reporting period, the Board updated its Board skills matrix, and identified the criteria to be considered when reviewing the skills and experience that the Board currently has or is looking to achieve in its membership. The Board undertook a skills gap analysis against the Board skills matrix with the assistance of an external organisation. The analysis rated each skill for its importance and coverage for both the existing business and ability to pursue the Company’s future strategies. The Board acknowledges that a female director would be very beneficial and positive to the Board and has set a target to appoint a female director in 2017. PAGE 40 ERM POWER ANNUAL REPORT | 2016 Principle 4 – Safeguard integrity in financial reporting The Company has an Audit and Risk Committee compliant with Recommendation 4 which consists of the four independent non- executive directors, Tony Bellas, Martin Greenberg (as Chair, and not Chair of the Board), Tony Iannello and Albert Goller. The Audit and Risk Committee Charter is available on the Company’s website and was updated during the period to realign the focus of the committee with appropriate emphasis on; (i) (ii) risk matters, the review of internal processes in preparation of financial statements and key accounting judgements, (iii) internal control processes, and (iv) audit related issues. 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, integrity and 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. When presenting financial statements for Board approval, the MD and Chief Financial Officer provide a formal statement in accordance with section 295A of the Corporations Act 2001 (Cth). This includes 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 Company’s auditor will attend the AGM and will be available to answer shareholders’ questions. Other aspects considered in maintaining and contributing to diverse viewpoints in Board discussions and to assist in avoiding unconscious bias include tenure and age of directors: Tenure 0-3 years 4-7 years >7 years No. of directors 3 2 2 Age 50-60 61-70 >70 No. of directors 2 4 1 Directors are encouraged to engage in professional development activities to develop and maintain the skills and knowledge needed to perform their role as directors effectively. During the reporting period, the independent Chair, two of the independent non-executive directors and the MD completed a five day course run by the Australian Institute of Company Directors. The Company continues to undertake a detailed induction process for new directors which includes; discussions with existing directors and senior executives on operational issues and the future strategic direction of the Company, the provision of key materials such as the Code of Business Conduct and the Company’s Security Trading Policy, together with site visits where appropriate. 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. In particular, the Code of Business Conduct (the Code) and the Securities Trading Policy apply to all directors and employees. The Company encourages employees to report known or suspected instances of inappropriate conduct, including breaches of the Code or the Securities Trading Policy. There are policies in place to protect employees from any reprisal, discrimination or being personally disadvantaged as a result of their reporting of a concern. A copy of the Code and the Securities Trading Policy are available on the Company’s website along with other corporate governance policies of the Company. 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. All directors of the Company also agree to comply with the Board governance protocols which outline, amongst other matters, the directors’ duties and the conduct expected of them as directors. PAGE 41 CORPORATE GOVERNANCE STATEMENT (CONT.) Principle 5 – Make timely and balanced disclosure The Company’s practice on disclosure is consistent with the Principles and Recommendations. The Board strictly adheres to the Company’s Continuous Disclosure Policy and procedures that 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 security holders The Company is committed to providing regular communication to shareholders about the performance of the Group and its business and operations. The Company’s website contains extensive information on its operations and corporate governance, and 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 updates on its operations. The Company complies with Recommendation 6.1 with the names, photographs and brief biographical information for each of its senior executives added to the Company’s website during the reporting period in April 2016. The Company has an investor relations program involving two-way interactions with institutional investors (including buy-side analysts), sell-side analysts, financial media and other members of the investment community, which for the reporting period included: • “Roadshows” after the full year and half results involving face-to-face, one-on-one or group meetings and lunches in Sydney and Melbourne. The meetings begin with an opening presentation from the MD and continue with questions and answers. • Teleconference/s on the day of the results with investors and analysts as a group, involving a presentation and questions and answers, and otherwise as necessary; also one-on-ones with individual investors or analysts/brokers, organised proactively or in response to requests. • Meetings – face-to-face throughout the year in Brisbane, Sydney and Melbourne. • Conferences – The MD occasionally presents at investment conferences organised by brokers and which are attended by institutional investors. • Filmed presentations and Q&A sessions – The MD participates in filmed presentations and Q&A sessions which are distributed through retail investor networks. The Company held one general meeting during the reporting period, the AGM on 29 October 2015. The explanatory memorandum in the notice of meeting sets out the process whereby shareholders may attend and ask questions, including written questions submitted prior to the meeting. The Board has not considered it necessary to hold general meetings outside of Brisbane, the location of its head office. The Board considers the makeup of the Company’s share register and monitors investor feedback as to whether the use of telecommunications during general meetings would be useful to investors, and is satisfied that the current process sufficiently encourages participation by shareholders. The Company give security holders the option to receive communications from, and send communications to, the Company and its security registry electronically. 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 Company’s policies and procedures, and in particular the Shareholder Communication Policy, comply with the Principles and Recommendations in relation to the rights of shareholders. Principle 7 – Recognise and manage risk The Board, through the Audit and Risk Committee, has an overarching Risk Management Framework Policy governing the Company’s approach to risk oversight and management and internal control systems 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. As mentioned under Principle 4, the Audit and Risk Committee Charter was updated during the reporting period to realign the focus of the committee with a greater emphasis on risk management. 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 Recommendation 7.1. Board, executive and business unit level controls are designed to safeguard Company and stakeholders’ interests in respect of these risks. Each executive management team member is responsible for communicating to their team the risk framework and structure required by the Board and the Audit and Risk Committee. The Chief Financial Officer is responsible for reporting to the Board and the Audit and Risk Committee and to provide assurance that the Company is not unduly exposed to risks it is not consciously willing to accept. PAGE 42 ERM POWER ANNUAL REPORT | 2016 The Company undertakes regular reviews of business units for major risks and the Risk Management Framework Policy, including during the reporting period via an organisation-wide process to identify potential risk events (the Enterprise Risk Register), take mitigating actions if they occur and manage them within the Company’s risk appetite, in compliance with Recommendation 7.2. The Company does not have a dedicated internal audit function, but periodically engages external consultants to perform internal control reviews. Any material exposures to economic, environmental and social sustainability risks are incorporated into the Enterprise Risk Register, and responsibility for oversight of these matters is held by the Board, the Health, Safety, Environment & Sustainability Committee and management’s Enterprise Risk Committee. The Health, Safety, Environment & Sustainability Committee Charter and Policy can be found on the Company’s website. The Company is an owner and operator of two gas-fired power stations in Australia and maintains risk management systems to ensure strict compliance with all environmental conditions. During the reporting period there were no non-compliances with the planning or environmental conditions of the power stations. Principle 8 – Remunerate fairly and responsibly In compliance with Recommendation 8.1, the Remuneration Committee was comprised of the Company’s four independent non-executive directors; Tony Iannello (Chair), Tony Bellas, Martin Greenberg and Albert Goller. Their attendance at meetings of the Committee is set out in the Directors’ Report. The Remuneration Committee Charter can be found on the Company’s website. The Remuneration Committee reviews and reports, at least annually, on the relative proportion of women and men in the workforce at all levels of the Group, excluding the Board (which is the responsibility of the Nomination Committee). These proportions are contained in the commentary on Principle 1 above. The remuneration of non-executive directors is structured separately from that of the MD and the Executive Management Team. The MD and the Executive Management Team 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. Detailed 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 “Investor Centre” tab, under “ASX Announcements” or within the “About Us” tab under “Governance”. More information on the Company’s Corporate Governance can be found in these locations. PAGE 43 ERM POWER LIMITED ANNUAL FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2016 CONTENTS Auditor’s Independence Declaration Financial Statements 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 45 46 47 48 49 50 51 107 108 The financial statements were authorised for issue by the directors on 25 August 2016. The directors have the power to amend and reissue the financial statements. These financial statements cover ERM Power Limited as a consolidated entity comprising ERM Power Limited and its controlled entities. The Group’s functional and presentation currency is Australian dollars (AUD). ERM Power Limited is a company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is set out on page 52. A description 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 16 to 21. The Directors’ Report does not form part of the annual financial statements. ABN 28 122 259 223 PAGE 44 ERM POWER ANNUAL REPORT | 2016 ERM POWER LIMITED AUDITORS’ INDEPENDENCE DECLARATION FOR THE YEAR ENDED 30 JUNE 2016 Auditor’s Independence Declaration As lead auditor for the audit of ERM Power Limited for the year ended 30 June 2016, I declare that to the best of my knowledge and belief, there have been: 1. no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and 2. no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of ERM Power Limited and the entities it controlled during the period. nawehSleahciM Partner PricewaterhouseCoopers enabsirB 25 August 2016 PricewaterhouseCoopers, ABN 52 780 433 757 480 Queen Street, BRISBANE QLD 4000, GPO Box 150, BRISBANE QLD 4001 T: +61 7 3257 5000, F: +61 73 257 5999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. PAGE 45 ERM POWER LIMITED CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 30 JUNE 2016 CONTINUING OPERATIONS Revenue Other income Total revenue Expenses Sale of equity accounted investment Provision for onerous contract EBITDAF Depreciation and amortisation Impairment expense Net fair value gain on financial instruments designated at fair value through profit or loss Results from operating activities Share of net profit of associates accounted for using the equity method Finance income Finance expense Profit before income tax Income tax expense Statutory profit for the year attributable to equity holders of the Company Statutory earnings per share based on earnings attributable to the ordinary equity holders of the Company Basic earnings per share Diluted earnings per share Note 2016 $’000 2015 $’000 5 2,762,538 2,314,585 807 1,777 2,763,345 2,316,362 6 (2,689,630) (2,234,844) 28(d) 19 7 8 8 9 33 33 (3,422) (1,898) 68,395 (25,229) – 39,483 82,649 402 4,281 (29,124) 58,208 (22,399) 35,809 – – 81,518 (20,288) (42,952) 97,689 115,967 692 5,217 (27,293) 94,583 (28,646) 65,937 Cents Cents 14.63 14.63 27.35 27.34 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. PAGE 46 ERM POWER ANNUAL REPORT | 2016 ERM POWER LIMITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2016 Statutory profit for the year Other comprehensive income / (loss) Items that may be reclassified subsequently to profit and loss Changes in the fair value of cash flow hedges (net of tax) Exchange differences on translation of foreign subsidiaries Items that will not be reclassified subsequently to profit and loss Changes in the fair value of financial assets at fair value through other comprehensive income (net of tax) Other comprehensive income / (loss) for the year attributable to equity holders of the Company, net of tax Note 2016 $’000 2015 $’000 35,809 65,937 24 24 24 137,193 1,569 (1,647) 1,134 (334) 367 138,428 (146) Total comprehensive income for the year attributable to equity holders of the Company 174,237 65,791 The above Consolidated Statement of Comprehensive Income should be read in conjunction with the accompanying notes. PAGE 47 ERM POWER LIMITED CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2016 Note 2016 $’000 2015 $’000 ASSETS Current Assets Cash and cash equivalents Trade and other receivables at amortised cost Inventories Current tax assets Other assets Derivative financial instruments Total Current Assets Non-Current Assets Trade and other receivables at amortised cost Financial assets at fair value through other comprehensive income 11 13 14 9 16 13 15 Investments accounted for using the equity method 28(c)/28(d) Derivative financial instruments Property, plant and equipment Deferred tax assets Intangible assets Total Non-Current Assets TOTAL ASSETS LIABILITIES Current Liabilities Trade and other payables 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 TOTAL EQUITY 16 17 9 18 20 21 21 16 22 21 21 16 9 22 23 24 192,467 330,596 22,082 94 5,333 158,698 709,270 32 150 1,500 51,429 172,836 218,305 36,433 – 6,341 11,367 445,282 14,094 3,463 11,647 5,901 391,266 396,856 6,036 79,041 529,454 1,238,724 367,043 27,861 9,332 6,838 10,999 422,073 – 184,305 44,599 99,917 16,427 345,248 767,321 471,403 332,355 103,413 35,635 471,403 4,961 42,813 479,735 925,017 279,239 33,183 8,912 20,289 2,032 343,655 10,500 189,109 42,697 18,271 1,069 261,646 605,301 319,716 326,816 (42,391) 35,291 319,716 The above Consolidated Statement of Financial Position should be read in conjunction with the accompanying notes. PAGE 48 ERM POWER ANNUAL REPORT | 2016 ERM POWER LIMITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2016 Balance at 1 July 2014 Profit for the period Other comprehensive loss Total comprehensive income / (loss) for the year Transactions with owners in their capacity as owners: Dividends paid Issue of shares pursuant to employee incentive scheme Issue of ordinary shares as consideration for a business combination (net of transaction costs and tax) Purchase of treasury shares Share based payment expense Acquisition of associate (net of tax) Balance at 30 June 2015 Profit for the period Other comprehensive income Total comprehensive income for the year Transactions with owners in their capacity as owners: Dividends paid Issue of shares pursuant to employee incentive scheme Purchase of treasury shares Share based payment expense Sale of financial assets (net of tax) Balance at 30 June 2016 Contributed equity $’000 Note Reserves $’000 Retained earnings $’000 Total equity $’000 322,337 (46,283) 1,151 277,205 – – – 1,233 3,721 444 (919) – – – (146) (146) – (81) – – 1,257 2,862 65,937 65,937 – (146) 65,937 65,791 (28,935) (27,702) – – – – (2,862) 3,640 444 (919) 1,257 – 326,816 (42,391) 35,291 319,716 – – – – 35,809 35,809 138,428 138,428 – 138,428 35,809 174,237 1,479 7,718 (3,658) – – – (29,367) (27,888) (1,287) – 2,565 6,098 – – – (6,098) 6,431 (3,658) 2,565 – 332,355 103,413 35,635 471,403 10 23/24 23/29 23 25 28(d) 10 23/24 23 25 The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying notes. PAGE 49 ERM POWER LIMITED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2016 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Transfer from broker margin account Interest received Income tax paid Note 2016 $‘000 2015 $‘000 2,986,028 2,555,608 (2,929,978) (2,424,227) 60,412 3,474 (22) 8,354 5,154 (643) Net cash flows from operating activities 12 119,914 144,246 Cash flows from investing activities Payments for gas exploration and evaluation Payments for gas development assets Payments for plant and equipment Payments for intangible assets Purchase of share investments Sale of share investments Payment for acquisition of subsidiary, net of cash acquired Net cash flows used in investing activities Cash flows from financing activities Proceeds from borrowings including receivables financing facility Repayments of borrowings including receivables financing facility Repayments of borrowings – limited recourse Loans to investees Finance costs Dividends paid Net cash flows used in financing activities Net increase / (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effect of exchange rate changes on cash and cash equivalents – – (8,263) (1,285) (38) (3,679) (18,045) (10,221) (1,500) 11,849 (7,870) (2,744) – (5,784) (23,829) (23,751) 2,749,935 2,513,666 (2,765,720) (2,610,432) (5,912) – (26,910) (27,888) (5,079) (1,495) (25,840) (27,702) (76,495) (156,882) 19,590 (36,387) 172,836 208,829 41 394 29 10 Cash and cash equivalents at the end of the year 11 192,467 172,836 The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying notes. PAGE 50 ERM POWER ANNUAL REPORT | 2016 INDEX TO NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS PAGE 1 2 3 4 5 6 7 8 9 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES SEGMENT REPORT FINANCIAL RISK MANAGEMENT CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS REVENUE EXPENSES NET FAIR VALUE GAIN ON FINANCIAL INSTRUMENTS DESIGNATED AT FAIR VALUE THROUGH PROFIT AND LOSS NET FINANCE EXPENSE INCOME TAX 10 DIVIDENDS PAID AND PROPOSED 11 CASH AND CASH EQUIVALENTS 12 RECONCILIATION OF CASH FLOWS FROM OPERATING ACTIVITIES 13 TRADE AND OTHER RECEIVABLES AT AMORTISED COST 14 INVENTORIES 15 FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME 16 DERIVATIVE FINANCIAL INSTRUMENTS 17 PROPERTY, PLANT AND EQUIPMENT 18 INTANGIBLE ASSETS 19 IMPAIRMENT OF NON-FINANCIAL ASSETS 20 TRADE AND OTHER PAYABLES 21 BORROWINGS 22 PROVISIONS 23 CONTRIBUTED EQUITY 24 RESERVES 25 SHARE BASED PAYMENTS 26 PARENT ENTITY FINANCIAL INFORMATION 27 COMMITMENTS AND CONTINGENCIES 28 INTERESTS IN OTHER ENTITIES 29 BUSINESS COMBINATION 30 RELATED PARTY DISCLOSURES 31 KEY MANAGEMENT PERSONNEL 32 AUDITORS’ REMUNERATION 33 EARNINGS PER SHARE 34 EVENTS AFTER THE REPORTING PERIOD 52 64 67 75 76 76 77 77 78 81 81 82 83 83 84 84 87 88 89 90 90 91 92 93 95 97 98 99 102 103 105 105 106 106 PAGE 51 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016 These financial statements cover ERM Power Limited the consolidated entity (“Group” or “Consolidated Entity”) consisting of ERM Power Limited (the “Company”) and its subsidiaries. The report is presented in Australian dollars. The adoption of the revised AASB 9 did not affect the Group’s accounting for its financial liabilities, as the new requirements only affect the accounting for financial liabilities that are designated at fair value through profit or loss and the Group does not have any such liabilities. The Company is incorporated and domiciled in Australia. Its registered office and place of business is Level 52, 111 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 16 to 21. This report was authorised for issue by the directors on 25 August 2016. 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. The Company is a for-profit entity for the purpose of preparing the financial statements. (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). 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 financial instruments) at fair value through profit and loss and other comprehensive income. Early adoption of Australian Accounting Standards The Group early adopted AASB 9 Financial Instruments (2014) with a date of initial application of 1 July 2015. As a result, the Group’s policies were amended to comply with AASB 9 issued in July 2015. This version of AASB 9 replaces the provisions of AASB 139 that relate to the recognition and measurement, impairment, derecognition and general hedge accounting. While AASB 9 does not need to be applied until 1 January 2018, the Group has decided to adopt it early from 1 July 2015. There was no difference between the previous carrying amount and the revised carrying amount of the financial assets at 1 July 2014 to be recognised in opening retained earnings and there was no change in classification of the financial assets. The Group elected to apply the hedge accounting in Chapter 6 of AASB 9 prospectively. The Group’s management has assessed the existing hedging relationships in accordance with the qualifying criteria in AASB 9 at 1 July 2015. The hedging relationships continue to meet the requirement under AASB 9 and all hedge relationships are continuing. No hedge ratio rebalancing was required at the initial application of AASB 9. Previously the following instruments were not hedge accounted but now are: • Electricity swaps, caps and purchased options used to hedge price exposure in our Australian electricity sales business. Instruments held for trading, exchange traded instruments (such as futures contracts), written options and all instruments related to renewable energy certificates and our US operations are not hedge accounted. The impairment model in AASB 9 is based on the premise of providing for expected losses. The change in the impairment model has no significant impact to the Group’s impairment policy. As outlined above, there has been no impact on adopting AASB 9 and no restatement of prior period has occurred. 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. Changes in accounting policies The Group has not had to change its accounting policies as the result of new or revised accounting standards which became effective for the annual reporting period commencing on 1 July 2015. The Group has reclassified interest income from revenue to finance income. (b) Principles of consolidation Subsidiaries The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of the Company as at 30 June 2016 and the results of all its subsidiaries for the year then ended. Control of an entity exists when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. PAGE 52 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016ERM POWER ANNUAL REPORT | 2016 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) (b) Principles of consolidation (cont.) Subsidiaries (cont.) 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 statement of financial position 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 the Company. Changes in ownership interests The Group treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the Group. A change in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interests to reflect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non-controlling interests and any consideration paid or received is recognised in a separate reserve within equity attributable to owners of the Company. When the Group ceases to have control, joint control or significant influence, any retained interest in the entity is remeasured to its fair value with the change in carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, jointly controlled entity or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss. 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. Joint arrangements Under AASB 11 investments in joint arrangements are classified as either joint operations or joint ventures. The classification depends on the contractual rights and obligations of each investor, rather than the legal structure of the joint arrangement. The Group has joint operations but no material joint ventures. Joint operations The Group recognises its direct right to the assets, liabilities, revenues and expenses of joint operations and its share of any jointly held or incurred assets, liabilities, revenues and expenses. These have been incorporated in the financial statements under the appropriate headings. Details of the joint operation are set out in note 28. 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. PAGE 53 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016 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 Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated financial statements are presented in Australian dollars, which is the Company’s functional and presentation currency. 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. Group companies The results and financial position of foreign operations (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet, • income and expenses for each income statement and statement of comprehensive income are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions), and • all resulting exchange differences are recognised in other comprehensive income. On consolidation, exchange differences arising from the translation of any net investment in foreign entities, and of borrowings and other financial instruments designated as hedges of such investments, are recognised in other comprehensive income. When a foreign operation is sold or any borrowings forming part of the net investment are repaid, the associated exchange differences are reclassified to profit or loss, as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing rate. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) (c) Parent entity financial information The financial information for the parent entity, ERM Power Limited, disclosed in note 26 has been prepared on the same basis as the consolidated financial statements, except as set out below: (i) Investments in subsidiaries, associates and joint arrangements Investments in subsidiaries, associates and joint venture entities are accounted for at cost in the financial statements of the Company. 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. Financial Guarantees (ii) 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. Tax consolidation legislation (iv) The Company 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, the Company 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. 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. PAGE 54 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016ERM POWER ANNUAL REPORT | 2016 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) (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. Cash that is on deposit with counterparties as security deposits and cash that is on deposit with financial institutions as security for bank guarantees issued to various counterparties as credit support, is defined as restricted cash, with a corresponding disclosure in contingent liabilities in Note 27. Cash collateral held in broker accounts to facilitate wholesale price hedging on the Sydney Futures Exchange is classified as restricted cash unless it is eligible for offset against the corresponding derivative liability. (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. Collectability is reviewed on an ongoing basis. For trade receivables, the company applies the simplified approach to providing for expected credit losses prescribed by AASB 9, which requires the use of the lifetime expected loss provision for all trade receivables. The amount of the impairment loss is recognised in the income statement. Inventories (h) Stock, materials and work in progress are stated at the lower of cost and net realisable value. Cost comprises direct materials, direct labour and an appropriate proportion of variable and fixed overhead expenditure, the latter being allocated on the basis of normal operating capacity. Cost includes the reclassification from equity of any gains or losses on qualifying cash flow hedges relating to purchases of raw material but excludes borrowing costs. Costs are assigned to individual items of inventory on the basis of weighted average costs. Costs of purchased inventory are determined after deducting rebates and discounts. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. 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 on settlement date. Subsequent measurement is at the lower of cost or net realisable value, with losses arising from changes in realisable value being recognised in the income statement in the period of the change. Renewable energy certificates held for trading are held at fair value less costs to sell. Financial assets (i) 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). The Group classifies its financial assets as either amortised cost or fair value. The classification depends on the Group’s business model for managing the financial assets and the contractual terms of the cash flows. Financial assets – at amortised cost (i) A financial asset is classified as at amortised cost only if both of the following criteria are met: • the asset is held within a business model with the objective to collect the contractual cash flows, and • the contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding. The nature of any derivatives embedded in the financial asset are considered in determining whether the cash flows of the investment are solely payment of principal and interest on the principal outstanding and are not accounted for separately. A gain or loss on a financial asset that is subsequently measured at amortised cost and is not part of a hedging relationship is recognised in profit or loss when the financial asset is derecognised or impaired and through the amortisation process using the effective interest rate method. (ii) Financial assets – at fair value through profit or loss If either of the two criteria above are not met, the financial asset is classified as at fair value through profit or loss. The Group has not designated any financial assets as measured at fair value through profit or loss so as to specifically eliminate or significantly reduce an accounting mismatch. The Group is required to reclassify all affected financial assets when and only when its business model for managing those assets changes. PAGE 55 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) (i) Financial assets (cont.) (iii) Equity investments All equity investments are measured at fair value. Equity investments that are held for trading are measured at fair value through profit or loss. For all other equity investments, the Group can make an irrevocable election at initial recognition of each investment to recognise changes in fair value through other comprehensive income rather than profit or loss. At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at fair value through profit or loss are expensed in profit or loss. A gain or loss on a financial asset that is subsequently measured at fair value and is not part of a hedging relationship is recognised in profit or loss and presented net in the income statement within other income or other expenses in the period in which it arises. The Group subsequently measures all equity investments at fair value. Where the Group’s management has elected to present fair value gains and losses on equity investments in other comprehensive income, there is no subsequent reclassification of fair value gains and losses to profit or loss. Dividends from such investments continue to be recognised in profit or loss as other revenue when the Group’s right to receive payments is established and as long as they represent a return on investment. Changes in the fair value of financial assets at fair value through profit or loss are recognised in other income or other expenses in the income statement as applicable. Interest income from these financial assets is included in the net gains / losses. Dividend income is presented as other revenue. 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 trade receivables only, the company applies the simplified approach permitted by AASB 9, which requires expected lifetime losses to be recognised from initial recognition of the receivables. Accounting policies applied prior to 1 July 2015: The Company has applied AASB 9 retrospectively, but has elected not to restate comparative information. As a result, the comparative information provided continues to be accounted for in accordance with the Company’s previous accounting policy. Under the Company’s previous accounting policy, 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’. PAGE 56 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016ERM POWER ANNUAL REPORT | 2016 The fair values of various derivative financial instruments used for hedging purposes are disclosed in note 16. Movements in the hedging reserve in shareholders’ equity are shown in note 7. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months; it is classified as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. Trading derivatives are classified as a current asset or liability. Cash flow hedges that qualify for hedge accounting The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in the cash flow hedge reserve within equity, limited to the cumulative change in fair value of the hedged item on a present value basis from the inception of the hedge. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss. When option contracts are used to hedge forecast transactions, the company designates only the intrinsic value of the option contract as the hedging instrument. Gains or losses relating to the effective portion of the change in intrinsic value of the option contracts are recognised in the cash flow hedge reserve within equity. The changes in the time value of the option contracts that relate to the hedged item (‘aligned time value’) are recognised within other comprehensive income in the costs of hedging reserve within equity. When forward contracts are used to hedge forecast transactions, the company generally designates only the change in fair value of the forward contract related to the spot component as the hedging instrument. Gains or losses relating to the effective portion of the change in the spot component of the forward contracts are recognised in the cash flow hedge reserve within equity. The change in the forward element of the contract that relates to the hedged item (‘aligned forward element’) is recognised within other comprehensive income in the costs of hedging reserve within equity. In some cases, the entity may designate the full change in fair value of the forward contract (including forward points) as the hedging instrument. In such cases, the gains and losses relating to the effective portion of the change in fair value of the entire forward contract are recognised in the cash flow hedge reserve within equity. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) (i) Financial assets (cont.) Recognition of day one gain or loss Evidence of fair value of an investment at initial recognition is often provided by the transaction price, unless the fair value of the instrument is evidenced by comparison with other observable current market transactions in the same instrument, or based on a valuation technique whose variables include only data from observable markets. Such financial instruments are initially recognised at the transaction price which is the best indicator of fair value, although the market value derived by independent valuers may differ. The difference between the transaction price and the market value (the day one gain or loss), is not recognised immediately for accounting purposes in profit or loss and is instead recognised through profit or loss progressively as the instrument is settled. Any subsequent measurement of the instrument excludes the balance of the deferred day one gain or loss. Derivatives and hedging activities (j) The Group routinely enters into forward sales contracts (Contracts) related to the provision of electricity. The Contracts are exclusively entered into with industrial, commercial, financial and government entities under term contracts. All of the electricity provided under these Contracts is traded in spot markets. The Group also enters into a variety of electricity derivative transactions (Derivatives) as part of an overall strategy to hedge the exposure to Contract prices. Contracts and Derivatives are managed as part of an overall commodity trading strategy. Revenue from the Contracts is recognised in accordance with the revenue recognition policy in note 1(v) Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured to their fair value at the end of each reporting period. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged and the type of hedge relationship designated. The Group designates their derivatives as hedges of foreign exchange risk associated with the cash flows of highly probable forecast transactions (cash flow hedges). The Group documents at the inception of the hedging transaction the economic relationship between hedging instruments and hedged items including whether the hedging instrument is expected to offset changes in cash flows of hedged items. The company documents its risk management objective and strategy for undertaking various hedge transactions at the inception of each hedge relationship. PAGE 57 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016 Derivatives that do not qualify for hedge accounting include the following types of transactions: Energy Market Activities – Trading Derivative instruments are entered into for risk management or profit making purposes, but are classified as held for trading when they do not meet requirements for hedge accounting as set out by the Australian Accounting Standards. The instruments include futures, bilateral written options, SFE traded caps and swaps and other risk management derivatives. The contracts are measured at fair value and the resultant gains or losses are recognised in profit and loss. Energy Market Activities – Non-Trading Contracts are entered into with individual parties in the normal course of business in order to economically hedge exposure to fluctuations in electricity prices. These derivative instruments may not meet the requirements for hedge accounting as set out by the Australian Accounting Standards. The instruments include OTC swaps, options, swaptions, caps and risk management assets. Settlements of the contracts require exchanges of cash for the difference between the contracted and spot market prices. The contracts are measured at fair value and the resultant gains or losses are recognised in profit and loss. (k) Fair value estimation The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. Refer to note 3 for further details. Property, plant and equipment (l) 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. 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(n). 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) Derivatives and hedging activities (cont.) (j) Amounts accumulated in equity are reclassified in the periods when the hedged item affects profit or loss, as follows: • The gain or loss relating to the effective portion of the intrinsic value of option contracts is treated as follows: Where the hedged item subsequently results in the recognition of a non-financial asset (such as inventory), both the deferred hedging gains and losses and the deferred aligned time value of the option contracts are included within the initial cost of the asset. The deferred amounts are ultimately recognised in profit or loss as the hedged item affects profit or loss (for example, through cost of sales). • The gain or loss relating to the effective portion of the spot component of forward contracts is treated as follows: Where the hedged item subsequently results in the recognition of a non-financial asset (such as inventory), both the deferred hedging gains and losses and the deferred aligned forward points are included within the initial cost of the asset. The deferred amounts are ultimately recognised in profit or loss as the hedged item affects profit or loss (for example, through cost of sales). When a hedging instrument expires, or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative deferred gain or loss and deferred costs of hedging in equity at that time remains in equity until the forecast transaction occurs, resulting in the recognition of a non-financial asset such as inventory. When the forecast transaction is no longer expected to occur, the cumulative gain or loss and deferred costs of hedging that were reported in equity are immediately reclassified to profit or loss. If the hedge ratio for risk management purposes is no longer optimal but the risk management objective remains unchanged and the hedge continues to qualify for hedge accounting, the hedge relationship will be rebalanced by adjusting either the volume of the hedging instrument or the volume of the hedged item so that the hedge ratio aligns with the ratio used for risk management purposes. Any hedge ineffectiveness is calculated and accounted for in profit or loss at the time of the hedge relationship rebalancing. Derivatives that do not qualify for hedge accounting Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognised immediately in profit or loss and are included within net fair value gains or losses on financial instruments designated at fair value through profit or loss. Any realised gains or losses on settlement of derivatives that do not qualify for hedge accounting are recognised immediately in profit and loss and are included within cost of sales regardless of the original settlement date of the instrument. PAGE 58 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016ERM POWER ANNUAL REPORT | 2016 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) (l) Property, plant and equipment (cont.) Depreciation 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 – 8 years • Plant and equipment 1 – 50 years • IT Equipment 1 – 3 years • Furniture and equipment 1 – 10 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. (m) Intangible assets Goodwill Goodwill is measured as described in note 1(o). Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisitions of associates is included in investments in associates. Goodwill is not amortised but it is tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. 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. Software Computer software is either purchased or developed within the organisation to support business operations and generate customer revenue. Software assets are recorded at cost less accumulated amortisation and impairment losses. Amortisation is calculated using the straight line method over an estimated useful lives. Depending on the individual software, the estimated useful life ranges between 3 and 10 years. Customer acquisition costs The direct costs of establishing customer contracts are recognised as an asset when the customer contract is expected to provide a future economic benefit to the Group. Direct costs are amortised over an average contract term of 3 years. Customer contracts acquired in a business combination are recognised at fair value at the acquisition date. They have a finite useful life and are subsequently carried at cost less accumulated amortisation and impairment losses. Customer contracts that are acquired through a trailing commission agreement have a corresponding provision liability recognised. The provision liability is measured against forecast payments required and is discounted at a risk free rate. Impairment of assets (n) 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 inflows. Intangible assets are assessed for impairment when facts and circumstances suggest that the carrying amount may exceed its recoverable amount. 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. (o) 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. PAGE 59 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) (o) Business combinations (cont.) The excess of the consideration transferred, the amount of any non- controlling interest in the acquire 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 discount on acquisition. 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. (p) 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. (q) 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. Trailing commission payments Customer contracts that are acquired through a trailing commission agreement have a corresponding provision liability recognised. The provision liability is measured against forecast payments required and is discounted at a risk free rate. (r) 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. (s) 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. 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 25 for further details. PAGE 60 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016ERM POWER ANNUAL REPORT | 2016 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) Earnings per share (t) Basic earnings per share are calculated by dividing: • 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 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. (u) 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. (v) 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 point, as specified in each contractual agreement, and is billed monthly in arrears. At each balance date, sales and receivables include an amount of sales delivered to customers but not yet billed and recognised as accrued income. Generation revenue is recognised from the generation of electricity when the electricity has been supplied to customers. 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. All revenue is stated net of goods and services tax (w) Finance income Interest revenue is recognised on a time proportional basis taking into account the interest rates applicable to the financial assets. (x) 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 costs are based upon spot prices for electricity and the outcomes of derivative financial instruments entered into for the purpose of risk management refer to note 3. (y) 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. 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 statement of financial position 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. (z) 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. PAGE 61 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) (aa) 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. (bb) Income tax Income tax 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. 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. PAGE 62 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016ERM POWER ANNUAL REPORT | 2016 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) (cc) 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. (dd) 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. Rounding of amounts (ee) 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. (ff) New accounting standards and interpretations Certain new accounting standards and interpretations have been published that are not mandatory for 30 June 2016 reporting periods. Unless stated otherwise below, 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. AASB 15 Revenue from Contracts with Customers (effective from 1 January 2018). The AASB has issued a new standard for the recognition of revenue. This will replace AASB 118 which covers contracts for goods and services and AASB 111 which covers construction contracts. The new standard is based on the principle that revenue is recognised when control of a good or service transfers to a customer – so the notion of control replaces the existing notion of risks and rewards. The standard permits a modified retrospective approach for the adoption. Under this approach entities will recognise transitional adjustments in retained earnings on the date of initial application (e.g. 1 July 2017), i.e. without restating the comparative period. The Group will only need to apply the new rules to contracts that are not completed as of the date of initial application. Management is currently assessing the impact of the new rules and has not identified any areas that are likely to be affected by the new standard. AASB 16 Leases (effective from 1 January 2019). The AASB has issued a new standard for the accounting treatment of leases which will replace AASB 117. AASB 16 will primarily affect the accounting by lessees and will result in the recognition of almost all leases on the balance sheet. The standard removes the current distinction between operating and financing leases and requires recognition of an asset (the right to use the leased item) and a financial liability to pay rentals for almost all lease contracts. Operating lease expenses will be replaced by interest and depreciation and the timing of expenses will change. The accounting by lessors, however, will not significantly change. Early adoption is allowed if the new revenue standard has also been applied. Implementation of the new lease accounting standard will have an impact on disclosures. Management is currently assessing the impact of the new rules. AASB 2014-10 Sale or contribution of assets between an investor and its associate or joint venture (effective from 1 January 2018). The amendments clarify the accounting treatment for sales or contribution of assets between an investor and its associates or joint ventures. They confirm that the accounting depends on whether the contributed assets constitute a business or an asset. AASB 2016-1 IASB issues narrow scope amendments to IAS 12 Income taxes (effective from 1 January 2017). The amendments to AASB 112 clarify the accounting for deferred tax where an asset is measured at fair value and that fair value is below the asset’s tax base. They do not change the underlying principles for the recognition of deferred tax assets. AASB 2016-2 IASB issues narrow scope amendments to IAS 7 Statement of cash flows (effective from 1 January 2017). The amendment to AASB 107 introduces additional disclosures that will enable users of financial statements to evaluate changes in liabilities arising from financing activities. The amendment requires disclosure of changes arising from: • cash flows, such as drawdowns and repayments of borrowings, and • non-cash changes, such as acquisitions, disposals and unrealised exchange differences. There are no other standards that are not yet effective and that are expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions. PAGE 63 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016 5 1 0 2 6 1 0 2 5 1 0 2 2 6 3 , 6 1 3 , 2 5 4 3 , 3 6 7 , 2 9 5 3 , 6 8 0 5 , 7 5 7 1 , 1 1 8 1 8 0 7 8 , 3 2 3 , 2 0 2 5 , 4 7 7 , 2 7 7 1 , 7 ) 2 5 3 , 2 4 2 , 2 ( ) 5 0 8 , 0 0 7 , 2 ( ) 0 2 2 , 3 2 ( – – ) 2 2 4 , 3 ( ) 8 9 8 , 1 ( – – 6 1 0 2 3 1 5 , 3 2 9 7 , 1 5 0 3 , 5 ) 6 4 6 , 0 2 ( ) 2 2 4 , 3 ( ) 8 9 8 , 1 ( – – ) 3 2 1 , 7 6 ( – – ) 4 3 4 , 0 7 ( – – ) 5 9 9 , 5 6 ( 8 1 5 , 1 8 5 9 3 , 8 6 ) 3 4 0 , 6 1 ( ) 8 8 2 , 0 2 ( ) 2 5 9 , 2 4 ( – ) 9 2 2 , 5 2 ( ) 9 5 4 , 3 ( ) 3 7 0 , 6 1 ( ) 1 6 6 , 0 2 ( 1 2 2 , 6 4 9 7 0 , 5 3 0 8 7 – ) 9 4 2 , 2 ( ) 2 4 2 , 2 1 ( ) 9 7 8 , 6 2 ( – – ) 6 4 2 , 2 1 ( ) 6 5 7 ( 4 4 3 , 3 1 1 3 1 5 , 5 0 1 5 7 7 , 6 6 4 8 4 , 3 3 2 4 7 5 , 6 3 1 , 2 8 1 2 , 0 3 4 , 2 5 1 0 2 6 1 0 2 5 1 0 2 6 1 0 2 5 1 0 2 6 1 0 2 0 0 0 ’ $ 4 5 6 , 6 0 1 0 3 1 , 6 9 5 7 7 , 6 6 4 8 4 , 3 3 2 4 7 5 , 6 3 1 , 2 8 1 2 , 0 3 4 , 2 s r e m o t s u c o t e u n e v e r l a n r e t x E 0 9 6 , 6 3 8 3 , 9 – – – – e u n e v e r t n e m g e s l a n r e t n I – – – ) 6 7 4 ( ) 8 5 8 , 4 ( ) 0 6 9 , 3 3 2 ( – – – – 0 6 5 , 0 5 3 5 4 , 4 5 ) 4 1 0 , 6 8 0 , 2 ( ) 5 6 7 , 5 7 3 , 2 ( t n e m t s e v n i d e t n u o c c a y t i u q e f o l e a S e u n e v e r t n e m g e S s e s n e p x E t c a r t n o c s u o r e n o r o f i i n o s v o r P ) i i ( F A D T B E I – ) 1 3 8 , 3 ( – ) 6 7 8 , 5 ( n o i t a s i t r o m a d n a i n o i t a c e r p e D e s n e p x e t n e m r i a p m I l i a c n a n i f n o ) s s o l ( / i n a g e u a v l r i a f t e N 9 8 6 , 7 9 3 8 4 , 9 3 7 6 9 , 5 1 1 9 4 6 , 2 8 ) 5 6 0 , 1 ( ) 0 4 6 , 6 3 ( ) 6 4 6 , 8 2 ( ) 9 9 3 , 2 2 ( 2 9 6 7 1 2 , 5 ) 3 9 2 , 7 2 ( 2 0 4 1 8 2 , 4 ) 4 2 1 , 9 2 ( ) 1 9 ( 2 9 6 8 7 4 , 1 3 8 5 , 4 9 8 0 2 , 8 5 ) 1 6 5 , 4 3 ( 7 3 9 , 5 6 7 4 3 , 2 3 9 0 8 , 5 3 9 8 1 , 9 1 e h t d e t a t s e r s a h p u o r G e h t ) 2 2 9 , 1 ( 3 6 6 ) 0 3 7 , 1 1 ( ) 2 3 8 , 4 2 ( 3 6 7 , 7 3 0 1 , 1 1 1 0 1 , 1 5 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n e e w t e b s e a S l . e m o c n i r e h t o d n a g n i r e t e m , s n o i t u o s l y g r e n e , g n i t l u s n o c s e s i r p m o c t n e m g e s r e h t O e h t n i e u n e v e R . n o i t a d i l o s n o c n o d e t a n m e i l i s e k a t y t i v i t c a t n e m g e s l l A . d o i r e p e v i t a r a p m o c r o t n e r r u c e h t r e h t i e r o f e u n e v e r l a n r e t x e l a t o t s ’ y t i t n e d e t a d i l o s n o c e h t f o e r o m r o % 0 1 o t s t n u o m a r e m o t s u c l e g n s i o N . a c i r e m A f o s e t a t S d e t i n U e h t d n a a i l a r t s u A n i e c a p l , s t n e m u r t s n i l i a c n a n i f f o e u a v l r i a f e h t n i s e g n a h c t e k r a m o t d e k r a m d e s i l a e r n u f o t c e f f e x a t r e t f a e h t i g n d u c x e l r e t f a y n a p m o C e h t f o s r e d o h l y t i u q e o t l e b a t u b i r t t a x a t r e t f a t i f o r p y r o t u t a t S ) i i i ( . s s o l d n a t i f o r p h g u o r h t e u a v l r i a f i t a d e t a n g s e d s t n e m u r t s n i l i a c n a n i f n o s e s s o l / i s n a g e u a v l r i a f t e n d n a t n e m r i a p m i , n o i t a s i t r o m a i , n o i t a c e r p e d , x a t , t s e r e t n i f e r o e b s g n n r a E i ) i i ( i . s e t a c o s s a m o r f s s o l r o t i f o r p y n a l s e d u c x e T A P N g n y l r e d n U i . s m e t i t n a c i f i n g s i r e h t o d n a s t c a r t n o c s u o r e n o n o s e s s o l / i s n a g d n a t n e m r i a p m i i l , y g n d r o c c A . s t n e m g e s l e b a t r o p e r s t i f o n o i t i s o p m o c d n a n o i t a s n a g r o i l a n r e t n i s t i d e g n a h c s a h p u o r G e h t , 6 1 0 2 Y F g n i r u d s n o i t a r e p o S U n i h t w o r g e h t f o t l u s e r a s A ) i ( . 5 1 0 2 e n u J 0 3 d e d n e r a e y e h t r o f n o i t a m r o n f i t n e m g e s g n i t a r e p o l a t o T r e h t O n o i t a r e n e G s t e s s A ) i ( S U a i l a r t s u A y g r e n E s s e n s u B i y g r e n E s s e n s u B i T R O P E R T N E M G E S . 2 PAGE 64 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016ERM POWER ANNUAL REPORT | 2016 2. SEGMENT REPORT (CONT.) The directors believe that EBITDAF, underlying EBITDAF and underlying NPAT provide the most meaningful indicators of the Group’s underlying business performance. Underlying NPAT is statutory net profit after tax attributable to equity holders of the Company after excluding the after tax effect of unrealised marked to market changes in the fair value of financial instruments, impairment and gains / losses on onerous contracts and other significant items. Underlying NPAT excludes any profit or loss from associates. Significant items adjusted in deriving underlying NPAT are material items of revenue or expense that are unrelated to the underlying performance of the Group. The directors utilise underlying NPAT as a measure to assess the performance of the segments. A reconciliation of underlying NPAT to the statutory profit after tax is as follows: $’000 Statutory profit after tax attributable to equity holders of the Company Adjusted for the following items: Net unrealised change in fair value of financial instruments designated at fair value through profit or loss after tax Share of net profit of associates accounted for using the equity method Other significant items New business identification, integration and establishment costs Unrealised foreign exchange loss / (gain) Arbitration costs net of proceeds Staff rationalisation costs Effective interest revenue on associate loan Swap termination payment Impairment of gas assets Impairment of power station development assets Loss on sale of associate Provision for onerous contract Financing establishment costs Wholesale counterparty default Tax effect on non-deductible acquisition costs De-recognition of capital loss deferred tax asset Tax benefit on other significant items Underlying NPAT all segments 2016 35,809 2015 65,937 (27,258) (68,328) (402) (692) 915 501 – 2,366 (965) – – – 3,422 1,898 370 363 317 4,538 (2,685) 19,189 2,216 (164) 605 1,540 (307) 3,772 14,165 28,787 – – – – – – (15,184) 32,347 (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) (xii) (xiii) (xiv) (xv) (i) (ii) (iii) (iv) (v) (vi) Costs incurred in respect of identifying, establishing and integrating new businesses started and new companies acquired. Unrealised foreign exchange losses / (gains) on funds held in US dollar and EURO bank accounts. Costs net of contributions received in respect of the Neerabup contractor arbitration. Costs associated with change of managing director (2015 only) and rationalisation of staff. Recognition of Empire Oil & Gas NL shares (Empire) loan at present value and interest revenue unwind. Final negotiated payment made in January 2015 as part of arrangement for bringing forward termination date of counterparty swap by 4 years to 30 June 2015. (vii) Impairment of Western Australian and New South Wales gas assets. (viii) Impairment of power station development assets. (ix) Loss on the sale of share interests in Empire. (x) Impairment of the contract to sublease office space. (xi) Costs incurred for the establishment of the unsecured senior bank guarantee facility with Liberty International Underwriters Singapore. (xii) Default by a wholesale counterparty that went into administration. (xiii) Tax impact of non-deductible acquisition costs for Source in FY2015. (xiv) Derecognition of deferred tax asset upon sale of Metgasco Limited and Empire shares. (xv) Tax effect of the above other significant items. PAGE 65 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016 1 6 9 , 4 6 3 0 , 6 7 1 0 , 5 2 9 4 2 7 , 8 3 2 , 1 5 1 0 2 6 1 0 2 5 1 0 2 6 1 0 2 5 1 0 2 6 1 0 2 5 1 0 2 6 1 0 2 5 1 0 2 6 1 0 2 6 5 0 , 0 2 9 8 8 6 , 2 3 2 , 1 4 7 2 , 2 8 3 2 8 , 9 6 9 9 7 , 9 1 4 0 6 6 , 5 2 4 0 2 4 , 2 6 3 8 9 , 1 9 3 6 5 , 5 5 3 2 2 2 , 5 4 6 l a t o T r e h t O n o i t a r e n e G s t e s s A y g r e n E s s e n s u B i S U a i l a r t s u A y g r e n E s s e n s u ) B T N O C . i ( T R O P E R T N E M G E S . 2 PAGE 66 s t e s s a t n e m g e s l a t o T s t e s s a x a t d e r r e e D f s t e s s a l a t o T 0 0 0 ’ $ s t e s s A s e i t i l i b a L i 0 3 0 , 7 8 5 4 0 4 , 7 6 6 2 1 7 , 2 1 7 4 7 , 5 1 2 7 0 , 7 3 2 1 6 6 , 7 4 2 3 7 9 , 1 4 0 5 3 , 0 7 3 7 2 , 5 9 2 6 4 6 , 3 3 3 s e i t i l i b a i l t n e m g e s l a t o T 1 7 2 , 8 1 7 1 9 , 9 9 1 0 3 , 5 0 6 1 2 3 , 7 6 7 s e i t i l i b a i l x a t d e r r e e d d n a f t n e r r u C s e i t i l i b a i l l a t o T e h t r o f i i r e k a m n o s c e d g n i t a r e p o f i e h c e h t s i o h w r o t c e r i i D g n g a n a M e h t y b d e w e v e r i s t r o p e r n o d e s a b s t n e m g e s g n i t a r e p o i e h t d e n m r e t e d s a h t n e m e g a n a M I I N O T P R C S E D T N E M G E S i g n o g n o e h t s s e s s a o t s a o s t n e m g e s g n i t a r e p o h c a e f o t i f i o r p g n y l r e d n u e h t n o n o i t a m r o n f i l i a c n a n i f i s e v e c e r l y l r a u g e r r o t c e r i i D g n g a n a M e h T . y t i t n E d e t a d i l o s n o C t n e m p o e v e d o t l h g u o r h t t p e c n o c l a i t i n i e h t m o r f , s n o i t u o s l n o i t a r e n e g r e w o p f o y r e v i l e d d n a s t e s s a n o i t a r e n e g r e w o p d e r i f - s a G s t e s s A n o i t a r e n e G a c i r e m A f o s e t a t S d e t i n U e h t n i s r e m o t s u c l i a i t n e d s e r d n a i s s e n s u b o t s e a s l y t i c i r t c e E l S U y g r e n E s s e n s u B i . t i f i o r p g n y l r e d n u t s a c e r o f d n a t e g d u b o t n o s i r a p m o c t n a v e e r l a l e b a n e o t d n a t n e m g e s h c a e f o e c n a m r o f r e p a i l a r t s u A n i s r e m o t s u c i s s e n s u b o t s e a s l y t i c i r t c e E l a i l a r t s u A y g r e n E s s e n s u B i i : s e c v r e s d n a s t c u d o r P : s t n e m g e s s s e n s u B i e t a r o p r o C d n a l s n o i t u o S g n i t h g L i s n o i t a r e p o d n a l , s c i t y a n A a t a D , g n i r e t e M , s a G r e h t O d n a a i l a r t s u A r o f m 0 . 2 4 4 $ s i s t e s s a e h t f o n o i t a c o l y b n w o d n e k o r b , s t e s s a x a t d e r r e e d d n a f s t n e m u r t s n i l i a c n a n i f n a h t r e h t o s t e s s a t n e r r u c - n o n f o l a t o t e h T . s e t a t S d e t i n U e h t r o f m 3 . 0 5 $ . n o i t c n u f e t a r o p r o c l a r t n e c s ’ p u o r G e h t y b d e g a n a m e r a t u b t n e m g e s c i f i c e p s a f o t r a p a e b o t d e r e d s n o c i t o n e r a l s e c n a a b x a t d e r r e e d d n a f t n e r r u c s ’ p u o r G e h T f o s n o i t a r e p o e h t n o d e s a b d e t a c o l l a e r a s e i t i l i b a i l d n a s t e s s a h t o B . s t n e m e t a t s l i a c n a n i f e h t n i s a y a w e m a s e h t n i d e r u s a e m e r a s e i t i l i b a i l d n a s t e s s a t n e m g e S . t e s s a e h t f o n o i t a c o l l i a c s y h p e h t d n a t n e m g e s e h t ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016ERM POWER ANNUAL REPORT | 2016 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 and interest 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 and interest rate swaps 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. (i) Market risk Electricity pool price risk 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 net profit from fluctuations in electricity pool prices. Subsidiaries in the Group’s electricity sales segment routinely enter 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 options. Electricity derivatives are either entered into in separate agreements or arise as embedded derivatives. Whilst the Group recognises the fair value of electricity derivative contracts for accounting purposes, the Group is not permitted to similarly recognise the fair value of the sales contracts that form the other side of the economic hedging relationship. The following tables summarise 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. Electricity sales sensitivity The impact disclosed below summarises the sensitivity on the unrealised mark to market of electricity derivatives contracts only and does not include any corresponding movement in the value of customer contracts, which would vary in the opposite direction to the underlying hedge. As electricity forward prices increase above the contracted price of a derivative contract (buy side contract) the derivative contract becomes more valuable as it allows the Group to effectively purchase electricity at a cost lower than the prevailing forward market price. Equally, the value of the corresponding customer contract (sell side contract) decreases as the Group has contracted to sell electricity to a customer at a price lower than the prevailing forward market price. Only the mark to market on the buy side contract has been recognised for accounting purposes regardless of whether there is an effective hedge in place. 2016 Net profit / (loss) – unrealised mark to market of electricity derivative contracts Other Components of Equity increase / (decrease) 2015 Net profit / (loss) – unrealised mark to market of electricity derivative contracts Other Components of Equity increase / (decrease) Increase by 10% $’000 Decrease by 10% $’000 148,110 60,774 (61,409) (96,795) 33,029 (79,281) – – Sensitivity of 10% has been selected as this is considered reasonably possible based on industry standard benchmarks and historical volatilities. PAGE 67 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016 3. FINANCIAL RISK MANAGEMENT (CONT.) (a) Financial risk management objectives (cont.) (i) Market risk (cont.) Electricity generation sensitivity The impact disclosed below summarises the sensitivity on the profit of generating assets held by the Group resulting from a change in spot prices. 2016 Net profit / (loss) Other Components of Equity increase / (decrease) 2015 Net profit / (loss) Other Components of Equity increase / (decrease) Increase by 10% $’000 Decrease by 10% $’000 4,747 (4,747) – – 2,018 (2,018) – – 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 on cash deposits. The risk is managed by entering into interest rate swap contracts for project term debt. 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. At balance date, if interest rates had been 100 basis points higher / lower and all other variables were held constant, the impact on the Group would be: 2016 Net profit / (loss) Other equity increase / (decrease) 2015 Net profit / (loss) Other equity increase / (decrease) Increase by 100bps $’000 Decrease by 100bps $’000 1,118 5,598 895 6,252 (1,118) (5,598) (895) (6,252) The impact on net profit is largely due to the Group’s exposure to interest rates on its non-hedged variable rate borrowings and cash assets. Foreign exchange risk The Group operates a US electricity retail business and is exposed to foreign currency translation risk in respect of the investment. There is no debt in respect of this investment and there are no cross currency transactions that expose the Group to further foreign exchange risk. PAGE 68 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016ERM POWER ANNUAL REPORT | 2016 3. FINANCIAL RISK MANAGEMENT (CONT.) (a) Financial risk management objectives (cont.) (ii) 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 the 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 credit quality of all financial assets is consistently monitored in order to identify any potential adverse changes. At 30 June 2016 there was an increased credit exposure created by high wholesale prices and significant positive mark to market valuations, which management continues to monitor. 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 company applies the simplified approach to providing for expected credit losses prescribed by AASB 9, which permits the use of the lifetime expected loss provision for all trade receivables. The loss allowance provision as at 30 June 2016 is determined as follows; the expected credit losses below also incorporates forward looking information. Total $’000 < 30 days $’000 31-60 days $’000 61-120 days $’000 > 120 days $’000 Trade Other(i) Trade Other(i) Trade Other(i) Trade Other(i) 2016 Consolidated Expected loss rate 1% – Gross carrying amount 53,675 33,157 15,130 2.5% 3,704 Loss allowance provision (1,298) (898) – (65) Net receivables 52,377 32,259 15,130 3,639 2015 Consolidated Expected loss rate 1% – 1% Gross carrying amount 46,627 29,381 14,333 1,999 Loss allowance provision (598) (306) – (16) Net receivables 46,029 29,075 14,333 1,983 The majority of year-end debtors relate to electricity sales customers. – 10%-25% – – – – – – – 657 (69) 588 34% 150 (51) 99 – 10 – 10 – 22 – 22 75% 969 (266) 703 74% 302 (225) 77 – 48 – 48 – 440 – 440 (i) Other receivables are neither past due or impaired and relate principally to employee shareholder loans, which are subject to loan deeds and the vendor finance loan to Empire. PAGE 69 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016 3. FINANCIAL RISK MANAGEMENT (CONT.) (a) Financial risk management objectives (cont.) (iii) 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 2016 is contained in Note 21. Maturities of financial liabilities The table below analyses 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. Financial liabilities Consolidated 2016 Trade payables Other payables Interest bearing liabilities Interest bearing liabilities – limited recourse(i) Derivatives 2015 Trade payables Other payables Interest bearing liabilities Interest bearing liabilities – limited recourse(i) Derivatives ≤1 year $’000 1 to 5 years $’000 >5 years $’000 Discount $’000 Total $’000 277,599 89,444 27,861 9,332 13,868 418,104 210,823 68,416 33,183 8,912 27,267 348,601 – – – 23,620 25,840 49,460 – – 10,500 24,031 26,216 60,747 – – – – – – 277,599 89,444 27,861 172,400 (11,715) 193,637 11,729 – 51,437 184,129 (11,715) 639,978 – – – – – – 210,823 68,416 43,683 178,322 (13,244) 198,021 9,503 – 62,986 187,825 (13,244) 583,929 (i) Recourse limited to assets of the Neerabup Partnership. Refer note 21 for further details. (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. PAGE 70 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016ERM POWER ANNUAL REPORT | 2016 3. FINANCIAL RISK MANAGEMENT (CONT.) (c) Fair value of financial assets and liabilities The carrying amounts and estimated fair values of all the Group’s financial instruments recognised in the financial statements are materially the same, with the exception of the following: Financial assets Electricity and gas derivative financial instruments Consolidated 2016 $’000 Carrying value 2016 $’000 Fair value Note (i) 209,924 241,331 209,924 241,331 (i) The carrying value of derivative financial assets recognised excludes a day one gain on certain electricity derivatives. In accordance with the Groups accounting policy a day one gain has not been recognised with the day one value of certain instruments entered into initially valued at the transaction price, which is the best indicator of fair value. Any gain subsequently realised is progressively recognised as the instruments are settled. The measurement of the instruments at 30 June 2016 excludes the remaining balance of the deferred day one gain of $31.4m. At inception the day one gain was $31.9m. The movement in the day one gain balance relates to settlement of derivatives through profit and loss during the year. The financial assets and liabilities held by the group are outlined below: Cash and cash equivalents The carrying amount is fair value due to the asset’s liquid nature. Derivative financial instruments 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) is determined using valuation techniques. The Group uses a variety of methods, such as 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. Equity investments 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. Other financial assets Due to their short-term nature, the carrying amounts of loans, receivables, and cash and cash equivalents approximate their fair value. Other financial liabilities at amortised cost The Group holds various trade payables and borrowings at period end. Due to the short-term nature of the trade payables the carrying value of these are assumed to approximate their fair value. The fair value of borrowings is not materially different then the carrying amounts as the interest rates are close to current market rates or are short-term in nature. PAGE 71 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016 3. FINANCIAL RISK MANAGEMENT (CONT.) (c) Fair value of financial assets and liabilities (cont.) The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. The following tables present the Group’s assets and liabilities measured and recognised at fair value at 30 June 2016 and 30 June 2015. As at 30 June 2016 Assets Electricity and gas derivatives Foreign exchange derivative contract Financial assets at fair value through other comprehensive income Total assets Liabilities Electricity and gas derivatives Interest rates swaps Total liabilities As at 30 June 2015 Assets Electricity and gas derivatives Embedded derivative contract Financial assets at fair value through other comprehensive income Total assets Liabilities Electricity and gas derivatives Interest rates swaps Total liabilities Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 1,889 208,035 – 150 203 – 2,039 208,238 4,534 – 4,534 5,275 41,628 46,903 – – – – – – – 209,924 203 150 210,277 9,809 41,628 51,437 Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 – – 3,463 3,463 13,095 – 13,095 15,345 1,923 – 17,268 14,383 35,508 49,891 – – – – – – – 15,345 1,923 3,463 20,731 27,478 35,508 62,986 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. Level 3 A valuation technique for these instruments is based on significant unobservable inputs. The Group’s policy is to recognise transfers into and transfers out of fair value hierarchy levels as at the end of the reporting period. For the years ending 30 June 2016 and 30 June 2015 there were no transfers between the fair value hierarchy levels. PAGE 72 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016ERM POWER ANNUAL REPORT | 2016 3. FINANCIAL RISK MANAGEMENT (CONT.) (d) Offsetting of financial assets and financial liabilities Financial assets and liabilities are offset and the net amount reported in the balance sheet where the Group currently has a legally enforceable right to offset the recognised amounts, and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. The Group has also entered into arrangements that do not meet the criteria for offsetting but still allow for the related amounts to be set off in certain circumstances, such as bankruptcy or the termination of a contract. The following table presents the recognised financial instruments that are offset, or subject to enforceable master netting arrangements and other similar agreements but not offset, as at 30 June 2016 and 30 June 2015. The column ‘net exposure’ shows the impact on the Group’s balance sheet if all set-off rights were exercised. The below table provides a reconciliation of the Group’s gross derivative financial assets and liabilities offset to those presented on the consolidated statement of financial position as at 30 June 2016 and as at 30 June 2015. As at 30 June 2016 $’000 Financial assets Gross carrying amount (before offsetting) Cash collateral and futures margin deposits received Gross amounts offset Related amounts not offset Net amount presented Financial instruments(i) Cash collateral Net exposure Electricity and gas derivatives contracts 248,844 (29,431) (9,489) 209,924 (1,022) (1,889) 207,013 Foreign exchange derivative contract 203 – – 203 – – 203 Total Financial liabilities 249,047 (29,431) (9,489) 210,127 (1,022) (1,889) 207,216 Electricity and gas derivatives contracts 39,240 (29,431) 41,628 – 80,868 (29,431) – – – 9,809 41,628 51,437 (1,022) – (1,022) – – – 8,787 41,628 50,415 Gross carrying amount (before offsetting) Cash collateral and futures margin deposits received Gross amounts offset Related amounts not offset Net amount presented Financial instruments(i) Cash collateral Net exposure Electricity and gas derivatives contracts 32,745 (17,400) Embedded derivative contract 1,923 – Total Financial liabilities 34,668 (17,400) – – – 15,345 1,923 17,268 (3,339) – (3,339) – – – 12,006 1,923 13,929 Electricity and gas derivatives contracts Interest rate swaps Total 69,148 35,508 (17,400) (24,270) 27,478 (3,339) (260) 23,879 – – 35,508 – – 35,508 104,656 (17,400) (24,270) 62,986 (3,339) (260) 59,387 (i) Financial instruments that do not meet the criteria for offsetting but may be offset in certain circumstances. PAGE 73 Interest rate swaps Total As at 30 June 2015 $’000 Financial assets ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016 3. FINANCIAL RISK MANAGEMENT (CONT.) (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. This approach is consistent with prior years. The capital structure of the Group as at balance date consists of total corporate facilities, as listed in note 21, total limited recourse facilities as listed in note 21 and equity, comprising issued capital, reserves and retained earnings as listed in notes 23 and 24. 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 the provision of bank guarantees or cash collateral. It also has a working capital facility in place which is settled each month. A large percentage 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. During the financial year ended 30 June 2016 the entity complied with all applicable debt covenants. The quantitative analysis of the Group’s gearing structure is illustrated below. To consider the risk of the Company’s capital structure it is appropriate to segregate the projects from the rest of the Group. The table below illustrates the gearing and interest cover for the Group. When the Neerabup assets and associated limited recourse debt are excluded the Group has no net debt. Current borrowings Non-current borrowings Total debt Cash and cash equivalents Net debt Total equity excluding reserves Total capital Gearing percentage(i) Gearing percentage(i) excluding Neerabup EBITDAF Interest cover ratio Consolidated 2016 $’000 2015 $’000 37,193 42,095 184,305 199,609 221,498 241,704 (192,467) (172,836) 29,031 68,868 367,990 362,107 397,021 430,975 7% 0% 2.35 16% 0% 2.98 (i) Gearing percentage is calculated as net debt divided by total capital. Net debt is calculated as total interest-bearing borrowings less cash and cash equivalents. Total capital is calculated as ‘equity’ as shown in the statement of financial position plus net debt less reserves attributable to fair value adjustments. PAGE 74 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016ERM POWER ANNUAL REPORT | 2016 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. 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. Details regarding the terms and conditions upon which the instruments were granted and methodology for determining fair value at grant date are available in note 25. 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 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. Joint arrangements The Group has classified its investments in the NewGen Neerabup Partnership. The partners of the Partnership are jointly and severally liable for the liabilities of the partnership and under the partnership agreement are entitled to a proportionate share of Partnership’s assets. 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. Impairment At 30 June 2016 the Group has tested goodwill for impairment and made critical judgements with respect to assumptions used in the value in use assessment. These assumptions are set out in Note 19. In 2015, the Group impaired the value of generation development assets as a result of our generation group ceasing material activities on the existing gas fired power generation development projects. A critical judgement was made to write the value of capitalised development costs down to nil on a value in use basis and based on the assumption that the assets hold no value to other participants in the industry. PAGE 75 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016 5. REVENUE Revenue from Continuing Operations Sale of electricity Electricity generation revenue Operations income and project fees Gas production and condensate income Consulting and other revenue Consolidated 2016 $’000 2015 $’000 2,662,268 2,204,128 88,397 2,418 – 9,455 99,620 3,969 3,426 3,442 2,762,538 2,314,585 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 Cost of electricity generation Employee benefits expense Other expenses Included in the above employee benefits and other expenses are: Rental expenses relating to operating leases Defined contribution superannuation expense (i) Includes total net realised gains on the settlement of derivative financial instruments of $214.8m (2015: $61.9m loss). Consolidated Note 2016 $’000 2015 $’000 (i) 2,559,836 2,116,421 59,144 42,710 27,940 52,788 39,289 26,346 2,689,630 2,234,844 3,889 2,264 3,788 2,491 PAGE 76 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016ERM POWER ANNUAL REPORT | 2016 7. NET FAIR VALUE GAIN ON FINANCIAL INSTRUMENTS DESIGNATED AT FAIR VALUE THROUGH PROFIT AND LOSS Unrealised Electricity and gas derivative contracts Hedge ineffectiveness Consolidated 2016 $’000 2015 $’000 36,524 2,959 39,483 97,689 – 97,689 The Group accounts for certain derivative financial instruments as cash flow hedges with corresponding unrealised value movements recognised in the cash flow hedge reserve. Any unrealised gain or loss on other instruments that are not hedge accounted and any ineffective portion of hedge accounted instruments is recognised directly in profit or loss. Refer note 16 for further information. Further information regarding the sensitivity and market risk of derivative financial instruments is contained in Note 3(a)(i). 8. NET FINANCE EXPENSE Finance income Interest income Finance costs Borrowing costs – bank loans Borrowing costs – receivables financing facility Borrowing costs – convertible notes Other borrowing costs Consolidated 2016 $’000 2015 $’000 4,281 4,281 5,217 5,217 12,662 13,000 6,056 3,845 6,561 6,595 3,911 3,787 29,124 27,293 PAGE 77 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016 9. INCOME TAX (a) Income tax expense Income tax comprises: Current tax expense Deferred tax expense Adjustment to current and deferred tax of prior periods Income tax expense (b) Numerical reconciliation of prima facie tax benefit to prima facie tax Profit from continuing operations Income tax expense calculated at 30% Other income taxes Net effect of expenses / (income) that are not deductible / (non-assessable) in determining taxable profit Capital loss not recognised Adjustment to deferred tax of prior periods Difference in overseas tax rates Income tax expense (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 cash flow hedge reserve Net tax effect of amounts charged to fair value reserve (d) Current tax assets Current tax receivables: Income tax receivable PAGE 78 Consolidated 2016 $’000 2015 $’000 194 73 21,887 28,288 318 285 22,399 28,646 58,208 17,462 194 (135) 4,538 318 22 94,583 28,375 73 (111) – 285 24 22,399 28,646 (58,797) (243) (59,040) 94 94 706 (157) 549 – – ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016ERM POWER ANNUAL REPORT | 2016 9. INCOME TAX (CONT.) (e) Recognised deferred tax assets and deferred tax liabilities Opening balance $’000 Recognised in income statement $’000 Acquisition of controlled entities $’000 Currency translation differences $’000 Recognised in equity $’000 Closing balance $’000 Movements in temporary differences – consolidated 2016 Carried forward income tax losses Net derivative financial liabilities Employee provisions Financial assets at fair value through other comprehensive income Investments in Associates Other items Deferred tax assets Set-off deferred tax liabilities Net deferred tax assets Net derivative financial assets Property, plant and equipment Goodwill Other items Deferred tax liabilities Set-off deferred tax assets Net deferred tax liabilities 2015 Carried forward tax losses Net derivative financial liabilities Employee provisions Financial assets at fair value through other comprehensive income Investments in Associates Other items Deferred tax assets Set-off deferred tax liabilities Net deferred tax assets Property, plant and equipment Capitalised gas exploration costs Gas assets Goodwill Other items Deferred tax liabilities Set-off deferred tax assets Net deferred tax liabilities 12,219 21,528 4,023 2,857 1,018 2,967 650 (21,528) (1,220) (2,614) (1,018) 1,162 44,612 (24,568) 9,119 (5,414) (728) (614) 2,363 (6,609) (29,962) 1,318 – (208) 1,682 – (55,471) (302) (2,149) (57,922) 18,825 45,865 2,702 4,240 – 1,285 72,917 (55,831) (4,594) (2,148) – (555) (63,128) – – 4 – – 977 981 – – – – – – 4,735 – – – – (1,048) – 21 – – 201 (826) 502 (116) 148 (15) 519 3 184 3 – – – (33,779) 4,735 190 358 4,594 2,148 (298) (1,596) 5,206 – – – – – – 2 – – (4) 2 – – – – (243) – – (243) (58,797) – – – 11,821 – 2,828 – – 5,307 19,956 (13,920) 6,036 (49,176) (61,001) (882) (2,778) (58,797) (113,837) – 706 – (1,383) 1,226 – 549 – – – – – – 13,920 (99,917) 12,219 21,528 4,023 2,857 1,018 2,967 44,612 (39,651) 4,961 (55,471) – – (302) (2,149) (57,922) 39,651 (18,271) PAGE 79 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016 9. INCOME TAX (CONT.) Tax consolidation The Company and its wholly-owned Australian controlled entities, have 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. (f) Tax losses Unused capital tax losses for which no deferred tax asset has been recognised Potential tax benefit at 30% Consolidated 2016 $’000 2015 $’000 15,127 4,538 – – The unused capital losses were incurred from the disposal of capital investments that are not likely to be recouped in the foreseeable future. (g) Unrecognised temporary differences Temporary difference relating to investments in subsidiaries for which deferred tax liabilities have not been recognised: Foreign currency translation Undistributed earnings Unrecognised deferred tax liabilities relating to the above temporary differences 811 – 811 340 5 345 Temporary differences of $0.8m (2015: $0.3m) have arisen as a result of the translation of the financial statements of the Group’s subsidiary in the US. However, a deferred tax liability has not been recognised as the liability will only eventuate in the event of disposal of the subsidiary, and no such disposal is expected in the foreseeable future. PAGE 80 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016ERM POWER ANNUAL REPORT | 2016 10. DIVIDENDS PAID AND PROPOSED During the year ended 30 June 2016, the Company paid a partially franked final dividend for the year ended 30 June 2015 of 6.0 cents per share and an unfranked interim dividend for the year ended 30 June 2016 of 6.0 cents per share (2015: 6.0 cents). Franking credits available to shareholders in subsequent years 2016 $’000 33 2015 $’000 2,106 After 30 June 2016 the following dividends were proposed by the directors. The dividends have not been provided for and there are no income tax consequences. Final proposed ordinary share dividend estimated based upon shares on issue at 30 June 2016 6.0 14,750 14,750 6 October 2016 Cents per share Total amount $’000 Unfranked $’000 Date of payment 11. CASH AND CASH EQUIVALENTS Current Restricted cash Non-restricted cash at bank and cash on hand Total cash and cash equivalents Consolidated 2016 $’000 2015 $’000 125,150 127,431 67,317 45,405 192,467 172,836 The cash and cash equivalents are bearing interest at rates between nil and 3.10%. Restricted cash 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. Cash that is on deposit with counterparties as security deposits and cash that is on deposit with financial institutions as security for bank guarantees issued to various counterparties as credit support, is defined as restricted cash, with a corresponding disclosure in contingent liabilities in Note 27. Cash collateral held in broker accounts to facilitate wholesale price hedging on the Sydney Futures Exchange is classified as restricted cash unless it is eligible for offset against the corresponding derivative liability. As at 30 June 2016 $27.2m cash collateral held in broker accounts has been offset against the corresponding liability (2015: $33.2m). The restricted cash deposits, held on term deposit, are bearing interest at rates between 2.35% and 3.10%. Term deposits Other restricted cash deposits Consolidated 2016 $’000 91,033 34,117 2015 $’000 122,391 5,040 125,150 127,431 PAGE 81 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016 12. RECONCILIATION OF CASH FLOWS FROM OPERATING ACTIVITIES Net profit after tax Adjustments for: Depreciation and amortisation of non-current assets Impairment of non-current assets Onerous contract Share based payment expense Consolidated 2016 $’000 2015 $’000 35,809 65,937 25,229 – 1,898 2,565 20,288 42,952 – 1,257 Net unrealised fair value gains on financial instruments and inventory (39,483) (97,689) 3,422 (402) 500 – (692) (164) 29,124 27,293 328 (48) (659) 190 – – (96,583) (15,913) 712 13,832 24,568 60,412 (2,363) 67 3,970 31,448 33,779 8,354 (5,206) (570) 60,986 29,012 119,914 144,246 Loss on sale of equity accounted investment Share of profits of associates Net exchange differences Finance costs Transfers to provisions: Employee entitlements Onerous contract Deferred consideration Changes in assets and liabilities (net of business combinations): Increase in trade and other receivables Decrease in other assets Decrease in inventories Decrease in deferred tax assets Decrease broker margin account offset against liabilities Decrease in deferred tax liabilities Increase / (decrease) in current tax liability Increase in trade and other payables Net cash provided by operating activities Disclosure of financing facilities Refer to note 21 for information regarding financing facilities. PAGE 82 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016ERM POWER ANNUAL REPORT | 2016 13. TRADE AND OTHER RECEIVABLES AT AMORTISED COST Current Trade receivables Other receivables Accrued income Non-current Other receivables Note (i) (ii) Consolidated 2016 $’000 2015 $’000 37,189 15,156 52,345 31,234 701 31,935 (iii) 278,251 186,370 330,596 218,305 (ii) 32 32 14,094 14,094 (i) Trade receivables are non-interest bearing and are generally on 30-day terms. (ii) Other receivables includes the present value carrying amount of a $14.9m loan granted by a subsidiary of ERM Power Limited to Empire as a consequence of selling the Group’s Western Australian Gas assets. Refer to note 30 for further details. (iii) Accrued income represents electricity amounts due to be invoiced after 30 June 2016 and wholesale counterparty settlements due to be accrued and received after 30 June 2016. 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. The carrying amounts of non-current receivables are equal to the fair values. 14. INVENTORIES Work in progress Stock on hand Renewable energy certificates Renewable energy certificates recognised under sale and repurchase arrangement Gas in storage Diesel fuel Note (i)(ii) (iii) Consolidated 2016 $’000 109 317 9,322 10,500 54 1,780 22,082 2015 $’000 – – 24,046 10,500 96 1,791 36,433 (i) Renewable energy certificates are pledged as security against outstanding bank loan and receivables finance facilities at 30 June 2016. (ii) Renewable energy certificates designated as commodity broker trader inventory are measured at fair value less costs to sell. (iii) The Group has right of repurchase under a sale and repurchase arrangement. The corresponding liability is included within borrowings at 30 June 2016. Refer to Note 21. PAGE 83 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016 15. FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME Equity investments at fair value through other comprehensive income (a) Equity investments at fair value through other comprehensive income comprise of the following individual investments: Non-current Listed securities Red Sky Energy Limited Metgasco Limited Consolidated 2016 $’000 2015 $’000 150 – 150 150 3,313 3,463 All shares held in listed entities as at 30 June 2016 have been classified as fair value through other comprehensive income because they are investments that the Group intends to hold for the long-term. No dividends have been received in respect of these investments during the current or prior year. Refer note 1(i) for further details. (b) Disposal of equity interests During the year ended 30 June 2016 the Company sold its shares in Metgasco Limited. The shares had a fair value of $3.2m and the Company realised a loss of $6.1m (net of tax) which is included in other comprehensive income. This loss was reclassified to retained earnings. 16. DERIVATIVE FINANCIAL INSTRUMENTS Current assets Electricity and gas derivatives Foreign exchange derivatives Non-current assets Electricity and gas derivatives Foreign exchange derivatives Embedded derivative Current liabilities Electricity and gas derivatives Non-current liabilities Electricity and gas derivatives Interest rate swaps Consolidated Note 2016 $’000 2015 $’000 158,627 11,367 71 – 158,698 11,367 (i) 51,296 133 – 51,429 6,838 6,838 2,971 41,628 44,599 3,978 – 1,923 5,901 20,289 20,289 7,189 35,508 42,697 (i) The Group’s fair value entitlement to an additional amount derived by reference to Empire’s share price as part of the consideration received for the sale of the Group’s Western Australian Gas assets. The top up payment is similar to a call option and accordingly management has valued this component using a Black-Scholes option pricing model. PAGE 84 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016ERM POWER ANNUAL REPORT | 2016 16. DERIVATIVE FINANCIAL INSTRUMENTS (CONT.) Derivative financial instruments used by the Group The Group is party to derivative financial instruments in the normal course of business acquired in order to manage exposure to fluctuations in electricity prices and interest and foreign exchange rates in accordance with the Group’s financial risk management policies. Derivative financial instruments designated as cash flow hedges Interest rate swaps Liabilities 12 months or less 1-2 years 2-5 years More than 5 years Carrying value 2016 $’000 2015 $’000 7,000 6,642 16,257 11,729 41,628 6,979 6,198 12,828 9,503 35,508 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 97% (2015: 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%% (2015: 7.189%) and the variable rate is 1.1% above the BBSY rate which at the end of the reporting period was 2.44% (2015: 2.47%). 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 re-measurement of hedging instruments at fair value 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 and the movement of the fair value of the hedged item and instrument deferred in the hedge reserve was $6.1m. The above table indicates the periods in which the cash flows associated with cash flow hedges are expected to impact profit or loss and the fair value of the related hedging instruments. The notional amount of debt covered by the interest rate swap in place at 30 June 2016 was $137.9m (2015: $143.7m). During the year ended 30 June 2016 amounts accumulated to the cashflow hedge reserve of $6.9m were settled and recognised in profit and loss. PAGE 85 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016 16. DERIVATIVE FINANCIAL INSTRUMENTS (CONT.) Electricity derivatives Net asset / (liability) 12 months or less 1-2 years 2-5 years More than 5 years Assets Carrying value(i) Liabilities Carrying value(i) Nominal hedge volume(ii) 2016 $’000 2015 $’000 2016 $’000 2015 $’000 2016 TWh 2015 TWh 142,024 28,816 15,812 5,548 192,200 – – – – – (5,226) (513) – – (5,739) – – – – – 12 5 2 1 20 – – – – – (i) Carrying value of hedging instruments only. For the year ended 30 June 2015 hedge accounting was not adopted for electricity derivatives and accordingly no values are shown for that year. (ii) Nominal hedge volumes exclude volumes for other instruments that provide an economic hedge but are not hedge accounted for, such as exchange based instruments and instruments used in the Group’s US operations. The Group uses cash flow hedges to mitigate the risk of variability in electricity prices. The following instruments are hedge accounted: • Electricity swaps, caps and purchased options used to hedge price exposure in our Australian electricity sales business. The above carrying value represents the total value of hedge instruments recognised on the Group’s balance sheet at 30 June 2016 together with maturity of these instruments and associated nominal volume. The value of these instruments excluding the ineffective portion has been recognised in the cash flow hedge reserve. An additional unrealised gain of $7.8m on an instrument has also been deferred in the cash flow hedge reserve following the cessation of hedge accounting for this instrument. Hedge rates for these instruments vary by product type, time period and region and range from $10 to $300 per MWh. Instruments held for trading, exchange traded instruments (such as futures contracts), written options and all instruments related to renewable energy certificates and our US operations are not hedge accounted. The above nominal hedge volumes exclude volumes associated with these instruments. The movement in the hedged items for the year ended 30 June 2016 was $200.1m. The movement in hedge instruments recognised in reserves for the year ended 30 June 2016 was $197.2m. The difference in these amounts is a result of hedge ineffectiveness of which an amount of $2.9m was recognised for the year ended 30 June 2016 (refer note 7). The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in the cash flow hedge reserve within equity, limited to the cumulative change in fair value of the hedged item on a present value basis from the inception of the hedge. Effectiveness is assessed against forecast electricity purchase requirements. Where the portfolio volume of the cash flow hedge contracts is in excess of forecast electricity purchase requirements for a particular time period an amount of ineffectiveness is recognised immediately in profit or loss. During the year ended 30 June 2016 net amounts accumulated to the cashflow hedge reserve of $159.6m were settled and recognised as a gain in profit and loss. PAGE 86 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016ERM POWER ANNUAL REPORT | 2016 17. PROPERTY, PLANT AND EQUIPMENT Consolidated 2016 Cost Accumulated depreciation and impairment Net carrying amount at 30 June 2016 Land $’000 Capital work in progress $’000 Plant and equipment $’000 Note Furniture, fittings and improvements $’000 Total $’000 22,963 (447) 22,516 5,288 486,068 12,841 527,160 – (127,424) (8,023) (135,894) 5,288 358,644 4,818 391,266 Opening net carrying amount at 1 July 2015 22,516 104 369,319 4,917 396,856 Exchange differences Acquisition of subsidiaries Additions Transfers Depreciation – – – – – – – 5,288 (104) – 191 1,561 – – (12,427) Closing net carrying amount at 30 June 2016 22,516 5,288 358,644 12 – 1,414 – (1,525) 4,818 12 191 8,263 (104) (13,952) 391,266 2015 Cost Accumulated depreciation and impairment Net carrying amount at 30 June 2015 23,109 (593) 22,516 104 – 104 484,222 (114,903) 369,319 11,394 518,829 (6,477) 4,917 (121,973) 396,856 Opening net carrying amount at 1 July 2014 23,109 26,735 380,052 5,795 435,691 Exchange differences Acquisition of subsidiary Additions Transfers Depreciation Impairment – – – – – – – 1,720 (157) 2 58 1,331 148 10 112 628 2 – (12,272) (1,630) (i) (593) (28,194) – – 12 170 3,679 (7) (13,902) (28,787) Closing net carrying amount at 30 June 2015 22,516 104 369,319 4,917 396,856 (i) Refer to note 19 for further details. Capital work in progress relates to capitalised costs for power station projects. One of the Group’s current generation assets, the Neerabup power station, is project financed by limited recourse debt, meaning the security of project lenders does not extend beyond the particular generation asset. The Group also raised funds for its equity investment in the Neerabup power station by issuing notes in 2008. Those notes are limited-recourse to the Group’s interest in the Neerabup power station. Refer note 21 for details regarding recourse and limited recourse borrowings of the Group. PAGE 87 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016 Goodwill $’000 Capital work in progress $’000 Software internally generated $’000 Software and other $’000 Customer acquisition costs $’000 Total $’000 18. INTANGIBLE ASSETS Consolidated 2016 Cost 32,568 1,304 Accumulated depreciation and impairment – – Net carrying amount at 30 June 2016 32,568 1,304 Opening net carrying amount at 1 July 2015 24,195 Current period trailing commission sales(i) Exchange differences Acquisition of subsidiaries Additions Transfer Amortisation – 827 7,546 – – – 6 – – – 1,298 – – Closing net carrying amount at 30 June 2016 32,568 1,304 2015 Cost Accumulated depreciation and impairment Net carrying amount at 30 June 2015 Opening net carrying amount at 1 July 2014 Exchange differences Acquisition of subsidiary Additions Transfer Amortisation 24,195 – 24,195 – 1,148 23,047 – – – Closing net carrying amount at 30 June 2015 24,195 (i) Refer to note 22 for corresponding provision movement. 6 – 6 4 – – 6 (4) – 6 18,095 (5,594) 12,501 5,981 (3,955) 2,026 45,347 103,295 (14,705) (24,254) 30,642 79,041 9,128 1,901 7,583 22,967 163 678 42,813 22,967 995 9,750 7,481 13,689 – 104 (873) 2,026 (8,230) (11,277) 30,642 79,041 – – 1,496 4,047 4 (2,174) 12,501 12,483 (3,355) 9,128 – 5 30 863 100 5,029 (3,128) 1,901 12,053 (4,470) 7,583 3,421 79 1,929 5,107 – (2,953) 7,583 53,766 (10,953) 42,813 10,924 1,242 25,386 10,221 – (4,960) 42,813 5,715 1,784 – – 4,919 4 (1,510) 9,128 15 410 189 – (497) 1,901 Amortisation of intangible assets is included in depreciation and amortisation expense in the income statement. PAGE 88 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016ERM POWER ANNUAL REPORT | 2016 19. IMPAIRMENT OF NON-FINANCIAL ASSETS Impairment loss (a) In 2015, the Group recognised a total impairment loss of $42.9m due to: • a decision to stop further spending on power station development assets given the current wholesale market conditions ($28.8m). • a decision to surrender two of the Group’s East Coast gas licenses to the government and scale back development of the remaining New South Wales exploration licence ($10.4m). • a write down of the Western Australian petroleum tenement interests ($3.8m). Impairment tests for goodwill and indefinite life intangible assets (b) Goodwill is monitored by management at the level of the four operating segments identified in Note 2: A segment-level summary of the goodwill allocation is presented below. Consolidated 2016 Goodwill Indefinite life intangible assets Business Energy Australia $’000 Business Energy US $’000 Generation Assets $’000 Other(i) $’000 Total $’000 – – – 26,108 – 26,108 – – – 6,460 32,568 – – 6,460 32,568 (i) Other goodwill includes acquisition of Lumaled Pty Ltd and Greensense Pty Ltd. The Group tests property, plant and equipment, intangibles and goodwill for impairment: • at least annually for indefinite life intangibles and goodwill; and • where there is an indication that the asset may be impaired (which is assessed at least each reporting date); or • where there is an indication that previously recognised impairment (on assets other than goodwill) may have changed. If the asset does not generate independent cash inflows and its value in use cannot be estimated to be close to its fair value, the asset is tested for impairment as part of the cash-generating unit (CGU) to which it belongs. Assets are impaired if their carrying value exceeds their recoverable amount. The recoverable amount of an asset or CGU is determined as the higher of its fair value less costs of disposal or value in use. At 30 June 2016 the Group did not have any indefinite life intangible assets. The Group had goodwill of $32.6m of which 80% related to the Group’s US operations. Management have utilised a value in use model to test goodwill for impairment at 30 June 2016 for the US operations. In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. The remaining 20% of goodwill results from purchase price allocations of the Greensense and Lumaled acquisitions completed 3 – 6 months prior to 30 June 2016. Nothing has occurred in the period since acquisition to 30 June 2016 that would indicate these purchase price allocations do not represent fair value. The following table sets out the key assumptions for determining the recoverable amount and testing impairment of the goodwill in the Group’s US electricity retailing operation: 2016 Pre-tax discount rate Years of cash flows included (FY2017 to FY2021) Average gross margin US$ per MWh Cumulative average growth rate of load sold Terminal value growth rate used Business Energy US 15.55% 5 US$5.30 73% 0% Cumulative average growth rate across the forecast period assumed is supported by the rapid growth in signed customer load for the business. During the year ended 30 June 2016 signed customer load (forward booked load) has increased from 4.0TWh to 10.8TWh following investment in people, systems and capability. PAGE 89 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016 20. TRADE AND OTHER PAYABLES Current Trade creditors and accruals Other creditors (i) Trade payables are unsecured and are usually paid within 60 days of recognition. 21. BORROWINGS Current Secured Bank loan – Receivables financing facility Bank loan – Inventory repurchase Secured – limited recourse Bank loan – Neerabup working capital facility Bank loan – Neerabup term facility (current portion) Total current borrowings Non-current Secured Bank loan – Inventory repurchase Secured – limited recourse Bank loan – Neerabup term facility Convertible notes Total non-current borrowings Total borrowings Note (i) Consolidated 2016 $’000 2015 $’000 277,599 89,444 367,043 210,823 68,416 279,239 Consolidated Note 2016 $’000 2015 $’000 (i) (ii) (iii) (iv) (ii) (iv) (v) 17,361 10,500 27,861 3,000 6,332 9,332 33,183 – 33,183 3,000 5,912 8,912 37,193 42,095 – – 10,500 10,500 135,212 49,093 184,305 184,305 221,498 141,302 47,807 189,109 199,609 241,704 Information on credit risk, fair value and interest rate risk exposure of the Group is provided at note 3. (i) Amounts drawn down on receivables financing facility secured against billed and unbilled electricity sales customer revenue receivables. (ii) Sale and repurchase agreement in respect of renewable energy certificates. The equivalent renewable energy certificate assets, over which the Group has the right of repurchase, are included within inventories at 30 June 2016. (iii) Amounts drawn down on a limited recourse bank working capital facility by Neerabup Partnership. This debt has recourse to the assets of Neerabup Partnership only. (iv) Amounts drawn down on a limited recourse term debt facility in respect of the Neerabup Partnership. This debt has recourse to the assets of Neerabup Partnership only. (v) Convertible notes are redeemable by the issuer from 30 September 2010 until maturity in February 2023. Notes have a coupon rate that is variable based on BBSY plus 4%. The notes are accounted for using the effective interest method at 7.78% (2015: 7.89%). 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. PAGE 90 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016ERM POWER ANNUAL REPORT | 2016 21. BORROWINGS (CONT.) 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: Total facilities – bank loans Facilities used at balance date – bank loans Facilities unused at balance date – bank loans 22. PROVISIONS Current Employee benefits – annual leave Onerous contract provision Customer acquisition cost trailing commission provision Deferred consideration Non-current Employee benefits – long service leave Onerous contract provision Customer acquisition cost trailing commission provision Movements in provisions Carrying amount at start of the year Additional provision recognised and charged to profit and loss Amounts used during the year Current period trailing commission sales provision recognised(i) Current period trailing commission sales paid Exchange differences Balances acquired through business combination Consolidated 2016 $’000 2015 $’000 381,425 392,223 (213,213) (233,897) 168,212 158,326 Consolidated 2016 $’000 2,254 328 7,728 689 2015 $’000 2,032 – – – 10,999 2,032 1,230 1,522 13,675 16,427 3,101 3,841 (1,676) 22,967 (4,272) 112 3,353 27,426 1,069 – – 1,069 2,911 1,770 (1,580) – – – – 3,101 (i) Corresponding amount capitalised as an intangible asset. The entire amount of the annual leave provision is presented as current since the Group does not have an unconditional right to defer settlement for any of these obligations. In addition, based on past experience, the Group expects all employees to take the full amount of accrued leave or require payment within the next 12 months. PAGE 91 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016 23. CONTRIBUTED EQUITY Consolidated Consolidated 2016 Number of shares 2015 Number of shares Note 2016 $’000 2015 $’000 Issued ordinary shares – fully paid 23(a) 245,836,004 242,021,217 339,669 332,134 Treasury shares 23(b) (3,370,583) (2,544,194) (7,314) (5,318) 242,465,421 239,477,023 332,355 326,816 (a) Movement in ordinary share capital At the beginning of the period 242,021,217 239,269,727 332,134 328,762 Issue of new shares – employee incentive scheme Issue of shares – dividend reinvestment plan Issue of shares – acquisition of subsidiary 29 Transfer from share based payment reserve Transfer to treasury shares At the end of the period 2,952,134 1,924,430 862,653 627,782 – – – 199,278 – – 6,430 1,479 – 1,288 (1,662) 3,640 1,233 444 81 (2,026) 245,836,004 242,021,217 339,669 332,134 (b) Terms and conditions of contributed equity Ordinary shares During the year ended 30 June 2016, there were no capital raisings undertaken. 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. For details of shares and options issued under employee share schemes (see note 25). PAGE 92 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016ERM POWER ANNUAL REPORT | 2016 24. RESERVES Cash flow hedge reserve Fair value reserve Share based payment reserve Transactions with non-controlling interests Foreign currency translation reserve Movements Cash flow hedge reserve Balance at the beginning of the year Revaluation – gross Revaluation – deferred tax Balance at the end of the year Fair value reserve Balance at the beginning of the year Revaluation – gross Revaluation – deferred tax Transfer to associate investment (net of tax) Transfer to retained earnings (net of tax) Balance at the end of the year Share based payment reserve Balance at the beginning of the year Share based payments vested Share based payment expense Balance at the end of the year Transactions with non-controlling interests reserve Balance at the beginning of the year Balance at the end of the year Foreign currency translation reserve Balance at the beginning of the year Currency translation differences – current period Balance at the end of the year Consolidated 2016 $’000 2015 $’000 112,338 (24,855) (900) 3,676 (6,664) 2,398 (14,404) (14,404) 2,703 103,413 1,134 (42,391) (24,855) (23,208) 195,990 (58,797) 112,338 (2,353) 706 (24,855) (6,664) (9,893) (91) (243) – 6,098 (900) 2,398 (1,287) 2,565 3,676 524 (157) 2,862 – (6,664) 1,222 (81) 1,257 2,398 (14,404) (14,404) (14,404) (14,404) 1,134 1,569 2,703 – 1,134 1,134 PAGE 93 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016 24. RESERVES (CONT.) (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. Fair value reserve (b) Changes in the fair value and exchange differences arising on translation of investments, such as equities classified as fair value through other comprehensive income, are recognised in other comprehensive income, as described in note 1(i) and accumulated in a separate reserve within equity. Transactions with non-controlling interests (c) This reserve is used to record the differences described in note 1(b) which may arise as a result of transactions with non-controlling interests that do not result in a loss of control. (d) Share based payment reserve The share based payments reserve is used to recognise: • the grant date fair value of options issued to employees but not exercised; • the grant date fair value of shares issued to employees; • the issue of shares held by the LTIST and LTIOT Employee Share Trusts to employees. Refer to note 25 for details of the employee share and option incentive schemes. Foreign currency translation (e) Exchange differences arising on translation of the foreign controlled entity are recognised in other comprehensive income as described in note 1(e) and accumulated in a separate reserve within equity. The cumulative amount is reclassified to profit or loss when the net investment is disposed of. PAGE 94 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016ERM POWER ANNUAL REPORT | 2016 25. SHARE BASED PAYMENTS Long term incentives (a) 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 selected employees (including the Managing Director) who are invited by the Board. These incentive awards have been granted by way of offers to participate in both the Long Term Incentive Share Trust (LTIST) and the Long Term Incentive Option Trust (LTIOT). LTIST i. Shares are acquired by a trustee who holds those shares on behalf of participants. The shares are acquired by the trustee either subscribing for new shares or purchasing shares on market. Participants hold their interest in the LTIST through 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 their vote in the case of a poll at a meeting of the Company. Vesting conditions may be a combination of service and performance hurdles, as determined by the directors. If the participant’s employment ceases prior to the shares vesting, the Board will determine if the participant’s units in the LTIST are forfeit or, for redundancy, death or permanent disability, or in circumstances that the Board determines appropriate, continue to be held to the end of the performance period at which time the proportion to vest will be re-assessed. Early vesting may occur on a change of control of the Company, 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. The fair value is independently determined using a Monte Carlo simulation (using a Black-Scholes framework). The model inputs for restricted shares granted are shown in the table below. Assessed fair value per share at grant date Number of units allocated under the plan during the financial year Share price at grant date Exercise price Expected price volatility of the Company’s shares based on historic volatility Risk free interest rate Expected vesting date Dividend yield Proportion subject to vesting on satisfaction of total security holder return (TSR) performance(i) FY2016 grants FY2015 grant $0.90 – $1.44 1,579,497 $1.48 – $2.22 Nil 33% – 35% 1.74% – 2.03% $1.15 512,336 $1.75 Nil 34.4% 2.79% 1 – 3 years after issue 3 years after issue 5.4% – 8.1% 100% 5.35% 100% (i) Certain grants may have other service based conditions in lieu of a TSR component. For those grants with a TSR condition, vesting is based 100% on meeting both TSR and service conditions. The performance hurdle will only be satisfied where the TSR value is positive. If the TSR value is negative, the performance hurdle will not be satisfied, and the underlying shares in the LTIST will not vest. PAGE 95 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016 25. SHARE BASED PAYMENTS (CONT.) (a) Long term incentives (cont.) LTIOT and other option grants ii. Options were granted during the 2011 financial year. No options have been granted subsequent to the 2011 financial year. 2011 financial year grant – LTIOT Participants were issued units at the prevailing market value of the options. 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. Early vesting and the consequences of cessation of employment prior to vesting are identical to the LTIST as described above. Details of movements in each option plan are set out below. Financial year 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 2011 2011 Total 1/11/2010 1/11/2017 $2.75 1,208,906 8/11/2010 8/11/2017 $2.75 242,706 1,451,612 – – – 30,070 – 30,070 – – – 1,178,836 1,178,836 242,706 242,706 1,421,542 1,421,542 Number Number Number Number Number Number The weighted average remaining contractual life of options outstanding at the end of the period is 1.3 years. (b) Other awards The Company may offer awards outside of the standard incentive plans. Performance Rights are granted as part of an employee retention strategy. The Performance Rights are subject to a vesting period and will be satisfied, at the Board’s discretion, in cash or shares, subject to continuous full-time employment with the Company. The vesting value will be the number of Performance Rights held, multiplied by the higher of either the notional issue price, or the 10 day VWAP at the vesting date. Details of the Performance Rights issues are set out below. Financial year 2016 2016 2015 2014 Grant Date Vesting date Number Notional price 21/12/15 06/01/19 468,232 29/10/15 02/07/16 383,216 23/09/14 23/09/19 280,114 16/08/13 16/08/18 92,285 $1.538 $1.566 $1.785 $2.709 (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: Shares issued under long term employee share scheme PAGE 96 Consolidated 2016 $’000 2,565 2,565 2015 $’000 1,257 1,257 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016ERM POWER ANNUAL REPORT | 2016 26. PARENT ENTITY FINANCIAL INFORMATION Summary financial information (a) 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 Net Assets Shareholders’ equity Contributed equity Treasury shares Fair value reserve Share option reserve Retained earnings Total equity Profit for the year Other comprehensive income / (loss) Total comprehensive income 2016 $’000 2015 $’000 228,778 205,848 379,349 367,700 11,204 12,726 10,388 11,503 366,623 356,197 339,669 332,134 (7,314) (900) 3,676 (5,318) (6,664) 2,398 31,492 33,647 366,623 356,197 33,310 22,685 (333) 367 32,977 23,052 (b) Guarantees entered into by the parent entity The parent entity has issued non-cash backed guarantees to certain third parties to support the operations of the Australia and US electricity sales businesses. (c) Contingent liabilities of the parent entity The parent entity does not have any contingent liabilities at 30 June 2016. (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 2016. PAGE 97 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016 27. 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 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 Sub-lease payments: Future minimum lease payments expected to be received in relation to non-cancellable sub-leases of operating leases Consolidated 2016 $’000 2015 $’000 11,905 6,227 – 18,132 4,713 19,067 7,408 31,188 2,625 1,090 – 3,715 4,671 17,929 12,288 34,888 1,869 – The Group leases office premises in Brisbane, Sydney, Melbourne, Perth, Newcastle and Houston. Operating lease commitments shown above are net of any cash incentives under the respective lease agreements. (c) Contingent liabilities 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 and other counterparties Bank guarantees – Lease arrangements Futures margin deposits Security deposits Bank guarantees – Western Power Bank guarantees – NSW exploration licence Note (i) (ii) (iii) (iv) (v) (vi) Consolidated 2016 $’000 2015 $’000 173,903 125,767 3,008 12,366 1,005 300 75 2,912 40,813 4,369 323 85 190,657 174,269 (i) The Group has provided bank guarantees in favour of the Australian Energy Market Operator to support its obligations to settle electricity purchases from the National Electricity Market. Bank guarantees have also been provided to various counterparties in relation to electricity derivatives. A portion of the guarantees are supported by term deposits. $150m of the bank guarantees are supported by non-cash backed guarantees in 2016 (2015: $80m). (ii) The Group has provided bank guarantees in relation to lease arrangements for premises in Brisbane, Sydney, Melbourne and Perth. These guarantees are supported by term deposits. (iii) Futures margin deposits represent cash lodged with the Group’s futures clearing brokers. The deposits are in relation to various futures contracts on the Australian Securities Exchange and may be retained by the clearing brokers in the event that the Group does not meet its contractual obligations. (iv) 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. (v) 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. (vi) The Group has provided bank guarantees in favour of the New South Wales (NSW) Government in connection with its gas exploration licences in NSW. These guarantees are supported by term deposits. PAGE 98 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016ERM POWER ANNUAL REPORT | 2016 28. INTERESTS IN OTHER ENTITIES Subsidiary companies (a) The Consolidated Entity consists of a number of wholly or majority owned subsidiaries as well as interests in joint operations for power station projects and gas interests. Name Material operating subsidiaries ERM Financial Services Pty Ltd ERM Gas Pty Ltd ERM Holdings Pty Ltd ERM Land Holdings Pty Ltd ERM Neerabup Power Pty Ltd ERM Neerabup Pty Ltd ERM Power Developments Pty Ltd ERM Power Generation Pty Ltd ERM Power International Pty Ltd ERM Power Investments Pty Ltd(i) ERM Power Retail Pty Ltd Greensense Pty Ltd(ii) Lumaled Pty Ltd(iii) Oakey Power Holdings Pty Ltd Powermetric Metering Pty Ltd SAGE Utility Systems Pty Ltd Source Power & Gas LLC(iv) Source Operations Group LLC(iv) SPG Energy Group LLC(iv) Other non-material subsidiaries Braemar 3 Holdings Pty Ltd ERM Braemar 3 Pty Ltd ERM Braemar 3 Power Pty Ltd ERM Business Energy LLC(v) ERM Gas WA01 Pty Ltd ERM Oakey Power Holdings Pty Ltd E.R.M. Oakey Power Pty Ltd ERM Power Services Pty Ltd ERM Power Utility Systems Pty Ltd ERM Wellington 1 Holdings Pty Ltd Queensland Electricity Investors Pty Ltd Richmond Valley Solar Thermal Pty Ltd (i) Registered in May 2016. (ii) Purchased 6 January 2016. Refer to note 29 for further details. (iii) Purchased 7 March 2016. Refer to note 29 for further details. (iv) Purchased 23 January 2015. (v) Registered in December 2014. Place of incorporation Percentage of equity interest held by the Company Percentage of equity interest held by the non-controlling interests 2016 % 2015 % 2016 % 2015 % QLD QLD QLD QLD VIC VIC VIC VIC QLD QLD VIC WA NSW ACT NSW VIC USA USA USA QLD QLD QLD USA VIC NSW QLD VIC QLD QLD QLD QLD 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 – 100 – – 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – PAGE 99 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016 28. INTERESTS IN OTHER ENTITIES (CONT.) (a) Subsidiary companies (cont.) The consolidated financial statements incorporate the assets, liabilities and results of the above subsidiaries in accordance with the accounting policy described in note 1(b). The equity interest is equal to the proportion of voting power held. (b) Significant joint operations – power station projects As at 30 June 2016 and 30 June 2015, the Group has the following interest in power station projects with other external parties: Neerabup Power Station: NewGen Power Neerabup Pty Ltd NewGen Neerabup Pty Ltd NewGen Neerabup Partnership Principle place of business Interest Held 2016 % 2015 % QLD QLD WA 50 50 50 50 50 50 The consolidated entity’s proportionate share of assets employed and liabilities incurred in power station projects classified as joint operations is summarised below. CURRENT ASSETS Cash and cash equivalents Trade and other receivables at amortised cost Inventories Other assets TOTAL CURRENT ASSETS NON-CURRENT ASSETS Property, plant and equipment Intangible assets TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Trade and other payables Borrowings – limited recourse Provisions TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Borrowings – limited recourse Derivative financial instruments TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS PAGE 100 Consolidated 2016 $’000 2015 $’000 10,898 3,780 – 419 10,042 3,125 96 430 15,097 13,693 174,784 179,182 10 174,794 189,891 925 9,332 52 10,309 135,212 41,628 176,840 187,149 2,742 17 179,199 192,892 709 8,912 45 9,666 141,302 35,508 176,810 186,476 6,416 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016ERM POWER ANNUAL REPORT | 2016 28. INTERESTS IN OTHER ENTITIES (CONT.) (b) Significant joint operations – power station projects (cont.) 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 2016 $’000 2015 $’000 25 – – 25 – – – – Joint ventures (c) In June 2016 the Group made a 33% investment in Energy Locals Pty Ltd for $1.5m, which provides a platform for members of communities to supply and charge each other energy. (d) Interests in associate Name of entity Place of business/country of incorporation Note Principle Activity Measurement method % of ownership interest 2016 2015 Empire Oil & Gas NL (i) Australia Gas production and exploration in Western Australia Equity method – 18.8 (i) The Group held 18.7% of Empire and had representation on its board of directors and a consequent ability to participate in the financial and operating decisions. In the opinion of the directors, ERM Power had significant influence and Empire was an associate of the Group. In June 2016, the Group sold 100% of its shareholding in Empire, realising a loss on disposal of $3.4m. PAGE 101 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016 29. BUSINESS COMBINATION (a) Prior year acquisition – SPG Energy Group LLC On 23 January 2015, the Group acquired 100% of the issued share capital of SPG Energy Group LLC (Source), the head company of a consolidated group that operates as an electricity retailer in the US, Texas and the PJM market. The acquisition allows the Group to expand its electricity retailing business operations into these US markets. At 30 June 2015 the fair value of the identifiable assets and liabilities was provisional. In 2016, the acquisition accounting was finalised as follows: Cash Trade and other receivables Plant and equipment Intangible assets: customer contracts Intangible assets: other Other assets Deferred tax assets Trade payables Derivative liabilities Provision for future customer acquisition costs Net identifiable assets acquired Add: goodwill Net assets acquired Provisional fair value as previously reported $’000 Adjustments(i) $’000 3,867 10,124 170 1,929 410 1,312 4,734 (22,553) (13,526) – (13,533) 23,047 9,514 – – – 678 – – 908 – (2,595) (1,009) 1,009 – Final fair value $’000 3,867 10,124 170 2,607 410 1,312 5,642 (22,553) (13,526) (2,595) (14,542) 24,056 9,514 (i) The provisional purchase price allocation has been adjusted to recognise a provision liability for trailing commission broker payments required to be made to third parties for customer referrals. A corresponding customer contract asset has been recognised and this asset is amortised through profit and loss over the life of the respective customer contracts. All post-acquisition trailing commission broker payments follow this same accounting treatment, which aligns with the accounting treatment applied to broker payments made in the Australian operations. This change to the purchase price allocation and subsequent amortisation of trailing broker commission costs has resulted in a reduction in operating costs of $4.9m in FY2016 and a corresponding increase in depreciation of the same amount. (b) Current year acquisition – Greensense Pty Ltd On 6 January 2016, the Group acquired 100% of the issued share capital of Greensense Pty Ltd (Greensense). Greensense is an award winning technology business focused on improving the sustainability performance of commercial buildings. A leader in the rapidly developing area of cloud-based, big data and analytics, Greensense software is used by some of Australia’s largest organisations across education, utilities, retail, government and commercial property. The acquisition of Greensense allows the Group to offer services that will drive energy and water efficiency, reduce costs and showcase sustainability achievements to its retail electricity customer base. The total purchase consideration was $5.3m paid in cash with goodwill of $3.8m recognised on acquisition. (c) Current year acquisition – Lumaled Pty Ltd On 7 March 2016 the Group acquired 100% of the issued share capital of Lumaled Pty Ltd (Lumaled). Lumaled specialises in energy-efficient lighting for industrial and commercial businesses. It develops and distributes LED products throughout Australia. The acquisition allows the Group to diversify its product offering to its electricity retail customers. The total purchase consideration was $3.7m with $3.0m paid in cash and a further $0.7m payable as contingent consideration under an earn-out arrangement with goodwill of $2.6m recognised on acquisition. PAGE 102 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016ERM POWER ANNUAL REPORT | 2016 30. 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. Equity interests in subsidiaries and jointly controlled entities Details of interests in subsidiaries are set out in note 28. Details of interests in jointly controlled entities are set out in note 28. Key management personnel Disclosures relating to key management personnel are set out in the Directors’ Report. Transactions with St Baker Enterprises Pty Ltd and Sunset Power Pty Ltd During the period the Company charged St Baker Enterprises Pty Ltd (a related party of Trevor St Baker, a Director) $1,532,994 including GST (2015: $413,332) for consulting and other services. The services were provided by ERM Power staff and the charges were at an arm’s length market rate. At 30 June 2016 all invoiced amounts had been paid in full. In the prior year the Company had a consulting agreement with Sunset Power Pty Ltd (“Sunset” a related party of Trevor St Baker) which expired on 30 June 2015 and was not renewed. No payments were made to Sunset under this agreement for the year ended 30 June 2016. During the year the Company charged $142,042 including GST (2015: $nil) for consulting and other services to Sunset. The services were provided by ERM Power staff and the charges were at an arm’s length market rate. At 30 June 2016 all invoiced amounts had been paid in full. Transactions with Sunset Power International Pty Ltd A subsidiary of the Company, ERM Power Retail Pty Ltd (“ERM”), has entered into a long term electricity swap contract with the Vales Point power station in New South Wales to hedge electricity purchases in relation to its eastern state electricity load from the NEM. The power station is 100% owned by Sunset Power International Pty Ltd (“SPI”) which in turn is owned and controlled by Trevor St Baker. The swap contract was entered into on 20 November 2015 and finalised in February 2016. The contract terms and conditions are no more favourable to SPI than those that it is reasonable to expect ERM would have adopted if dealing at arms-length with an unrelated person and are not adverse to ERM. The components of the contract are as follows: • Firm flat swap sold to ERM priced at market prices (based on market observed ASX 24 Energy contract prices); • Firm peak swap sold to ERM priced at market prices (based on market observed ASX 24 Energy contract prices); • Call option for ERM to purchase additional off-peak swaps; • Call option for ERM to purchase additional peak swaps; • Reallocation and capital efficiency payments over the term of the contract. ERM have access to the respective hedge volumes under the agreement out to 31 December 2022. The total premiums payable for the option over the period 1 January 2016 to 31 December 2022 is $6.5m. All accounts payable are within payment terms of the agreement and no impairment loss has been recognised during the period in relation to the transaction. The agreement expires on 31 December 2022 and under the agreement ERM is expected to hedge approximately 21% of ERM’s electricity load sales over the term of the agreement prior to exercise of any of the available options. As at 30 June 2016 net assets of $94m have been recognised in relation to the above transaction comprising the following: • MTM of electricity swaps of $55.2m of which $35.4m is current; • MTM of electricity options of $29.7m of which $7.9m is current; • Accrued income of $9.1m. During the period ended 30 June 2016 total net receipts of $15m were recognised in profit and loss for the year ended 30 June 2016 in respect of the swap agreement. Under the terms of the swap agreement SPI has posted a bank guarantee in favour of ERM for $8.5m. The guarantee is accessible under a range of financial risk events. PAGE 103 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016 30. RELATED PARTY DISCLOSURES (CONT.) Transactions with Empire Oil & Gas NL In February 2015, a subsidiary of ERM Power granted a $14.9m loan to Empire as a consequence of selling the Group’s Western Australian Gas assets. The key terms of the facility are: • Repayable at the earlier of 31 August 2016 and the completion of the sale or like disposal of the Red Gully Facility by Empire, or any transaction that has the same or substantially similar economic outcome. • No interest is payable during the term of the loan. As at 30 June 2016, the present value carrying amount of the loan is $14.9m. The loan was subsequently repaid on 12 August 2016. The subsidiary of ERM Power is also entitled to an additional amount derived by reference to Empire’s share price as part of the consideration received for the sale of the Group’s Western Australian Gas assets. The key terms of the financial asset are: • Payment will only be made if the volume average price of Empire’s shares on ASX over 30 Trading Days ending on the Trading Day prior to the payment date is greater than $0.80. • Payment is adjusted to factor in only 70% of any value accretion above $0.80. • Payment date is the repayment date of the abovementioned loan. As at 30 June 2016, the fair value of the financial asset is $nil. Other related party transactions In the normal course of business the Company enters into the following transactions with related parties: • Project management and operations management fees are charged to jointly controlled entities; • Interest is paid on shareholder loans; and • Directors personal travel insurance is provided under standard terms of a directors and officers business travel insurance policy taken out by the Company. Cover under this policy for directors personal travel is provided by the insurer at no additional cost to the Company. 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. Transactions with jointly operated entities: Movements in net loans advanced / (repaid) Current trade receivables balance Current trade payables balance Project fees and operations management fees Refer note 28(b) for details of significant jointly controlled entities. Consolidated 2016 $ 2015 $ 646 (34,508) 93,186 404,515 – – 2,597,824 2,494,226 PAGE 104 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016ERM POWER ANNUAL REPORT | 2016 31. KEY MANAGEMENT PERSONNEL Key management personnel compensation Short-term employee benefits Long-term employee benefits Post-employment benefits Termination benefits Share-based payments Detailed remuneration disclosures are provided in the Remuneration Report. 32. 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 Consolidated 2016 $ 2015 $ 4,716,281 4,853,723 40,561 17,418 206,430 244,670 – 481,572 1,738,047 97,267 6,701,319 5,694,650 Consolidated 2016 $ 2015 $ 540,000 619,899 540,000 619,899 Amounts received or due and receivable by PricewaterhouseCoopers Australia for non-audit services: Other agreed-upon procedures in relation to the entity and any other entity in the consolidated Group 134,400 162,000 Total remuneration of PricewaterhouseCoopers Australia 134,400 162,000 674,400 781,899 Amounts received or due and receivable by network firms of PricewaterhouseCoopers Australia for: An audit or review of the financial report of the entity and any other entity in the Group Total remuneration of network firms of PricewaterhouseCoopers Australia 148,128 184,896 148,128 184,896 PAGE 105 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016 33. EARNINGS PER SHARE Basic earnings per share Diluted earnings per share Consolidated Consolidated 2016 Number of shares ‘000 2015 Number of shares ‘000 244,744 241,078 244,806 241,142 2016 Cents 14.63 14.63 2015 Cents 27.35 27.34 Reconciliation of weighted average number of ordinary shares Weighted average number used in calculating basic earnings per share 244,744 241,078 Effect of share options on issue 62 64 Weighted average number used in calculating diluted earnings per share 244,806 241,142 Information concerning earnings per share Options Options granted are considered to be potential ordinary shares and taken into account in the determination of diluted earnings per share. They are not included in the determination of basic earnings per share. Reconciliation of earnings used in calculating earnings per share Basic earnings per share Profit attributable to the ordinary equity holders of the Company used in calculating basic earnings per share From continuing operations Diluted earnings per share Consolidated 2016 $’000 2015 $’000 35,809 65,937 Profit attributable to the ordinary equity holders of the Company used in calculating diluted earnings per share From continuing operations 35,809 65,937 34. EVENTS AFTER THE REPORTING PERIOD On 12 August 2016 the loan of $14.9m to Empire Oil & Gas NL was repaid ahead of the scheduled repayment date of 31 August 2016. Since 30 June 2016 there have been no other matters or circumstances not otherwise dealt with in the financial report that have significantly or may significantly affect the Group. PAGE 106 ERM POWER LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2016ERM POWER ANNUAL REPORT | 2016 ERM POWER LIMITED DIRECTORS’ DECLARATION In the opinion of the directors of ERM Power Limited (“Company”): (a) the financial statements and notes set out on pages 44 to 106 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 2016 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 Chairman 25 August 2016 PAGE 107 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF ERM POWER LIMITED Independent auditor’s report to the members of ERM Power Limited Report on the financial report We have audited the accompanying financial report of ERM Power Limited (the company), which comprises the consolidated statement of financial position as at 30 June 2016, the consolidated income statement and consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors’ declaration for ERM Power Limited (the consolidated entity). The consolidated entity comprises the company and the entities it controlled at year’s end or from time to time during the financial year. Directors' responsibility for the financial report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements comply with International Financial Reporting Standards. Auditor’s responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the consolidated entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. Auditor’s opinion In our opinion: PricewaterhouseCoopers, ABN 52 780 433 757 480 Queen Street, BRISBANE QLD 4000, GPO Box 150, BRISBANE QLD 4001 T: +61 7 3257 5000, F: +61 73 257 5999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. PAGE 108 ERM POWER ANNUAL REPORT | 2016 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF ERM POWER LIMITED (a) the financial report of ERM Power Limited is in accordance with the Corporations Act 2001, including: (i) (ii) giving a true and fair view of the consolidated entity's financial position as at 30 June 2016 and of its performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001. (b) the financial report and notes also comply with International Financial Reporting Standards as disclosed in Note 1. Report on the Remuneration Report We have audited the remuneration report included in pages 28 to 42 of the directors’ report for the year ended 30 June 2016. The directors of the company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. Auditor’s opinion In our opinion, the remuneration report of ERM Power Limited for the year ended 30 June 2016 complies with section 300A of the Corporations Act 2001. Matters relating to the electronic presentation of the audited financial report This auditor's report relates to the financial report and remuneration report of ERM Power Limited (the company) for the year ended 30 June 2016 included on ERM Power Limited’s web site. The company’s directors are responsible for the integrity of ERM Power Limited’s web site. We have not been engaged to report on the integrity of this web site. The auditor’s report refers only to the financial report and remuneration report named above. It does not provide an opinion on any other information which may have been hyperlinked to/from the financial report or the remuneration report. If users of this report are concerned with the inherent risks arising from electronic data communications they are advised to refer to the hard copy of the audited financial report and remuneration report to confirm the information included in the audited financial report and remuneration report presented on this web site. PricewaterhouseCoopers nawehSleahciM rentraP [remove or insert page no’s to match accounts] enabsirB 6102tsuguA52 PAGE 109 ERM POWER LIMITED SHARE AND SHAREHOLDER INFORMATION TWENTY LARGEST SHAREHOLDERS The following table sets out the 20 largest shareholders of ERM Power Limited (Company), when multiple holdings are grouped together, and the percentage each holds of the 248,791,097 shares on issue as at 12 August 2016. Shareholders Shares # % of issued shares St Baker Energy Holdings Pty Ltd J P Morgan Nominees Australia Limited HSBC Custody Nominees (Australia) Limited Ilwella Pty Limited Smartequity EIS Pty Ltd Gaffwick Pty Limited Sunset Power Pty Ltd Citicorp Nominees Pty Limited Andrew St Baker & Cathryn St Baker St Baker-Childs Investments Pty Ltd Trevor and Judith St Baker Family Philanthropic Pty Ltd Philip St Baker and Peta St Baker St Baker Sunset Holdings Pty Ltd St Baker Investments Pty Ltd Sunset Power A Pty Ltd Sunset Power B Pty Ltd Sunset Power C Pty Ltd Sunset Power D Pty Ltd WH and LL St Baker Pty Ltd BNP Paribas Noms Pty Ltd 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Total DISTRIBUTION OF SHARES The following table summarises the distribution of shares as at 12 August 2016: Shareholdings 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,000 – 100,000 100,001 – and over Total 43,549,489 16,569,794 15,563,515 11,209,001 9,372,542 8,489,436 6,435,892 6,219,869 5,070,865 4,054,228 3,025,242 2,826,593 2,622,185 2,622,185 2,538,749 2,538,749 2,538,749 2,538,749 1,442,100 1,386,736 17.50 6.66 6.26 4.51 3.77 3.41 2.59 2.50 2.04 1.63 1.22 1.14 1.05 1.05 1.02 1.02 1.02 1.02 0.58 0.56 150,614,668 60.55 Shareholders # % of issued shares 1,325 3,214 1,577 1,842 145 8,103 0.29 3.82 4.98 18.61 72.30 100.00 The number of investors holding less than a marketable parcel of 481 shares was 526, holding 100,657 shares. PAGE 110 ERM POWER ANNUAL REPORT | 2016 ERM POWER LIMITED SHARE AND SHAREHOLDER INFORMATION SUBSTANTIAL SHAREHOLDERS The following table shows holdings of five per cent or more of voting rights as notified to the Company 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 04/07/2016 63,516,907 25.84% 1 Trevor Charles St Baker controls each registered shareholder of St Baker Energy Holdings Pty Ltd as trustee for the St Baker Energy Innovation Trust, Sunset Power A Pty Ltd as trustee for the Sunset Power Trust A, Sunset Power B Pty Ltd as trustee for the Sunset Power Trust B, Sunset Power C Pty Ltd as trustee for Sunset Power Trust C, Sunset Power D Pty Ltd as trustee for the Sunset Power Trust D, Baygrove Pty Ltd as trustee for ERM Consultants STF S/F, Sunset Power Pty Ltd as trustee for the St Baker Family Trust, Sunset Power Holdings Pty Ltd and Trevor and Judith St Baker Family Philanthropic Pty Ltd as trustee for the Trevor and Judith St Baker Family Foundation. Trevor is a joint registered holder of TC and JK St Baker as trustee for some family members. VOTING RIGHTS At 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 share held. SECURITIES EXCHANGE LISTING The Company’s shares are traded on the Australian Securities Exchange under the symbol “EPW”. UNQUOTED SECURITIES As at 12 August 2016, there were 1,421,542 options on issue, each exercisable into a fully paid ordinary share. Expiry Date 1 November 2017 8 November 2017 Issue price of shares (cents) 275.0 275.0 Number under option 1,178,836 242,706 Number of holders 20 1 PAGE 111 CORPORATE DIRECTORY COMPANY ERM Power Limited ABN 22 122 259 223 DIRECTORS Tony Bellas (Non-Executive Chair) Trevor St Baker (Non-Executive Deputy Chair and Founder) Albert Goller Martin Greenberg Tony Iannello Wayne St Baker Jon Stretch (Managing Director and CEO) COMPANY SECRETARY Phil Davis HEAD OFFICE (Registered Office and Principal Place of Business) Level 52, One One One 111 Eagle Street Brisbane Qld 4000 GPO Box 7152 Brisbane Qld 4001 Australia Tel: (07) 3020 5100 Fax: (07) 3220 6110 AUDITORS PricewaterhouseCoopers SHARE REGISTRY Link Market Services Limited Level 12, 680 George Street Sydney NSW 2000 Tel: 1300 554 474 Fax: (02) 9287 0303 WEBSITE www.ermpower.com.au E R M P O W E R L I M I T E D A N N U A L R E P O R T 2 0 1 6 ERM Power Limited ABN 28 122 259 223 Level 52, 111 Eagle Street Brisbane Queensland 4000 www.ermpower.com.au